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IMF sees Australia risks tilt to downside on China and rising trade tensions

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Australia's economy grew at the fastest pace since 2012 in Q2 and unemployment fell to 5 per cent.

Sydney

THE balance of risks to Australia's economy are "tilted to the downside" due to a deteriorating global outlook, the International Monetary Fund (IMF) said, urging the central bank to keep interest rates low.

It added that Australia's economic expansion is expected to continue, further reducing slack in the economy and paving the way for "gradual upward pressure" on wages and prices. It welcomed the cooling of the housing market amid strong growth, but warned that larger forces could buffet the economy.

"Weaker-than-expected near-term outlook in China, coupled with further rising global protectionism and trade tensions could delay full closure of the output gap. Tightening of global financial conditions could spill over into domestic financial markets, raising funding costs and lowering disposable income of debtors, with the impact also depending on the response of the Australian dollar."

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Australia is the most China-dependent economy in the developed world, and as a small, open trading nation, is vulnerable to global volatility. Still, it grew at the fastest pace since 2012 in Q2 and unemployment fell to 5 per cent as record-low interest rates encourage firms to hire and invest.

"Despite recent strong growth and declining unemployment, it is not yet the time to withdraw macroeconomic policy support given remaining slack," the IMF said. The Reserve Bank of Australia has kept its benchmark interest rate unchanged at 1.5 per cent since August 2016.

"The disinflationary effects from continued strong retail competition still weigh on core inflation, while one-off declines in some administered prices have temporarily lowered headline inflation."

The IMF sees risks more evenly balanced on the home front.

"A stronger pick-up in the non-mining business sector, larger spillovers from public infrastructure investment, and the Australian dollar depreciation in real effective terms over the past year could boost near-term growth more than projected. And domestic demand may turn out weaker if wage growth remained subdued or investment spillovers were smaller."

Treasury Secretary Philip Gaetjens on Sunday said government debt needs to be cut to restore Australia's ability to combat any future economic downturn. "While the budget position has recently been improving on the revenue and spending sides, we have some work to do to reduce the government debt accumulated over the past decade." Australian house prices climbed 70 per cent in the past decade, led by a near-doubling of property values in Sydney and a 90 per cent surge in Melbourne, the IMF said. It noted house prices have moderated recently due to tighter lending standards, increased supply, and easing foreign demand. BLOOMBERG