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IMF upgrades point to substantial budget revisions

By Colin Brinsden, Economics Correspondent
Thu Oct 1 21:23:41 EST 2009
Thu Oct 1 11:23:41 UTC 2009

CANBERRA, Oct 1 AAP - Economists believe the latest optimistic upgrades to Australia's economic growth forecasts by the IMF suggest the federal government's projections are in need of a substantial revision.

In its latest World Economic Outlook, released in Istanbul on Thursday, the International Monetary Fund (IMF) jacked up its Australian gross domestic product (GDP) forecasts.

It is also now predicting the nation's unemployment rate will reach 7.0 per cent next year, well below the May budget projection of 8.25 per cent by mid-2010.

"The recent evolution of industrial production, retail sales, and confidence indicators suggests that Australia is on its way to recovery," the IMF said.

For 2009, the IMF forecast growth of 0.7 per cent, having previously expected a 0.5 per cent contraction.

It was the only advanced economy expected to grow this year.

For 2010, it expects the economy to expand by 2.0 per cent, up from its previous estimate of 1.3 per cent growth.

"(This confirms) our economy has outperformed all advanced economies during the global recession, with stronger growth and lower debt and deficits than the major advanced economies," Treasurer Wayne Swan said in a statement.

The government has said revisions to its May budget forecasts won't be announced until the Mid-Year Economic and Fiscal Outlook (MYEFO) later in the year.

"If (the IMF outlook) is some indication of how Treasury is going to change its forecasts in the MYEFO statement, there could be some pretty significant changes," Nomura Australian chief economist Stephen Roberts told AAP.

He said he wouldn't be surprised to see GDP for 2009/10 revised up by a full two percentage points.

That would take GDP to 1.5 per cent growth, rather than the 0.5 per cent contraction forecast in the budget.

Such growth should see the huge budget deficits forecast reined in somewhat," Mr Roberts said.

"Most of the work done for the May budget was done in the darkest gloom of recession fears. It hasn't quite panned out that way," he said.

The IMF also raised its projections for world growth but warned risks to the outlook remained on the downside.

"After a deep global recession, economic growth has turned positive, as wide-ranging public intervention has supported demand and lowered uncertainty and systemic risk in financial markets," it said.

However, it said the global recovery was expected to be slow as financial systems remained "impaired", support from governments would gradually have to be withdrawn, and households that suffered from "asset price bursts" would continue to rebuild their savings.

"Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery," it said.

It now expects world growth to contract by 1.1 per cent in 2009, a reversal from its previous forecast of 1.4 per cent negative growth.

For 2010, it forecasts growth expanding by 3.1 per cent in 2010, also an upgrade of 0.6 percentage points.

Mr Swan said the IMF had highlighted the considerable challenges ahead for the global economy with the recovery likely to be slow and unemployment continuing to rise for some time, adding that "complacency must be avoided".

"As the global policy support is gradually phased down over time and the inventory rebuilding progressively loses its momentum, private demand will need to gain momentum to sustain the recovery," Mr Swan said.