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BFCSA: 'Delicate' Australian Property Market: IMF warns on property slide

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'Delicate': IMF warns on property slide

Australian Financial Review Apr 7, 2019 — 11.44pm

Jacob Greber


Washington | Australia's housing market contraction is worse than first thought, says a top IMF analyst, leaving the economy in what he called a "delicate situation" that boosts the need for faster infrastructure spending and even potential interest rate cuts.

In an exclusive interview, the International Monetary Fund's lead economist for Australia, Thomas Helbling, endorsed last week's federal budget forecasts for recognising the "weaker outlook" and its use of sober commodity price forecasts.

However, Dr Helbling warned the negative fallout from what the IMF will this week admit is a greater-than-anticipated property market downturn in Australia requires more effort by governments to deliver new sources of growth to make up for a worsening shortfall.

Dr Helbling implied the pace of infrastructure spending – as measured in the national accounts – has fallen short of what was scheduled in recent budget figures.

"I think given where the economy is now, that this growth impetus comes forward is important in the current cyclical setting.

"The ambition [on infrastructure spending] is in many senses welcome," he said. "The housing market downturn is sort of sagging on the demand side, so you want to have other demand sources pulling."

The assessment by Dr Helbling suggests whichever party wins the next election will have its work cut out for it sustaining Australia's near three-decade run of continuous economic growth.

The property market downturn will be among factors driving a likely downgrade in the IMF's latest forecast for the Australian economy, which will be published as part of the latest World Economic Outlook ahead of the fund's annual spring meetings in Washington this week.

"In terms of general direction, we're not surprised [prices have fallen]," Dr Helbling said. "That said, [the] downturn has been a bit bigger."

Furthermore, Dr Helbling said the contraction in residential investment – arguably the primary driver of Australia's economic growth since the end of the resources investment phase half a decade ago – has come "earlier than expected".

He confirmed the IMF will release forecasts in the coming week for Australia that incorporate the effects of a "stronger contraction in residential investment relative to what we had" at its last outlook which was based on the state of the economy in December.

The comments indicate Australia's economy is tracking below what the IMF anticipated six months ago in the last World Economic Outlook.

Back then the fund predicted growth would come in at 3.2 per cent in 2018 before cooling to 2.8 per cent. Official ABS national accounts published last month showed annual growth in 2018 came in materially lower at 2.8 per cent.

Given those factors, Dr Helbling said the Reserve Bank was right to shift last month from a tightening bias to a more neutral stance given weaker-than-anticipated GDP figures for the fourth quarter and "signals of weakness" elsewhere across the economy.

"I think the question is: will it need to change the monetary policy stance, and I think they are looking at that.

"It's a delicate situation at the moment."

He said there was still a plausible scenario in which the economy weakens in the first half of this year and then picks up without damaging the labour market, or dragging on the inflation outlook.

"In that case they could just keep the monetary policy stance," he said. "But it's also possible that maybe the inflation trajectory, the projection, shifts down a bit; labour market conditions are a bit weaker, and then by the very logic of the flexible inflation targeting regime, I would expect they would ease."

Asked whether that decision was likely to be made in the next few months, Dr Helbling said: "Yes".

"If there are material changes to inflation trajectory and, or – and typically it will be both, there will be an 'and', to the employment picture, I think they will."

On the property market the IMF's baseline forecast remains of an economy that absorbs the housing market downturn.

"In the sense it will be painful, there will be some wealth effects – it will, everything else, be a drag on the economy," he said.

Which is why there needs to be renewed focus on making sure there are "other forces that pull demand" up, he said.

When The Australian Financial Review interviewed Dr Helbling in Washington late last week he said he had only had a brief opportunity to study the budget, but said the primary forecasts were "broadly as expected".

"What we would look at in the first place is [whether}the weaker outlook has been incorporated That's always a big concern in a budget."

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