The International Monetary Fund has called for more interest rate hikes and federal government spending restraint as the country navigates a "narrow path" to slow inflation without tipping into recession.
Subscribe now for unlimited access.
or signup to continue reading
In a major update on the health of the economy, the IMF forecast growth to slow to 1.6 per cent in 2023, down from about 3.6 per cent in 2022, as higher interest rates and weaker global growth weigh on demand and net exports, but predicted the country would avoid a crash.
"Australia has reached a stronger cyclical position than many other advanced economies, with limited scarring," the IMF report said. "From its strong ... position, Australia's economy is expected to come to a soft landing in 2023."
It forecasts inflation will gradually ease over the next 23 months to drop below 3 per cent by the end of 2024 and house prices will continue to slide.
Treasurer Jim Chalmers welcomed what he said was "a glowing report card" for the government's budget and economic plan.
"The IMF recognises the Albanese Labor government's approach to managing the economy is responsible, makes key investment in growth and resilience and begins the hard work of budget repair," Dr Chalmers said.
But the IMF said the risks facing the economy were "skewed significantly to the downside" and warned there was little room for policy error if the country was to avoid a hard landing.
Tighter financial conditions, the erosion of real incomes by high inflation, falling house prices and soft global conditions were forcing growth to slow and there was significant uncertainty about how each might play out, the IMF said.
It called on the Reserve Bank to continue raising interest rates in the short-term but said the pace of hikes should be guided by updates on how key parts of the economy, including consumer spending, the labour market and housing, were performing.
The government has benefited from a commodity-fuelled surge in revenue which pumped an extra $8.8 billion into its coffers in the six months to December, putting the budget on track to a deficit much smaller than had been feared.
A record increase in the cost of living in the year to December is increasing calls for the government to provide more support for households feeling the pinch from rising interest rates and surging inflation.
Dr Chalmers said the government will provide "responsible cost-of-living relief that doesn't add to inflationary pressures", but he is also facing pressure to invest more in defence, health, education, disability services and other areas.
The IMF has urged the government to proceed cautiously and constrain its spending.
"The Commonwealth government should direct windfall revenue gains to budget repair," it said.
"The implementation of spending programs should remain judicious, with any additional cost-of-living support amid high inflation to be kept temporary and well targeted to the vulnerable."
Dr Chalmers said the IMF acknowledged the government's spending restraint in helping curb inflation.
Though house prices are falling significantly in major markets such as Sydney, the Fund said there was as yet no cause for concern that this could destabilise banks or the financial system because of robust lending standards and capital buffers.
But it said the drop in home values were doing little to improve the affordability of housing either for rent or purchase and added that a strong focus on boosting supply was "essential".
The Fund also echoed calls from peak business and employer groups for tax reform.
"There are opportunities to make the tax system more efficient and equitable, rebalancing it from currently high direct to indirect taxes, and raise sufficient revenues to fund the government programs," the IMF said.
