The IMF's World Economic Outlook (WEO) has reaffirmed the strength of Australia's economic fundamentals in the face of a weaker global recovery, with the Australian economy again forecast to outperform every major advanced economy over this year and next.
While prospects for our region remain positive, the IMF notes that the global recovery has recently suffered new setbacks, with the crisis deepening in the euro area, and weakness in advanced economies as a whole contributing to more moderate growth in emerging economies. The WEO notes:
"The recovery has suffered new setbacks, and uncertainty weighs heavily on the outlook. A key reason is that policies in the major advanced economies have not rebuilt confidence in medium-term prospects. Tail risks, such as those relating to the viability of the euro area or major U.S. fiscal policy mistakes, continue to preoccupy investors."
Reflecting this, the IMF has revised down its global growth forecasts, with the global economy expected to grow by 3.3 per cent in 2012, down from 3.5 per cent in their July WEO update. The IMF is forecasting global growth of 3.6 per cent in 2013, revised down from 3.9 per cent.
The IMF highlights that the crisis in the euro area remains the biggest threat to the global outlook. While recent policy interventions have helped ease financial market turbulence, European leaders must make progress on a fiscal and banking union, and implement broader structural reforms to boost growth and competitiveness and restore fiscal sustainability.
The report also highlights the threat of the excessive fiscal tightening in the Unites States at the end of 2012, which, if not averted, risks pushing the US economy back into recession. The IMF also underscores the need for US policymakers to achieve credible medium term fiscal consolidation while still supporting growth.
While weakness in advanced economies has weighed on activity in Asia, global growth will continue to be powered by growth in our region. China is expected to grow 7.8 per cent in 2012 and 8.2 per cent in 2013, and India is expected to grow 4.9 per cent in 2012 and 6.0 per cent in 2013.
Despite the impact of ongoing global headwinds and challenging conditions faced by some sectors, the IMF expects the Australian economy to grow by 3.3 per cent in 2012 and 3.0 per cent in 2013, outpacing every major advanced economy – another indication of the Australia's strong economic fundamentals. In 2013, the IMF also expects the Australian economy to grow twice as fast as advanced economies as a whole (1.5 per cent). The IMF's growth outlook for Australia remains consistent with the economy growing around its trend rate.
The IMF also forecasts Australia's unemployment rate to remain low at 5.2 per cent in 2012 and 5.3 per cent in 2013 – dramatically lower than unemployment levels across most major advanced economies.
The Australian economy remains the standout performer of the developed world, with solid growth, low unemployment, contained inflation, strong public finances and an enormous pipeline of investment in resources, which is boosting our economic capacity and export volumes.
The Government remains on track to return the budget to surplus in 2012-13, well ahead of every major advanced economy, although weaker global growth and lower commodity prices will clearly make this task more challenging.
Today's report follows the IMF's recent concluding statement on Australia, which again strongly endorsed the Government's clear and credible fiscal strategy, highlighting that the return to surplus in 2012-13 remains appropriate in the current economic conditions.
Later this week, I will travel to Japan for the annual meetings of the IMF, World Bank and the East Asia Summit Finance Ministers' Meeting. These meetings will provide a timely opportunity to get a first-hand assessment of regional and global economic developments from my counterparts, and discuss the challenges facing the global economy and the need for policy makers to do more to deal with continued volatility.