The IMF, alongshore its release today published a report on aspects of the Australian economy, looking mainly at the labour market, monetary policy and Government debt. It makes salutary reading. Its a big report, but the main take-outs on our reading are:
Labour Market
Though we seem to have managed to keep unemployment under control though the mining downturn, under-employment and static income growth are the consequences. This will continue for some time.
However, long term unemployment has risen and unemployment is higher than consistent with labor market equilibrium.
Monetary Policy
Growth will remain sluggish, and the RBA may need to cut rates further, but the net effect will be to smooth the outcomes, but not enough to reverse the growth trend. The IMF suggest the equilibrium interest rate has declined from around 2% to 1% now.
The policy rate has been below the equilibrium throughout most of the post-GFC recovery, indicating that monetary policy has been in a ‘loose’ stance.
The IMF also says there is room for greater policy transparency from the RBA.
Fiscal Policy
In recent years, the repeated ambitious fiscal consolidation to reach medium-term fiscal targets under a slowly recovering economy highlights the traditional focus on medium term fiscal objectives. Ambitious budget repair strategy risks being destabilizing in the short term.
Whilst, budget repair is required to return to the Government’s medium-term balance anchor, its pace is in question. The Government will find it difficult to reduce debt in the short to medium term. The IMF says a flexible long-term debt anchor can reinforce the commitment to debt sustainability under both temporary and persistent shocks and still allow for fiscal policy to a play a role in short-term macroeconomic stabilization. The medium-term budget balance anchor is less robust in
maintaining long-term sustainability in the face of persistent negative shocks.
