AUSTRALIA will likely dodge recession this year even as its economic growth is set to more than halve on a combination of rising interest rates and a weakening global expansion, the International Monetary Fund (IMF) said.

“Australia’s economy is expected to come to a soft landing in 2023, although risks are skewed significantly to the downside,” IMF staff said in the concluding statement of their Article IV mission released on Thursday.

They pointed to “tighter financial conditions, erosion of real incomes amid high inflation, declining housing prices, and soft global growth” as threats.

The fund expects the A$2.2 trillion (S$2 trillion) economy to expand 1.6 per cent this year, down from an October forecast of 1.9 per cent, and cut its 2022 estimate to 3.6 per cent from 3.8 per cent. Inflation is seen staying elevated at 5.5 per cent, up from October’s 4.8 per cent.

It highlighted the need for the government to tighten fiscal policy and the Reserve Bank of Australia (RBA) to keep raising borrowing costs to cool price pressures.

“Restrictive macroeconomic policies are needed in the near term to mitigate strong domestic demand and address inflation,” the IMF said. “The pace of rate increases should continue to be data-dependent.”

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Data last week showed inflation shot up to 7.8 per cent in the fourth quarter, the fastest pace in 32 years, boosting bets for a 25-basis-point hike at the RBA’s first meeting of the year on Tuesday (Jan 31).

A senior RBA official said on Wednesday that CPI likely peaked last quarter.

The IMF said the current 3.1 per cent cash rate is in “broadly neutral territory” and said that staff expect it to peak at around 3.85 per cent in the second quarter.

Other data point to early signs of easing demand in response to the central bank’s 3 percentage points of hikes between May and December. Retail sales were surprisingly weaker than forecast and employment growth is slowing too.

IMF estimates show inflation in Australia will decline gradually while remaining above the RBA’s 2-3 per cent target until 2024. The central bank will publish its own updated economic forecasts on Feb 10.

The fund’s report also said:

• Tax reform could strengthen economic efficiency and public revenue

• Financial stability risks from a housing downturn appear contained, and policies should aim to alleviate deteriorating affordability

• Potential cyber threats to financial infrastructure require adequate investment, close monitoring and contingency planning

• Close scrutiny of non-bank financial institutions is important given their rapid growth

• Reigniting productivity growth and boosting inclusion will require a strong focus on structural reforms

• Upgraded climate change mitigation targets should be supported by strong policy action BLOOMBERG