“The IMF argues the RBA should only ease rates further if there is an unexpected deterioration in the economic outlook,” says UNSW Australia’s James Morley. “This is prudent advice. The current conditions, while not exactly robust, suggest a wait-and-see attitude on monetary policy.”
The International Monetary Fund warned in its latest report on the state of the Australian economy that after years of rapid growth, Australia’s out-performance has faded with a soft real economy, a maturing financial cycle and slowing potential growth.
James Morley is a Professor of Economics and Associate Dean (Research) at UNSW Business School. He says “the IMF’s more critical suggestion in terms of current policy was on the fiscal side, where it was argued that the current planned fiscal consolidation - in other words a return to surplus - is ‘more frontloaded than desirable’. I believe the IMF is right about this.”
The IMF report stated that a small surplus should remain a longer-term anchor of fiscal policy, and that increasing public investment would support demand and insure against downside growth risks.
“What the IMF seem to be saying here is that while it’s a good general aim to have a surplus, at the moment there are, quite frankly, bigger considerations,” he says.
The IMF highlighted that while Australia has grown around twice as fast as its peers for the last two decades and not had a technical recession for 25 years, the waning resource investment boom and sharp fall in the terms of trade have brought this to a halt.
“Real interest rates are low, including long-term rates. So this is a very good time for more public investment,” added James Morley.
“Current economic conditions, which the IMF label as ‘recovery’, are fragile enough that large spending cuts or tax increases needed to deliver on current plans for the budget balance would surely undo the good work on the transition to the post-mining boom era that the RBA and a low dollar have accomplished.”
For further comment call James Morley on 02 9385 3366, 0406 842 550,
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