Key facts
- The IMF downgraded Australia's 2027 GDP growth forecast by 0.1 percentage points to 1.6%.
- The downgrade is attributed to a higher likelihood of further Reserve Bank of Australia interest rate hikes.
- Rising global energy prices pose a risk of stronger second-round inflation effects.
- Financial markets are pricing in an 80% chance of an RBA rate hike on September 29.
- The IMF noted that recent changes to capital gains taxation and negative gearing could reduce housing-related distortions.
- The IMF stated that recent house price falls have not addressed housing affordability issues.
The International Monetary Fund has downgraded its forecast for Australia’s economic growth in 2027, warning that the Reserve Bank of Australia may need to increase interest rates further to control inflation. The IMF also urged Australian federal and state governments to implement more disciplined budgets to curb rising debt and address the nation's persistent inflation problem.
In its concluding statement following annual consultations, the IMF predicted the Australian economy would grow by 1.9% this year but revised its forecast for real GDP growth in 2027 down by 0.1 percentage points to 1.6%. This downgrade was attributed to the increased likelihood of another interest rate hike by the RBA.
The IMF highlighted that inflation remains a significant challenge, compounded by weak productivity growth that is hindering the economy's potential. The institution noted that a risk exists that further increases in global energy prices could lead to stronger second-round effects on inflation and lift expectations, necessitating further monetary policy tightening.
Recent increases in fuel prices in Australia, driven by the worsening Middle East conflict which pushed Brent crude above $US108 a barrel, are threatening to spill over into domestic inflation. Consequently, financial markets are factoring in an 80% probability of an RBA rate hike on September 29.
The IMF offered qualified support for the Labor government's recent changes to investor taxes, including capital gains taxation and negative gearing, suggesting they could reduce housing-related distortions. However, it emphasized the need for continued efforts to minimize compliance costs and investment impacts during implementation.
Regarding housing, the IMF stated that recent price falls have not resolved affordability issues and welcomed measures to increase supply, while urging both state and federal governments to intensify their efforts. The report pointed out that combined federal and state deficits have widened over the past two years due to significant state spending on infrastructure, increased social services costs, particularly in healthcare and the NDIS, and government support for cushioning the impact of initial global energy price shocks.
While acknowledging that Australia's overall public debt remains relatively low compared to other advanced economies, IMF officials highlighted rising debt and interest costs, especially at the state government level. They suggested that restraining general government spending, alongside strong private demand, would support the RBA's disinflation efforts.
Looking long-term, the IMF identified poor productivity growth as Australia's key structural challenge, stating that reversing the recent slowdown is crucial for improving living standards and ensuring the sustainability of public and private debt obligations.