This week the latest IMF World Economic Outlook was released. Once again the news was less than stellar with growth projections downgraded across the board. While the IMF generally sees good foundations for growth in Australia in the years ahead it also sees risks from a slowing China and an overheated housing market. Significantly, it has suggestions for economic policy on taxation and infrastructure that are right in the current political frame.
As a general rule, the IMF outlooks don’t have too much to do with Australia. Our economy, while large, is generally on the fringe of issues the IMF cares about in a global sense. But the latest outlook, titled Adjusting to Lower Commodity Prices, has Australia positioned right in the middle.
The picture the IMF gives of the year ahead does not provide much joy for those hoping for a return to the good times. The first lines of the executive summary can hardly be accused of burying the lead: “Global growth for 2015 is projected at 3.1%, 0.3 percentage point lower than in 2014, and 0.2 percentage point below the forecasts in the July 2015 World Economic Outlook update.”
In the previous IMF outlooks in July and April, there was generally a more optimistic outlook with few growth downgrades and even some upgrades. And following many years of gloom after the GFC there was a sense that maybe things were settling down a little.
And yet when we look at the projections for growth next year, the latest view of the IMF has them at their most pessimistic.
When the IMF first projected world economic growth for 2016 back in September 2011, it predicted 4.9% growth. By October 2013 it was expecting to see 4.1% growth. Now it expects 2016 will see just 3.6% economic growth across the world:
The main reason for the most recent downgrade is a poorer expectation for growth in the advanced economies. The euro area, as well as the UK and USA, have all seen their growth projections for 2016 downgraded.
While growth for 2016 in the emerging Asian economies (which includes China, India and Indonesia) was not downgraded, that is in part because the negative outlook there has long been set in.
Back in September 2011 when the outlook was much rosier, the IMF predicted the emerging Asian economies would see growth of 8.6% in 2016, whereas now it foresees just 6.4%.
For Australia, the pessimism is similar to other developed economies. Growth in 2016 is expected to be higher than it has been in 2014 and 2015, but it is now expected to be lower than was previously hoped:
The IMF’s projection for Australia’s economy to grow by 2.9% in 2016 is the equal weakest projection it has made. Similarly, the projection for the USA’s economy to grow by 2.8% next year is well below previous estimates.
While there will inevitably be further revisions next April and October, it does rather give a pause to any great projections of optimism. The forecasts also display the view that growth – even if it is to be better than recent years – is not expected to return to that seen in the 1990s and early 2000s:
The IMF predicts Australian GDP growth in 2020 of just 2.8% – a good deal below our 30 years average of 3.1%:
Similarly, while from 1995 to 2007 the UK’s economy grew each year by at least 2.5%, in 2020 the IMF predicts growth of just 2.1%.
The IMF sees risks for Australia mostly coming from a “hard landing” in China, as it notes unsurprisingly that “an unexpectedly sharp fall in iron ore prices could reduce prices below production costs, and further dent incomes and growth”.
But it is the decline in income growth that the IMF give most of its focus.
As noted previously, falling export prices have whacked our national income growth and the IMF recommends a number of measures designed to counter this slowdown.
As ever, the use of “reform” gets a workout, although even when calling for a broadening of the GST it notes there will be a need for “at least fully compensating those on lower incomes.”
Such compensation would limit the impact an increased GST would have on reducing the deficit. But pointedly the IMF is rather unconcerned about this. It also suggests that increasing public investment in infrastructure should be “financed by borrowing”. This, it argues, would reduce “the pace of deficit reduction,” would support demand in the economy, “take the pressure off monetary policy, and insure against downside growth risks”.
The IMF suggests such investment would also help fill the gap of private investment left by the end of the mining boom, provide an incentive for private investment, boost productivity, as well as possibly help ease “housing supply bottlenecks,” and would take advantage of “record low interest rates” (something I’ve been calling for some time now).
The IMF also has concerns with our housing market.
While not explicitly suggesting a fall in house prices is imminent, it does note that housing prices are out of whack with the underlying fundamentals of our economy. It argues that governments should reduce “incentives for potentially excessive financial investment in housing” – such as the concessional treatment of capital gains tax in real estate, the exemption of owner-occupied housing for the calculation of the age pension and negative gearing.
The new prime minister would gain some comfort from his decision to put changes to superannuation taxation concessions back on the table, for the IMF suggests “the system is complex and disproportionately benefits higher-income earners” and should be changed.
He would be less enamoured by their take on changes to workplace relations. The IMF rather interestingly notes that “while business perceptions of Australia’s relative labour market efficiency score it below the average for Anglo-countries, OECD measures of regulatory stringency show Australia is relatively less stringent compared to other countries.”
But the IMF realises that for some businesses and business groups ignorant perceptions trump reality, and thus it hopes the current review of workplace relations by the Productivity Commission “may help improve perceptions”.
All up, the prescription of increasing the GST, increasing debt (or at least slowing the path back to surplus), changing housing and superannuation taxation rules and some small changes to workplace relations have enough political sweetness and poison to please and annoy everyone.
It makes for a tough sell for Malcolm Turnbull and Scott Morrison.
Yet more difficult is the IMF acknowledgement that even if these measures were to occur, given the weaker projections of terms of trade over the next few years, “achieving 2% growth in per capita disposable income in the medium term” would require a productivity growth “not consistently observed in Australia’s past”.
The IMF sees risks ahead for Australia, but also chances to improve the situation if the government is prepared to argue for things either politically fraught (such as the GST) or inconsistent with their previous positions (such as paying for infrastructure with debt). But above all the IMF tells of a future where “adjusting to lower commodity prices” is something we will not be able to avoid.
