Cross-posted from Martin North’s DFA Blog.
The IMF recently released their Regional Economic Outlook: Asia and Pacific. The report contained a number of interesting nuggets about the Australian economy. We summarise some of the most significant observations in the post. Of course, beauty is in the eye of the beholder, so my selection will be a personal one, selecting the issues which resonated for me.
First, growth. Growth in Asia is projected to remain steady at 5.4 percent in 2014 and 5.5 percent in 2015, helped by stronger growth in advanced economies, healthy labour markets, and robust credit growth. However they downgraded Australia’s GDP growth forecast for the next couple of years. 2014 is now at 2.6% and 2015 is now at 2.7% (both down 0.2% from the October 2013 update). “Australia’s economy is likely to grow below trend as the investment phase of the mining boom passes its peak and begins to decline. Growth is expected to remain broadly stable at 2.6 percent in 2014, with a modest pickup going in 2015.”
The IMF shows the relative position of Public Debt and Fiscal Balance across the region. Given the current “budget emergency” in the local political narrative, it is useful to highlight that Australia is currently relativley well place, compared with the US, UK or Euro area. The data shows the current emergency is a confection.
Turning to inflation, they have a range of estimates across the region, low in Taiwan, Singapore and Korea, high in India, Indonesia and Vietnam. Australia registers a little above the top of the RBA target of 3% in 2014, and slightly lower in 2015.
The IMF summarises the tier 1 capital ratios across the region. Taiwan, China and India are the only countries in the region with lower tier 1 capital. Australia sits about around 10% and is below the average for the Euro region, United States and Latin America. Japan has more than double the tier 1 capital buffers. This raises the question of the adequacy of the Australian tier 1 arrangements, and despite some increases, there are a number of offsets which reduce the requirements.
Of course local regulators will argue that the banking system in Australia has lower risks, but that does not jive with the IMF data on non-performing loans. On an international basis current Australian tier 1 ratios are not that flash!
Turning to household debt to GDP ratios, we find the IMF reporting that Australian households are at the top end, with New Zealand. They show the penetration of housing debt, which is high in Australia. They comment generally “Rising household indebtedness represents an emerging vulnerability in the region, particularly where it has grown rapidly, posing risks to domestic demand. A sharp decline in house prices could be both a trigger and an amplification mechanism for these risks”.
Turning to macroprudential measures, aimed at helping to control the economies, the IMF state that there is evidence that macroprudential measures when applied to the housing sector can help to control risks in the market, but there is little evidence that other macroprudential measures are as effective. “Housing-related measures have mitigated private credit growth in Asia, but this is not true for other MPP instruments and CFMs”. “It is important to note that macroprudential tools seek to contain the buildup of financial imbalances, including in specific sectors, and to enhance resilience against financial cycle downturns, but they are not intended to play a broader role in economic management”.
