NO.073

IMF Says Economic Fundamentals In Australia Remain Sound

The IMF’s latest World Economic Outlook (WEO) confirms that the economic fundamentals in the Australian economy remain sound, despite a slowdown in world growth.

In its latest WEO – prepared before the events of 11 September in the United States – the IMF’s forecasts for world growth have been revised down further since May 2001, with growth in the world economy expected to moderate to 2.6 per cent in 2001 before rebounding to a more solid 3.5 per cent in 2002. This follows very strong world growth of 4.7 per cent in 2000. The downward revisions incorporated in the latest outlook reflect the synchronised slowing in output in the first half of 2001 and the weakening in growth prospects that were being observed across most industrialised economies and regions before the terrorist attacks of 11 September.

The IMF provides a favourable assessment of the Australian economy, with an outlook of strong economic growth, low inflation, declining unemployment and an improving current account deficit as a share of GDP. Importantly, the IMF notes that Australia, like the United States, has shown evidence of an improvement in underlying productivity. A favourable domestic outlook coupled with confirmation of Australia’s underlying productivity improvements is recognition of Australia’s strong economic fundamentals and an endorsement of the Government’s economic management.

The IMF expects growth in Australia of 3.8 per cent in 2002, stronger than in the US, Europe or Japan. In addition, the IMF anticipates inflation to fall to 2.0 per cent in 2002, at the lower end of Australia’s medium term inflation target band. A strengthening domestic economy will lead to an improvement in the unemployment rate, which the IMF expects to improve to 6.7 per cent in 2002. Moreover, the current account deficit as a share of GDP is expected to decline to 2.8 per cent.

The IMF’s latest World Economic Outlook needs to be assessed in the context of the heightened uncertainty in the aftermath of the events of 11 September. While the IMF notes that the initial economic effects from the terrorist attacks are likely to be small, the indirect impact on the US and world economy over the medium term remains very uncertain. However, the terrorist attacks came at a time when the world economy was already slowing and the increased uncertainties arising from these events will heighten the downside risks to the world outlook that existed before 11 September.

CANBERRA

26 September 2001