IMF cuts Australia 2027 growth forecast to 1.6%, flags rate-hike risk

IMF calls for tighter Australian budgets to ease inflation pressure

The International Monetary Fund has cut its forecast for Australia’s economic growth in 2027 to 1.6%, downgrading its outlook by 0.1 percentage points and warning that the Reserve Bank of Australia may have to raise interest rates further to bring price pressures back under control.

The downgrade, contained in a “concluding statement” that followed the Washington-based institution’s annual consultations with Treasury, RBA and Australian Prudential Regulation Authority officials, predicts the Australian economy will grow by 1.9% this year. The fund flagged that the cut to its 2027 outlook reflected the higher likelihood of another RBA rate hike.

“Inflation remains a central challenge, while weak productivity growth is weighing on the economy’s potential,” the statement said. “There is a risk that further large increases in global energy prices lead to stronger second-round effects and lift inflation expectations, warranting further tightening” in monetary policy.

Fuel prices in Australia are rising again after the worsening Middle East conflict pushed the global oil benchmark, Brent crude, above US$108 a barrel on Wednesday, marking a 35% surge since the start of August. As global energy costs climb and threaten to spill over into domestic inflation, financial markets are pricing in an 80% chance of a Reserve Bank rate hike on 29 September.

The IMF called on federal and state governments to tighten their belts, with the report saying more disciplined budgets will rein in rising debt burdens and help solve Australia’s long-running inflation problem. The fund noted that the combined federal and state deficit had widened over the past two years as states spent heavily on infrastructure projects and on higher social services costs, particularly in healthcare and the national disability insurance scheme. Taxpayer money was also committed to cushioning the impact of the initial global energy price shock, most notably through cuts to the fuel excise.

New South Wales and Queensland spend more than twice as much on debt interest now than before the pandemic, according to Challenger. While “Australia’s overall public debt remains relatively low compared to many other advanced economies,” IMF officials pointed to rising debts and interest costs, especially in state governments. “The ongoing efforts to restrain general government spending, amidst strong private demand, would also support disinflation efforts by the RBA.”

On Labor’s changes to investor taxes, the IMF largely backed — or at least did not overtly criticise — the reforms, though it noted widely publicised concerns around unintended consequences. “Changes to capital gains taxation and negative gearing can reduce housing-related distortions, but continued efforts to minimise compliance costs and impact on investment are needed during implementation,” the report said.

House price falls had done little to address unaffordable housing, the IMF said, welcoming steps taken to boost housing supply even as it urged state and federal governments to do more.

In the longer term, poor productivity growth was “Australia’s key structural challenge,” the IMF said. “Reversing the slowdown in recent years will be crucial to improving living standards” and making public and private debt obligations sustainable over the long run.

The Guardian wrote that the new assessment “will come as a blow to Jim Chalmers, the treasurer, who is already under pressure to present a convincing story of improving living standards and prosperity.”

The IMF comments arrive ahead of Monday’s release of the government’s latest intergenerational report, which The Guardian reported will paint a long-term and likely challenging picture of Australia’s economy and budget.