Global economic body praises the strength of Australia’s post-Covid economy – but issues a telling warning about what’s to come

The International Monetary Fund has warned a slowdown is coming for Australia’s economy, despite its post-COVID recovery being stronger than most other countries.

In its latest assessment of Australia’s finances, the global body said while the economy was performing well, growth was about to weaken, fueled by cost-of-living pressures and a slowdown in productivity.

Although the IMF said inflation rates in Australia had peaked, they remained stubbornly high. The IMF estimated that it would take another two years for the country to return to the Reserve Bank’s target range of between two and three percent.

The report predicts that economic growth is expected to slow to 1.8 percent annually in 2023, before falling again to 1.4 percent in 2024.

“Faltering private consumption would continue to weigh on the economy as mortgage-bearing households bear the brunt of higher interest rates, amid lower real wages and depleting savings,” the IMF statement said.

“While external price pressures have eased, leading to a decline in goods inflation, the persistence of non-tradable prices, driven by demand pressures, will keep inflation high.”

The economic assessment found that the IMF praised the government’s macroeconomic policies, which had led to “strong recovery and resilience.”

It said Australia’s economic recovery from the global slowdown caused by the COVID-19 pandemic remained stronger than in peer countries, thanks to strong net exports.

“However, the slowdown in household consumption growth was offset by resilient private investment, supported by public investment in transport, health, education and national defense,” the report said.

‘Net exports are contributing to growth thanks to robust coal and services sales, supported by inflows of foreign students, migrants and tourists.’

The IMF also warned that while strong net migration was expected to ease pressure on the labor market, it would increase demand in areas such as the rental market.

The monetary body said there is a need for further fiscal tightening to reach the target inflation level in 2025.

“Directors saw merit in comprehensive tax reform and emphasized that rebalancing the tax system from direct to indirect taxes, while addressing regressive impacts, would promote greater efficiency,” the report said.

‘The directors noted the renewed increases in house prices and recommended the introduction of additional borrower-based prudential tools.’

Treasurer Jim Chalmers welcomed the IMF’s assessment, saying it was an endorsement of the government’s economic strategy.

“The report makes clear that our government is doing better than other countries when it comes to putting our budget in much better shape to buffer against the global economic uncertainty ahead,” he said.

‘The IMF rightly recognizes our efforts in the areas of housing, competition, institutional reform, skills and education, climate and energy and making the tax system fairer.’

The monetary body said the government needed “continued vigilance” as economic conditions deteriorated.

“Short-term policies should focus on navigating the economy towards a soft landing, by bringing inflation back to target, while maintaining financial stability. Policy coordination will be critical,” the report said.

Dr. Chalmers said the report had confirmed Australia was tackling economic challenges from a position of strength.

“Today’s report follows the recent endorsement of our fiscal strategy by the IMF itself, along with those of the RBA, the OECD, international rating agencies and others,” he said.

“While inflation remains a defining challenge, we are making encouraging progress.”