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Keep rates low to aid jobs, IMF urges

AAP logoAAP 14/11/2016

Australia needs to keep interest rates low and spend more on quality infrastructure for the economy to return to full employment, particularly against a weak global backdrop, the International Monetary Fund says.

In its preliminary findings of its annual official visit to Australia, the IMF says the nation's recent growth spurt above three per cent resulting from largely "temporary factors" could be prolonged if the improvement in the terms of trade boosts business confidence and unlocks investment.

It says Australia's economic performance has remained remarkable compared to other countries, but warns there is a downside risk to the outlook if investment remains subdued should company profits remain under pressure for longer.

"While unemployment has remained relatively low, underemployment and longer-term unemployment has risen, and nominal wage and inflation have been weak," it said in a statement on Tuesday.

"Consumption growth could turn lacklustre if wage growth stayed low."

The Washington-based institution says the fall in the unemployment rate has likely overstated the improvement in labour markets with the underemployment rate having risen as some 80 per cent of jobs created in the past year have been part-time.

It says Australia's prudential policies have improved the risk profile of new loans and resulted in a tentative stabilisation of the country's housing market.

However, declines in longer term interest rates and continuing strong demand, including from non-residents, has put renewed upward pressure on house prices in some cities.

It also says house price cycles have been amplified by a tax system that provides incentives for real estate investment.

It warns - in what could be viewed as a veiled swipe at US president-elect Donald Trump - there are risks to global trade for an exporting country like Australia from rising populism and nationalism in large economies and from tighter and more volatile global financial conditions.

This could result in a sharp slowdown in China, adding to Australian domestic risks, potentially triggering a housing correction.

However, Australians appear to have taken the surprise Trump win in their stride, no doubt helped by the general positive response of financial markets.

The weekly ANZ-Roy Morgan consumer confidence gauge edged up 0.3 per cent, building on the 3.2 per cent rise in the previous week.

ANZ senior economist Jo Masters was encouraged to see a steady result in the face of the surprise election result and in contrast to the 1.7 per cent hit to confidence in the wake of Brexit earlier this year.

However, she expects the news flow to remain dominated by the president-elect in the coming weeks as a clearer picture of the new administration's policy platform emerges.

"As such, there remains the potential for bouts of financial market volatility and a consequent impact on confidence," Ms Masters said.

Shadow treasurer Chris Bowen said for all Prime Minister Malcolm Turnbull's talk about "jobs and growth" the IMF report embarrassingly confirms the rise in underemployment.

He said the IMF had again raised the red flag on negative gearing and capital gains tax arrangements.

"The Turnbull government should take heed of the world's pre-eminent economic institution, stop playing politics and immediately look to reform negative gearing and capital gains which would improve macroeconomic resilience," he told AAP.

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