China’s Thrift, and What to Do About It

From The IMFBlog.

What makes China’s citizens so thrifty, and why does that matter for China and the rest of the world? The country’s saving rate, at 46 percent of GDP, is among the world’s highest. Households account for about half of savings, with corporations and the government making up the rest.

Saving is good, right? Up to a point. But too much saving by individuals can be bad for society. That’s because the flip side of high savings is low consumption and low household welfare. High savings can also fuel excessive investment, resulting in a buildup of debt in China. And because people in China save so much, they buy fewer imported goods than they sell abroad. That contributes to global imbalances, according to a recent IMF paper, China’s High Savings: Drivers, Prospects, and Policies. The country’s authorities are aware of the issue and are taking steps to address it.

China’s saving rate started to soar in the late 1970s. A look at some of the causes of the increase points to some potential remedies.

Demographics explain about half the increase in saving, the Chart of the Week shows. China’s average family size dropped dramatically after the introduction of the “one child” policy. That influenced household budgets in two ways. Parents spent less money raising their children. At the same time, because children were traditionally a source of support in old age, having fewer children prompted parents to save more for retirement.

Greater income inequality, resulting from China’s transition to a more market-driven economy, is also a big contributor. A wider gap between rich and poor increases saving because the wealthy spend a smaller proportion of their income on necessities and put more money in the bank.

Economic reform has boosted saving in other ways. More Chinese now live in their own homes, as opposed to housing provided by state-owned enterprises. So they must save for a down payment and for mortgage payments. (Household debt, while still low, has risen rapidly in recent years, linked largely to asset price speculation.) And a decline in government spending on social services during the economic transition in the 1980s and 90s has meant that Chinese must save more for retirement or to pay for health care.

There are several things the government can do to encourage more spending:

  • Make the income tax more progressive and family friendly;
  • Spend more on health care, pensions and education;
  • Spend more on assistance to the poor, which would reduce income inequality.

Of course, China will need more revenue to pay for all of this. One answer would be to increase the dividends paid by state owned enterprises. Another would be to transfer shares of these firms to social security funds. With the right policies, China can encourage spending while avoiding the fate predicted by Confucius: “He who does not economize must agonize.”

IMF Report Suggests 7.1% Mortgage Rate in 2021

The IMF published their latest assessment of Australia’s economy.  It is relatively positive, though calls out risks in the housing sector and once again suggests tax changes would assist. They are also critical of attempts to segregate the property market into local and foreign buyers.  There is a whole separate document on housing and risks in the system.

However, the underlying economic model assumptions are interesting. Most significant is the expected rise in average mortgage rates from 5.1% now, to 7.1% in 2021.  That would cause some pain (and lift mortgage stress from ~920k to 1.25m households on our models).

They show unemployment drifting down to 5%, whilst there is a little improvement in GDP. The RBA cash rate rises to 3.25% in 2022/3. Overall wages growth drifts higher to 2.9% in 2023. House prices remain elevated, as does household debt, and debt to income rises, as interest rates climb.

On February 7, the Executive Board of the International Monetary Fund (IMF) concluded the 2017 Article IV consultation with Australia.

Australia has enjoyed a comparatively robust economic performance while adjusting to the end of the commodity price and mining investment booms of the 2000s. The recovery from these shocks has advanced further in 2017. Aggregate demand has been led by strong public investment growth amid a boost in infrastructure spending and private business investment has picked up, but private consumption growth has remained subdued. Employment growth has strengthened markedly over the year, although the economy is not yet back at full employment. Wage growth is weak and inflation is below its target range.

The macroeconomic policy stance has become more supportive with the infrastructure investment boost. The monetary policy stance is accommodative, with the current policy rate setting implying a real policy rate at zero relative to estimates of the real neutral long-term interest rate in the range of 1 to 2 percent. Infrastructure spending at the Commonwealth and State levels has increased by an average of 0.5 percent of GDP annually over the next 4 years relative to the last Article IV Consultation.

A housing boom has supported the Australian economy’s adjustment to the end of the boom, but has led to housing market imbalances and household vulnerabilities, which the authorities have addressed with a multipronged approach. The supply response to higher house prices has been strengthened, through increased spending on infrastructure, which helps increase the supply of accessible and developable land, and through zoning and planning reforms. The Australian Prudential Regulation Authority (APRA) used prudential policies to lower housing-related risks to household balance sheets and the banking system. Market entry for first-time home buyers has been facilitated through tax relief, grants, and support for accumulating deposits for down payments within the Superannuation framework.

Australian banks have further strengthened their resilience to negative housing and other shocks in 2017 and improved their funding profile. The capital adequacy ratio of the Australian banking system rose by another 0.8 percentage points through 2017, reaching 14.6 percent by end-September, with 10.6 percent in the form of Common Equity Tier 1 (CET-1) capital. The liquidity coverage ratio was comfortably above minimum requirements. By end-September 2017, many banks already had Net Stable Funding Ratios (NSFR) above the 100 percent required from January 1, 2018.

Recent structural policy efforts have focused on addressing infrastructure gaps, strengthening competition, and fostering research and development (R&D). Reforms to the competition law at the Commonwealth level, as proposed in the 2015 Competition Policy Review (the “Harper Review”), were enacted in November 2017, which should encourage more competitive behavior in the economy. The National Innovation and Science Agenda (NISA) seeks to strengthen R&D. In 2014, the government committed to reduce the gender gap in labor force participation by 25 percent by 2025 as part of the Brisbane Commitments in the G-20 process. The company tax rate for small companies with a turnover of up to A$50 million has been lowered from 30 to 27½ percent over the next 5 years.

Executive Board Assessment

Executive Directors commended Australia’s robust economic performance during the rebalancing of the economy in the wake of the mining investment boom of the 2000s. This has been helped by a resilient economy and strong policy frameworks. Directors noted that a more robust global outlook, employment growth, and infrastructure investment should help accelerate economic expansion. Nonetheless, while near‑term risks to growth have become more balanced, negative external risks could interact with domestic financial vulnerabilities and pose a threat to the recovery. Directors urged the authorities to maintain prudent policies, continue to address financial vulnerabilities, and raise long‑term productivity.

Directors agreed that continued macroeconomic policy support is needed to secure employment and inflation objectives. With inflation below target and the economy not yet back at full employment, the monetary policy stance should remain accommodative until stronger domestic demand growth and inflation are evident. Directors welcomed the more supportive fiscal policy stance due to infrastructure investment. They concurred that the Commonwealth budget repair strategy remains appropriately anchored by medium‑term budget balance targets. They noted that in the case of a more gradual recovery, Australia has the fiscal space to absorb this risk and protect spending for macrostructural reforms.

Directors considered appropriate the multipronged policy for addressing housing imbalances and vulnerabilities, including a tightening of prudential policies, a strengthening of housing supply, and targeted demand policies. They took note of the staff’s assessment that some policies are classified as capital flow management measures (CFMs) under the Fund’s Institutional View (IV), although their use has been consistent with the IV in most cases—in particular, that the CFMs have not substituted for warranted macroeconomic policies. In this context, many Directors raised the issue of intent and emphasized the need to consider the substance of the measures, and to assess their effectiveness in reducing financial stability risks. Some Directors, nonetheless, encouraged the authorities to consider measures that do not distinguish between residents and non‑residents where feasible (for example, on vacant properties). Directors noted that the housing policy package could be complemented by tax reform, including a gradual shift to more efficient property taxation through the introduction of a systematic land tax regime. Strong supply‑side policies will remain critical.

Directors highlighted that increased infrastructure investment should provide a welcome lift to productivity and longer‑term growth. Sustained structural policy efforts in promoting innovation and competition, upgrading labor force skills and reducing gender gaps, and advancing broad tax reform would complement these positive effects.

This Is Why Markets Have Gotten Jumpy

Back in April 2017, the IMF released a Financial Stability Report update which said that “in the United States, if the anticipated tax reforms and deregulation deliver paths for growth and debt that are less benign than expected, risk premiums and volatility could rise sharply, undermining financial stability”.

They said that more than 20% of US firms would find it hard to service their debts, if rates rose – and yes, now rates are rising! This puts pressure on companies, and on their banks.  This is no “flash crash”, it’s structural!

Under a scenario of rising global risk premiums, higher leverage could have negative stability consequences. In such a scenario, the assets of firms with particularly low debt service capacity could rise to nearly $4 trillion, or almost a quarter of corporate assets considered.

The number of US firms with very low interest coverage ratios—a common signal of distress—is already high: currently, firms accounting for 10 percent of corporate assets appear unable to meet interest expenses out of current earnings (Panel 5).


This figure doubles to 20 percent of corporate assets when considering firms that have slightly higher earnings cover for interest payments, and rises to 22 percent under the assumed interest rate rise. The stark rise in the number of challenged firms has been mostly concentrated in the energy sector, partly as a result of oil price volatility over the past few years. But the proportion of challenged firms has broadened across such other industries as real estate and utilities. Together, these three industries currently account for about half of firms struggling to meet debt service obligations and higher borrowing costs (Panel 6).

The Current Economic Sweet Spot Is Not the “New Normal” – IMF

From the IMF Blog.

As the year 2018 begins, the world economy is gathering speed. The new World Economic Outlook Update revises our forecast for the world economy’s growth in both 2018 and 2019 to 3.9 percent. For both years, that is 0.2 percentage points higher than last October’s forecast, and 0.2 percentage points higher than our current estimate of last year’s global growth.

This is good news. But political leaders and policymakers must stay mindful that the present economic momentum reflects a confluence of factors that is unlikely to last for long. The global financial crisis may seem firmly behind us, but without prompt action to address structural growth impediments, enhance the inclusiveness of growth, and build policy buffers and resilience, the next downturn will come sooner and be harder to fight.

Every government should be asking itself three questions today. First, how can we raise economic efficiency and output levels over the longer term? Second, how can we support resilience and inclusiveness while reducing the likelihood that the current upswing ends in an abrupt slowdown or even a new crisis? Third, how can we be sure to have the policy tools we will need to counter the next downturn?

Near-term prospects

Looking first at where we are now, how do we see the world economy in the near term?

The primary sources of GDP acceleration so far have been in Europe and Asia, with improved performance also in the United States, Canada, and some large emerging markets, notably Brazil and Russia, both of which shrank in 2016, and Turkey. Much of this momentum will carry through into the near term. The recent U.S. tax legislation will contribute noticeably to U.S. growth over the next few years, largely because of the temporary exceptional investment incentives that it offers. This short-term growth boost will have positive, albeit short-lived, output spillovers for U.S. trade partners, but will also likely widen the U.S. current account deficit, strengthen the dollar, and affect international investment flows.

Trade is again growing faster than global income, driven in part by higher global investment, and commodity prices have moved up, benefiting those countries that depend on commodity exports.

Even as economies return to full employment, inflation pressures remain contained and nominal wage growth is subdued. Financial conditions are quite easy, with booming equity markets, low long-term government borrowing costs, compressed corporate spreads, and attractive borrowing terms for emerging market and developing economies.

Explaining the upturn

The current upturn did not arise by chance. It began to take hold in mid-2016 and owes much to accommodative macroeconomic policies, which supported market sentiment and hastened natural healing processes.

Monetary policy has long been and remains accommodative in the largest countries, underpinning the current easy global financial conditions. Even though the United States Federal Reserve continues to raise interest rates gradually, it has been cautious, having wisely responded to the turbulence of early 2016 by postponing previously expected rate increases. The European Central Bank has started to taper its large-scale asset purchases, which have played a critical role in reviving euro area growth, but has also signaled that interest-rate increases are a more distant prospect.

Moreover, fiscal policy in advanced economies has, on balance, shifted from contractionary to roughly neutral over the past few years, while China has provided considerable fiscal support since its growth slowed at mid-decade, with important positive spillovers to its trade partners. In the U.S., of course, fiscal policy is about to take a markedly expansionary turn, with complex effects on the world economy.

Not the “new normal”

Our view is that the current upturn, however welcome, is unlikely to become a “new normal” and faces medium-term downside hazards that likely will grow over time. We see several reasons—to some extent reflected in our medium-term growth projections—to doubt the durability of the current momentum:

  • Advanced economies are leading the upswing, but once their output gaps close, they will return to longer-term growth rates that we still expect to be well below pre-crisis rates. While we project advanced-economy growth of 2.3 percent in 2018, our assessment of the group’s longer-term potential growth is only about two-thirds as high. Demographic change and lower productivity growth pose obvious challenges that call for major investments in people and research. Fuel exporters face especially bleak prospects and must find ways to diversify their economies.
  • The two biggest national economies driving current and near-term future growth are predictably headed for slower growth. China will both cut back the fiscal stimulus of the last couple of years and, in line with the stated intentions of its authorities, rein in credit growth to strengthen its overextended financial system. Consistent with these plans, the country’s ongoing and necessary rebalancing process implies lower future growth. As for the United States, whatever output impact its tax cut will have on an economy so close to full employment will be paid back partially later in the form of lower growth, as temporary spending incentives (notably for investment) expire, and as increasing federal debt takes a toll over time.
  • As important as they have been to the recovery, easy financial conditions and fiscal support have also left a legacy of debt – government, and in some cases, corporate and household – in advanced and emerging economies alike. Inflation and interest rates remain low for now, but a sudden rise from current levels, perhaps due to procyclical policy developments, would tighten financial conditions globally and prompt markets to re-evaluate debt sustainability in some cases. Elevated equity prices would also be vulnerable, raising the risk of disruptive price adjustments.
  • Despite rising growth in Europe, Asia, and North America, there is less good news in the Middle East and Sub-Saharan Africa; the latter area weighed down by the weakness of its larger economies. Low growth, driven in part by adverse weather events and sometimes combined with civil strife, has sparked significant outward migrations. Improvements in some large Latin American economies are notable but aggregate growth in the region will be weighed down this year by continuing economic collapse in Venezuela.
  • Even though the recovery has lifted employment and aggregate income from crisis lows, voters in many advanced economies have soured on political establishments, doubting their ability to deliver broadly shared growth in the face of tepid real wage gains, reduced labor shares in national income, and rising job polarization. A turn to more nationalistic or authoritarian governance models, however, could result in stalled economic reforms at home and a withdrawal from cross-border economic integration. Both developments would harm longer-term growth prospects, to the detriment of those who have already fallen behind over the past few decades. Levels of inequality are high in emerging market and low-income economies, and carry the seeds of eventual future disruptions unless growth can be made more inclusive.

Policymakers must face the challenges

Perhaps the over-arching risk is complacency. While the current conjuncture might appear to be a sweet spot for the global economy, prudent policymakers must look beyond the near term.

No matter how tempting it is to sit back and enjoy the sunshine, policy can and should move to strengthen the recovery. Now is the time to build policy buffers, reinforce defenses against financial instability, and invest in structural reforms, productive infrastructure, and people. The next recession may be closer than we think, and the ammunition with which to combat it is much more limited than a decade ago, notably because public debts are so much higher.

An upswing so broad also furnishes an ideal moment to act on a range of multilateral challenges. These include countering global financial stability threats, including cyber-threats; strengthening the multilateral trading system; cooperation on international tax policy, including the fight against money laundering; and promoting sustainable development in low-income countries. Of especially urgent importance is to fight irreversible environmental damage, notably from climate change.

The Digital Payment Boom in India

From The IMFBlog.

What does a shoe shiner in India have in common with central bankers and finance ministers? They both can appreciate the digital-payment boom. It’s sweeping the world but has accelerated in India, where last November the government demonetized—declaring that 86 percent of the country’s currency in circulation would cease to be legal tender.

Mobile payment platforms like Paytm, stepped in to fill the void left by demonetization, and in the process­- are bringing more people into the banking fold. In this podcast, Paytm Chief Financial Officer Madhur Deora says he was not all that surprised when the invitation came to speak at the IMF-World Bank Annual Meetings.

“All bodies around the world—whether they’re central banks, the IMF, World Bank or the World Economic Forum—are seeing this as perhaps one of the top two or three changes or developments around the world that can have the biggest impact,” Deora said.

And the scale of that impact is significant, he said.

“Some of the problems that have existed for decades, 50 years, maybe 100 years in some places—we really have the opportunity to solve a lot of those problems over the next, literally, five years,” Deora said.

He gives the expanding use of smart phones a lot of the credit. Until four years ago, mobile payments didn’t exist in India. But smart-phone penetration has grown, and in the next few years, he sees 60-70% of the population having smart phones.

Beyond payments, the digital platform also allows those who previously couldn’t open a bank account or get a loan access to an array of financial services and products.

“We can solve for borrowing, access to credit. We can also solve for access to savings products, because our distribution is very, very cheap,” he said.

For finance chiefs and central bankers, digital payments allow them to more accurately assess the economy, as well as tax more efficiently.

While some may be leery of regulation, Deora sees it as a help, not a hindrance, to problems related to a country’s development.

“Lack of financial inclusion, which is present in most emerging markets is a problem that bothers well-meaning central bankers. I think regulators around the world have woken up to the fact that technologies can solve those problems,” he said.

This all may sound as if the entrepreneur has become a budding expert in development.

“I think that might be pushing it a bit, but we certainly see the potential for social impact. We see that this has some behavior-changing outcomes, and perhaps, very soon, some life-changing outcomes,” Deora said.

Listen to the podcast here:

GDP – Not Fit For Purpose In The Digital Era

From The IMF Blog.

Gross domestic product, or GDP, has been used to measure growth since the Second World War when economies were all about mass production and manufacturing. In this podcast, economist Diane Coyle, says GDP is less well suited to measure progress in today’s digital economy.

“I think the issue for GDP comes if the pace or scope of innovation is changing as much as it seems to be at the moment,” says Coyle. “So, that gap between what we’re measuring and the welfare effect seems quite large.”

Coyle, Professor of Economics at the University of Manchester in the United Kingdom, says while economists argue GDP was never meant to measure welfare, nearly everyone assumes it does just that.

“GDP is shorthand for welfare,” says Coyle. “So, if it’s becoming a less good indicator, that really matters.”

Another aspect of the economy that Coyle says GDP misrepresents is productivity. With all the technological advances in recent years one would expect that economies have become more productive. But GDP suggests the opposite is true. Coyle refers to this phenomenon as the productivity puzzle and says the mismeasurement of digital activities within the economy has a lot to do with it.

Coyle also emphasizes the role of official statistics in measuring productivity and growth. She says companies that are making huge profits from mining big data have a responsibility to share their data with governments. Because the purpose of official statistics is to enable governments to better run their countries.

“It’s part of the social contract,” says Coyle. “If you are a successful company taking advantage of the legal system, the infrastructure and public facilities in a country, then it’s just part of the deal that you cooperate with the statistical agencies.”

You can listen to the podcast HERE

You can also watch the webcast of Diane Coyle speaking at the IMF Statistical Forum on Measuring the Digital Economy.

Diane Coyle is author of GDP A Brief but Affectionate History

IMF On Australia

The IMF has issued a concluding statement following their official visit to Australia. They warn that growth will be modest, more effort is required to contain housing risks – including macroprudential, and a structural reform agenda is required to lift productivity and growth.

Over the past year, Australia’s recovery under the transition from the mining boom has continued despite setbacks. Domestic demand growth has strengthened, and employment growth has picked up markedly since the beginning of the year, most of it in full-time jobs. But labor market slack remains present, and wage growth has remained weak. Beyond wages, stronger retail competition and continued declines in import prices have contributed to inflation outcomes below the mid-point of the Reserve Bank of Australia’s target range of 2 to 3 percent. With stronger terms of trade, the current account deficit has narrowed substantially and the trade balance has moved into surplus, primarily because of higher global prices for coal and iron ore.

Looking forward, conditions are in place for a pick-up in economic growth to above-trend rates. The improved picture reflects a stronger global outlook, recent stronger employment growth, and a stronger contribution from infrastructure investment with positive spillovers to private investment and the rest of the economy, more than offsetting the declining contribution from dwelling investment. Non-mining private business investment should rebound further, while the drag from mining investment should be ending.

The pickup in growth is likely to be modest, while inflation and wages will be slow to rise. Household consumption is expected to be held back by low real wage growth, given labor market slack and structural change in some sectors. Economic slack is projected to decline gradually. Upward pressure on prices and wages should emerge once the economy has been at full employment, including lower underemployment, for some time.

With stronger momentum in domestic demand and inflation close to the midpoint of the target range not yet secured, continued macroeconomic policy support will remain essential . With a welcome pickup in public investment, the overall fiscal stance is expected to be broadly neutral in 2017 and 2018. With the cash rate at 1.5 percent, monetary policy remains appropriately accommodative. With Australia’s recovery lagging that of other major advanced economies, monetary policy should remain firmly focused on ensuring stronger sustained momentum in domestic demand and inflation.

The Commonwealth government’s budget repair strategy is appropriately anchored by medium-term budget balance targets . The strategy is predicated on a rapid rebound of nominal growth to trend, leading to structural revenue and expenditure improvements. The risk is that with a gradual recovery, the rebound to trend might not be as quick as expected. Australia has the fiscal space to absorb this risk and protect or, if needed, increase the spending envelopes for infrastructure investment, structural reforms supporting trend growth and productivity.

Near-term risks to growth have become more balanced, but large external shocks, including their interaction with the domestic housing market, are an important downside risk. On the positive side, the improved global outlook could lead to a stronger-than-expected recovery, underpinned by a larger pickup in non-mining business investment. On the downside, there is the risk of unexpectedly tighter global financial conditions flowing through to domestic financial conditions in Australia while the economy is still recovering. Australia is also particularly exposed to downside risk from China through its trade links in commodities and services. Domestically, growth in consumer spending could weaken if improvements in household incomes turn out to be more gradual than expected, or if a cooling housing market and high debt to income ratios discourage further declines in household saving rates.

Managing Housing Imbalances and Financial Sector Risks

The housing market is expected to cool, but imbalances—lower housing affordability and household debt vulnerabilities—are unlikely to be corrected soon. In the absence of a major shock to the economy, the cooling is expected to be driven mainly by the building completion rate catching up with demand in the major eastern capital regions. But given continued strong population growth and foreign buyer interest, demand growth for housing is expected to remain robust, and, in the absence of a large inventory of vacant properties, prices should stabilize, rather than fall significantly. Declines in household debt-to-income ratios would thus need to be driven by strong nominal income growth and amortization.

The Commonwealth and States have appropriately used a multi-pronged approach to address increasing housing market imbalances and related systemic risks to banks.

Prudential policies by the Australian Prudential Regulation Authority (APRA) have lowered the risks to the banking sector from their large exposure to the housing market in a low-interest rate environment, primarily through a sequential tightening of required underwriting standards. The latest round involved tighter standards on the origination of interest-only loans, and reinforced a cap on lending growth to investors. On the demand side, some States have helped qualified first-time homebuyers to enter the market, including through grants and exemption from stamp duty. In addition, the Commonwealth is assisting those buyers to build savings more quickly for a home deposit via the superannuation system.

Supply-side policies will be most effective in achieving housing affordability in the longer term. The housing supply response is being strengthened through a variety of measures at the State and Commonwealth levels, increasing the supply of developable land and the efficiency of its use. including higher housing densification. These include ramping up infrastructure spending and reforms to planning and zoning. These steps have appropriately been complemented by measures to provide for increases in the supply of affordable housing targeted to lower- and middle-income households.

Supply-side policies could also help in raising productivity and trend growth. Ensuring longer-term affordability in housing, and location cost more broadly, could lower risks that businesses and people are not able to move to the urban areas where they would be most productive because of agglomeration and other network externalities. This, in turn, would also help lower risks to longer-term growth.

These policy efforts should be complemented by tax reform . Housing-related tax settings can also play a role in strengthening supply and efficient use of land and, in the longer term, should limit potential distortions they might introduce in the demand for property. The State stamp duty tax regimes are inefficient—they have narrow tax bases, and discourage mobility and transactions in existing properties that could have more productive alternative uses. It should be replaced with a systematic land tax regime applying to all residential and commercial properties. As demonstrated by the recent reform in the Australian Capital Territory, the transition can be gradual, which helps to avoid a disruptive impact on State revenues. Cash flow problems for low-income homeowners can be addressed through deferment options.

Prudential reform efforts on lifting banks’ mortgage asset quality are appropriately complemented by reforms refining the capital adequacy framework. In combination with higher capital adequacy and liquidity requirements, tighter mortgage underwriting standards have strengthened banks’ resilience to housing market shocks. APRA is in the process of further refining the capital adequacy framework. In July 2017, it clarified the capital requirements for Australian banks’ to “be unquestionably strong,” as suggested by the 2014 Financial Sector Inquiry. It is also preparing regulations to address the systemic risk from banks’ concentrated exposure to residential mortgages through capital requirements.

Fostering Long-Term Growth Opportunities

Reforms could lift productivity growth . The decline in trend output growth in Australia over the past decade or so was driven mainly by lower labor force growth and lower rates of capital accumulation, both developments reflecting corrections after the mining investment boom which are likely to have run their course. Average productivity growth has picked up recently, primarily because of the transition to higher capital stock utilization in the mining sector. Nevertheless, productivity growth could be lifted by reforms.

There is scope to expand infrastructure spending beyond the recent increase in the fiscal envelope. According to some international metrics, Australia has a notable infrastructure gap compared with many other advanced economies. While the recent boost has helped to narrow the gap, it might not be enough to close it. Further increases in investment have the potential to improve physical and digital interconnectivity, both internally and with Australia’s trading partners, thereby contributing to higher growth.

Fostering innovation, research and workforce skills upgrades, would complement the productivity effects from more infrastructure.

  • Australia’s research and development (R&D) share of GDP lags other OECD members. But the relatively small scale National Innovation and Science Agenda (NISA) is only funded through FY2018/19. A clear implementation of the upcoming 2030 Strategic Plan for the Australian Innovation, Science and Research System by defining the scope and funding of policy instruments would help strengthen the reach and magnitude from its possible positive productivity externalities.
  • Flexible labor markets have contributed to relatively smooth adjustment after the end of the mining boom. But with continued structural change and higher under- or unemployment in some age and skill cohorts, defining a longer-term envelope for active labor market policies for workforce re-education and skill upgrades can help raise human capital and labor force participation, such as the levy proposed to maintain the new Skilling Australians Fund.

Productivity and inclusion could also be supported with a broad tax reform package . The Commonwealth government has implemented a reform by lowering the corporate income tax rate for SMEs, with the goal of broadening it to all firms at an even lower rate. A more comprehensive tax reform has the potential to increase efficiency of the tax system, increase investment and labor demand, and reduce inequality. This would entail lowering taxes on income from mobile factors of production (capital and labor) and increasing reliance on taxes on immobile factors of production (land) and indirect taxes on consumption, undertaken in a revenue neutral way. Such a reform would complement the switch to a broad-based tax on land instead of stamp duties already discussed.

Reconsidering broad tax reforms. Concerns about the regressive nature of higher taxes on consumption at a time of low wage growth could be addressed by broadening the base, reducing generous tax concessions (some of which are not means-tested or are limited), and revising the design of the income tax reform. Two developments could encourage reconsideration of tax reform. First, significant corporate income tax reductions in other large advanced economies, which would have capital flow implications of potential concern for Australia. Second, the ongoing Horizontal Fiscal Equalisation Review by the Productivity Commission is reopening consideration of the distribution of GST revenues, which could allow for a broader package for agreement between the Commonwealth and the States.

The proposed areas of reform suggested above could draw further measures from the recent work by the Productivity Commission. In its inaugural 5-Year Productivity Review, the Commission has proposed structural reforms in health, education, urban development, and regulatory aspects of market efficiency. These proposals could define new policy parameters, which could also increase certainty about policy directions for business investment decisions. These would also build upon the recently enacted legislative agenda of the Competition Policy Review (the Harper report) at the Commonwealth level. At the State level, there are still further agreements needed to fulfill the Harper report’s implementation.


A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

Is The Global Banking Network Really De-globalising?

An IMF working paper “The Global Banking Network in the Aftermath of the Crisis: Is There Evidence of De-globalization?” released today, shows that contrary to popular belief, the Global Banking Network has not shrunk since the GFC in the simple way often thought. Using complex and innovative modelling, they conclude that the banking world in some ways is connected more deeply, and with greater complexity than before. This means that players in one location could be impacted more severely by events in other geographies. They conclude that the hidden dynamics of the global banking network after the crisis suggest that the assertion that cross-border lending has shrunk globally seems to miss out significant details. They refrain from assessing the risk impact of this observation.

However, we conclude, like our digital world, global banking is more financially networked than ever, suggesting that risks could be propagated widely and in unexpected directions.

The global financial crisis in 2008-09 underscores the unique role of financial interconnectedness in transmitting and propagating adverse shocks. Previous literature stresses the significance of network structure in generating contagion,  lays out detailed mechanisms of contagion through balance-sheet effects, is followed by a large body of theoretical and empirical research on interbank markets, mostly within a single country or region, that focuses on modeling banks’ behavior in response to shocks in the financial system. Cross-border implications of the banking network, however, are mostly ignored due to scarcity of data and rich country-level heterogeneity that may lower the explanatory power of a unified framework.

The sharp fall in global cross-border banking claims after the crisis has been persistent, either measured in Bank for International Settlements (BIS) Locational Banking Statistics (LBS) or BIS Consolidated Banking Statistics (CBS). This persistent aggregate decline in cross-border banking claims has been considered evidence of financial deglobalization. In this paper, we consider the validity of the financial de-globalization argument by studying the evolution of the global banking network before, during and after the crisis, with a particular focus on the aftermath of the crisis. Instead of trying to establish the role of the network in propagating the crisis at a global level, we take the role of the global banking network as given and seek to investigate the impact of the crisis on the network. In this context, our key contributions to the literature are twofold: (i) we measure and map the global banking network using a model-free and data driven approach; and (ii) we analyze the evolution of the network using network analysis tools, including some novel applications, that are relevant given the  characteristics of the global banking network and the available data.

The foremost challenge in constructing the global banking network is to map and identify an accurate and comprehensive network structure using the available data on cross-border banking flows. Researchers face a tradeoff between data coverage and frequency. High frequency data, such as banks’ daily transactions, often contain a limited number of banks within a country, while datasets with a good coverage of global lending mainly report country-level aggregate statistics, and are updated infrequently. This challenge is further complicated by the difficulty in identifying the composition, sources and destinations of bank flows, primarily due to the use of offshore financial centers as important financial intermediaries. Not only are global banks able to conduct cross-border lending via entities in their headquarters and offshore financial centers, but also they can lend domestically through subsidiaries and/or branches within the border of the borrower countries. BIS International Banking Statistics (IBS), through its two datasets (LBS and CBS), offer the best available data to map the international bank lending activity across countries. This is especially the case of the CBS dataset, which consolidates gross claims of each international banking group on borrowers in a particular country, aggregating those claims following the nationality of the parent banks. This nationality-based nature of CBS is an advantage over LBS, which follows a residency-based principle, and thus obscures the linkages between the borrower country and the parent bank institution, when lending originates in affiliates located in third countries (e.g., off-shores financial centers). A disadvantage of using CBS is that it registers the full claims of the affiliates, independent of how those assets were funded (e.g., a claim of a foreign affiliate that is fully funded with local domestic depositors is still counted as a claim from the country of the parent bank on the borrower country where the affiliate is located). In order to avoid this overstatement of financial linkages, which are large in the case of emerging countries as shown in the next section, we combine BIS CBS data with bank level data, taking into account the claims of foreign affiliates and the local deposit funding used by subsidiaries and branches.

We use the improved measure of cross-border banking linkages to  onstruct a sequence of global banking networks, and apply tools from network theory to analyze the evolution of economic and structural properties of the network. We take a step further to incorporate this important discussion into our choice of metrics to identify important players and trace the structural evolution of the global banking network. We provide an in-depth discussion of network measure choice based on the structural context of a core-periphery, asymmetric and unbalanced network structure and in the economic context of characterizing banking flows at the country level.

We introduce measures of node importance that capture  distinct aspects of global banking linkages. In particular, we use recursively defined Katz-Bonacich centrality and authority/hub measure to characterize country importance based on its connection to and dependence on other important countries, as well as a novel application of modularity in order to capture the regional fragmentation of the network. The flexibility of our network configuration allows us to use a small number of network metrics to reveal distinct aspects of network structure and node importance.

We find that the overall shrinkage of cross-border bank lending after the crisis, which has been the key argument behind the claims on financial de-globalization, is also reflected in the average number of links and their strength in the global banking network.

However, rich details on the evolution of the network suggest that this argument is overly simplified.

While connections within traditional major global lenders (banks in France, Germany, Japan, UK, and US) became sparser, many non-reporting countries located at the periphery of the network are more connected, mainly due to the rise of non-major global lenders out of Europe. Measured in metrics of node importance, these lenders have been steadily climbing up the rank, resulting in a corresponding decline of European lenders in status and borrowers’ decreasing dependence on traditional lending countries. Moreover, we find substantial evidence indicating increasing level of regionalization of the global banking network. Even though post-crisis retrenchment of major global and non-major European banks’ operation in the aggregate was just partially offset by the rest of the BIS reporting countries’ regional expansion, their targeted expansions have increased regional interlinkages through both direct cross-border and affiliates’ lending. More formally, using network modularity as a novel application to assess the quality of network cluster structure based on region divisions, we find that this measure increases after the crisis, thus indicating, from the perspective of network theory, that some form of regionalization characterizes the post-crisis dynamics of the global banking network. Finally, we also confirm this regionalization process through a regression analysis of the evolution of cross-border lending. After controlling by geographical distance and trade relationships as well as lender and borrower characteristics, we find a statistically significant increase in cross-border lending when both borrower and lender belong to the same region, especially in the case of peripheral lenders during the post-crisis period.

We show that without proper adjustment, country-level banking statistics suffer from multiple data issues that distort the actual role of each country in cross-border lending, and increase the difficulty of accurately detecting key players in the network. We find evidence confirming the overall shrinkage in the scale of cross-border bank lending using a variety of network analysis tools. Moreover, these methods capture rich dynamics that occur inside the global banking network and are not captured by traditional aggregate indicators.

Using a set of centrality measures with meaningful economic interpretations, we delve substantially deeper to capture the interconnectedness faced by each country. While the structural stability of the highly concentrated global banking network is mainly due to the stability of major global lenders, we observe decline in importance for non-major global European lenders and a corresponding rise in the ranks for lenders from other region, comprised of mostly emerging market lenders. The hidden dynamics of the global banking network after the crisis suggest that the assertion that cross-border lending has shrunk globally seems to miss out significant details.

NOTE: IMF Working Papers describe research in progress by the authors and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the authors and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Assessing China’s Residential Real Estate Market

The IMF just published a working paper examining real estate in China.

After a temporary slowdown in 2014-2015 China’s real estate market rebounded sharply in 2016. As signs of overheating emerged, the government turned to tighten real estate markets through a range of macroprudential and administrative measures. Many empirical studies point out that the house price surge is driven by fundamentals, while others consider the pickup of real estate activity is unsustainable. This paper uses city-level real estate data to estimate the range of overvaluation of real estate markets across city-tiers, and assesses the main risks of a real estate slowdown and its impact on economic growth and financial stability.

Real estate has been a key engine of China’s rapid growth in the past decades. Real estate investment grew rapidly from about 4 percent of GDP in 1997 to the peak of 15 percent of GDP in 2014, with residential investment accounting for over two thirds of the total real estate investment.

Bank lending to the sector makes up 25 percent of total bank loans, about half of all new loans in 2016, and banks’ increasing exposures to real estate, including through property developers and household mortgages, may pose financial stability concerns. Real estate also has strong linkages to upstream and downstream industries (about a quarter of GDP is real-estate related).2 In addition, land sales are a key source of local public finance, accounting for about 30 percent of local government revenue in 2016, while general government net spending financed by land sales is about 9 percent of the headline revenue in 2016. There has been a rapid expansion of government subsidies on social housing, consisting of nearly 6 million apartment units in 2015-2017.

Real estate markets vary significantly in China because of its large economic size, economic and social diversity, and fragmented local government policies. The real estate cycles tend to be more pronounced in top-tier cities in terms of price volatility, but they account for a small fraction of real estate inventory and investment.  Smaller cities constitute over half of residential real estate investment, but the price increase on average was much lower during 2013-16.

Distortions render China’s property market susceptible to both price misalignment and overbuilding. On the supply side, the market is distorted by local governments’ control over land supply and their reliance on land sales to finance spending. On the demand side, the market is prone to overvaluation—housing is attractive as an investment instrument given a history of robust capital gains, high savings, low real deposit interest rates, a lack of alternative financial assets, as well as capital account restrictions.

The government has closely monitored real estate activity given its importance in the economy. Policies are highly decentralized, with local governments (often with local branches of the financial regulators) deciding land sale and infrastructure development, granting construction and sales permits to developers, and setting purchases restrictions. The central government and financial regulators can also affect the housing market through financing conditions and macro-prudential tools for mortgage lending.

If house prices rise further beyond “fundamental” levels and the bubble expands to smaller cities, it would increase the likelihood and costs of a sharp correction, which would weaken growth, undermine financial stability, reduce local government spending room, and spur capital outflows. Empirical analysis suggests that the increasing intensity of macroprudential policies tailored to local conditions is appropriate. The government should expand its toolkit to include additional macroprudential measures and push forward reforms to address the fundamental imbalances in the residential housing market.

Note: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.