The IMF doesn’t share the government’s heroic growth prediction | Greg Jericho

The latest review of Australia’s economy by the International Monetary Fund has a much less rosy outlook for the next few years than does the government’s budget papers. And in light of the latest release of wages price data showing continued weak wages growth, the IMF crucially predicts much lower wages growth than does the budget – a factor which creates a major risk to the government’s hopes for a return to surplus by 2021.

The IMF’s report of the state of Australia’s economy overall is generally praising of our performance. It noted the “robust economic performance during the rebalancing of the economy in the wake of the mining investment boom of the 2000s”. Effectively the shift from the boom through the GFC and now into the export phase of the mining boom is given a tick.

But whereas the budget papers only look ahead four years to 2020-21, the IMF projects out to the end of 2023, and what they project is generally less optimistic than that of the treasury.

The latest figures from the mid-year fiscal and economic outlook expected Australia’s economy to grow by 3% from 2018-19 onwards; the IMF however sees growth of 3.1% in 2019, but then slowing below 3% after that until reaching 2.6% by 2023:

The IMF certainly does not see another mining boom around the corner. It projects iron ore and coal prices to fall slightly from the current levels, with no anticipation of an increase out to 2023.

As a result the size of mining investment is predicted to remain around 2.6% of GDP – well below the 8.5% it achieved in 2013:

And while the IMF at least sees no dire straits ahead – although, rarely does the IMF ever predict a recession – it does anticipate some risks.

For Australia the risks are primarily with the ability of the budget to return to a surplus and in the housing market.

As I have noted ever since last year’s budget was handed down, the government’s predictions for wages growth are rather heroic.

On Wednesday the latest figures showed overall wages growth improving slightly from 2.0% to 2.1%, while the budget predicts by June this year wages will be growing by 2.25%, and by June next year at 2.75% before hitting 2.25% by June 2020.

Such an improvement accounts for a large level of the budget’s income tax revenue figures, and the basis for the budget return to surplus.

The IMF, rather than seeing a relatively quick return to average wages growth of around 3.5% as the budget does, instead has wages growing below 3% through until the end of 2023:

As such the IMF notes that because the budget’s projections are reliant upon “income bracket creep for personal income tax collection”, the “risk is that with a gradual recovery, the rebound to trend nominal growth might not be as rapid.”

Should wages – and other areas of the economy – not grow as fast in nominal terms (ie due to low inflation and wages growth), then the IMF notes that this poses “risks to spending envelopes supporting macrostructural reforms, including infrastructure spending”.

And the IMF is clear that infrastructure spending has been a major factor in the improvement of the economy in the past year. And while it notes such spending has narrowed the “infrastructure gap”, it recommends that “further infrastructure spending increases should be considered.”

And it also sees less drive coming from the housing sector than has been the case.

While the IMF continues to argue the Reserve Bank should maintain low interest rates over the short term it does see rates rising slightly over the next two years.

By the end of next year, it predicts the cash rate to have risen from the current 1.5% to 2.0%, and will again rise to 2.5% by the end of the decade.

It also forecasts a strong slowdown in the rise in house prices. And while it anticipates a “soft landing” (again, the IMF rarely predicts a housing crash) it does not see the level of house prices relative to incomes falling back to the level they were before the IMF began cutting rates in 2011:

We can also add the IMF to the list of those who argue that negative gearing causes house prices to rise.

The report has strong words about negative gearing and the 50% capital gains discount. It notes that such “preferential tax treatment of home ownership and investment” distorts the housing market and investment choices. It notes that these two policies “favour residential real estate relative to many other investments, supporting higher demand and valuation relative to a counterfactual of no or lower tax preferences”.

It views these imbalances as one of the risks inherent in our economy. As ever in such reports, the IMF recommends the removal of stamp duty along with improved supply-side policies such as reforms to zoning and planning at a local and state level that “promote efficient use of land in denser urban settings.”

But while the IMF does predict lower economic and wages growth than does the budget, one area it is more positive is unemployment.

Whereas the budget sees unemployment falling no further than 5.25% over the next three years, the IMF predicts a rate of 5.0% by the end of 2020.

In essence the picture the IMF paints is thus one consistent with the new normal – weaker economic growth, housing affordability still above where it was a decade ago, and while employment prospects are good, the likelihood of a wage rise are not.