Australia in ‘enviable’ position: IMF

The International Monetary Fund (IMF) has warned that recent global financial market volatility has increased uncertainty over Australia’s near-term economic outlook, but it starts from an “enviable position”.

In its annual report on Australia released on Friday, the Washington-based institution said the key downside risk to the outlook was that the global recovery stalled or Asian growth faltered in the near term, affecting demand for commodities.

“Contagion from the euro area periphery and uncertainty about progress towards fiscal consolidation in the United States could also destabilise global funding markets,” it said in its annual Article IV staff report.

Domestically, a fall in house prices, which it believes are overvalued by 10 to 15 per cent, could hurt consumer confidence further and depress consumption growth.

Still, it also sees the upside risk of investment in the resources sector being larger than expected, boosting growth and pushing up wages and inflation.

“Also, households may become more confident as the boom progresses and reduce their current high level of savings.”

Risks to the outlook aside, the IMF said Australia’s performance since the onset of the global financial crisis had been enviable, being one of a handful of economies to avoid a recession.

This was attributed to the nation’s healthy banking system, a flexible exchange rate, and robust demand for commodities from Asia, especially China.

Based on its current expectations, the economy will grow by almost two per cent in 2011 and accelerate by 3.3 per cent in 2012 on the back of strong demand for commodities and a sharp rise in mining investment.

For 2013, the IMF expects growth of 3.4 per cent and then 3.3 per cent annually out to 2016, supported by a fast growing Asia, fuelling construction of several large iron ore and LNG projects which could raise private business investment to 50-year highs in coming years.

The unemployment rate should also gradually fall to 4.75 per cent by 2012.

“If the recovery remains on track, further increases in the policy (interest) rate are likely to be needed to contain inflation pressures from the impact of the mining boom on the wider economy,” the IMF said.

However, if global financial markets become severely disrupted or world growth falters, macroeconomic policy is well positioned to respond.

“The RBA has ample scope to cut the policy interest rate and provide liquidity support to banks, which proved effective in the global financial crisis,” it said.

It said there was also “fiscal space” to delay the return to a budget surplus and, if needed, to take temporary discretionary measures, given the low level of commonwealth government debt at six per cent of gross domestic product.

Treasurer Wayne Swan said the report was a timely reminder of Australia’s strong fundamentals given the recent heightened concerns about the global economic outlook.

“While Australia is not immune to volatile global conditions, we can’t lose sight of our impressive economic credentials and our proven track record of dealing effectively with global instability,” Mr Swan said in a statement.

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