australia gets the thumbs up from imf...

Source: www.news.com.au/business (breaking news)

Australia gets thumbs up from IMF
By Sandra O'Malley - October 24, 2006 12:20pm

THE International Monetary Fund (IMF) has given the Australian economy the thumbs up, saying it has a bright outlook and it is well placed to deal with commodity price falls.

Australia's economy is riding high on the back of strong demand for its resources from a booming China and India, with unemployment at 30-year lows and a strong corporate sector filling government coffers with tax.

In its annual assessment of the Australian economy, the IMF warned that the recent improvement in Australia's terms of trade, resulting from high commodity prices, may not be long-lasting.

But it believed Australia would be able to cope with that eventuality.

"Directors noted that much of the recent improvement in Australia's terms of trade may eventually be reversed, and that there are also broader downside risks to the global economic outlook in the medium term," the IMF said.

"Nonetheless, directors considered that Australia's macroeconomic policies, flexible exchange rate regime, and the robust medium-term fiscal outlook and the medium-term focus of monetary policy provide substantial cushions to help the economy cope with a fall in commodity prices or other shocks."

But, with Australian households' unfailing appetite for credit, the IMF did sound a warning note for authorities to monitor private external debt closely.

While endorsing the establishment of the Future Fund and the government's achievement in eliminating public debt, describing it as an "impressive milestone", the IMF urged the commonwealth to consider using some of its surplus to help progress the national reform agenda.

They think this investment could help Australia better deal with the future challenges of an ageing population and rising healthcare costs.

"Directors recognised that progress on this reform agenda would be challenging, as evidenced by the lagging reform implementation in crucial areas, such as trading water," the IMF said.

"Accordingly, directors urged the authorities to make appropriate use of the resources provided by the recent surge in fiscal revenues to help spur the implementation of reforms.

"They considered that such an investment in reforms would help sustain strong economic growth and better position Australia to address the challenges of an ageing population and rising healthcare costs."

Overall, the IMF said Australia's economic performance was robust and its "prospects remain bright".

"The economy is entering its 16th year of expansion, reflecting the benefits of wide-ranging structural reforms and sound macro-economic policies," it said.

After a modest slowing last year, it expected growth to strengthen once more.

"Strong global growth has lifted Australia's terms of trade to the highest level in three decades," the IMF said.

"As a result, business investment has risen sharply, laying the foundation for solid export-led growth in the medium term."

At the same time, however, commodity prices were "assumed to decline significantly owing to an expansion in the global capacity of the mining sector.

"But there are both upside and downside risks to this outlook," the IMF said.

The IMF judged the two interest rate rises this year as an appropriate tightening given the prospects for inflation from rising world commodity prices and the tight labour market in some sectors.

"(Directors) noted that further monetary tightening may eventually be needed if domestic demand growth or other factors lead to an increase in underlying inflation pressure," it said.

Inflation figures, out tomorrow, are expected to play a major deciding role in whether the Reserve Bank of Australia lifts rates in November.