IMF Raises Australian 2007 Growth Forecast To 4.4%

Sep 13, 2007 - The International Monetary Fund raised its 2007 growth forecast for Australian economy to 4.4% from its earlier prediction of 2.6%, the IMF said Wednesday. The Australian economy expanded 2.7% in 2006.

The IMF report said that Australia's total domestic demand was expected to climb 5.1% in 2007, up from a 3.5% increase in the previous year. Private consumption was projected to expand 4.5%, while total investment would rise 5.7% in 2007, the report said. This compared to the increases of 3.1% and 6.5% respectively in 2006.

Business would grow 9.5% compared to 8.9% in the previous year, the report said. Dwelling was expected to spike 6.2%, rebounding from a 1.5% slump last year.

Exports were projected to gain 6.1% in 2007, up from a 3.4% rise in the previous year. Imports were predicted to rise 9.5% faster than the 7.6% spurt seen a year ago.

IMF forecasted the Australian annual CPI inflation to touch 2.1% and unemployment rate to stay at 4.5% in 2007. In the previous year, the CPI and unemployment rate stood at 3.5% and 4.8% respectively.

Australia's current account deficit would be equivalent to 5.6% of GDP in 2007 and 2008, up from 5.5% in 2006, the Fund said. IMF agreed that the external deficit appeared sustainable, although the resulting debt requires continued careful monitoring.

The world body noted that Australia's trade deficit narrowed, while the investment income balance continued to deteriorate, reflecting large net dividend payments. The Australian dollar has appreciated substantially over the past few years, but IMF did not see any misalignment in light of Australia's strong terms of trade gains. Net foreign liabilities increased to over 60% of GDP, but the Fund noted that there was limited exposure to foreign exchange risk.

IMF noted that the Reserve bank of Australia resorted to tightening monetary policy in August, after retaining the cash rate at 6.25% since November 2006, as signs of renewed inflation pressure began to emerge. The RBA raised its key overnight cash rate target by 25 basis points to an eleven-year high of 6.50% in August.

On the fiscal front, the Fund observed that the current budget projection indicated a decline of cash surplus to 1.0% of GDP from 1.7% in the previous year. IMF recommended that, going forward, the surplus be allowed to exceed budget forecasts if growth and revenues are stronger than expected, given the strength of momentum.

The IMF Executive Directors commended the Australian authorities for their exemplary macroeconomic management.

"Sound fiscal, monetary, and structural policies, against a background of sizable terms of trade gains, have created the conditions for a continued expansion, supported by high employment levels," the Executive body said.

The directors noted that Australian banks' exposure to the U.S. subprime mortgage loans is low, and the direct impact of the recent credit market turbulence on Australia has been modest. However the Fund urged to step up vigilant monitoring of evolving market developments.

Australia's second quarter GDP rose 0.9% sequentially on the back of robust business investment, the Australian Bureau of Statistics said earlier this month. The growth topped the expected 0.6% growth despite trailing the 1.6% pace in the first quarter. Annually, the economy expanded 4.3% in the second quarter after climbing 3.8% in the previous quarter.