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IMF warns of risks for Australia's economy -

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ELEANOR HALL: The International Monetary Fund is going against that trend on interest rates. In its
latest report on the Australian economy, it says the Reserve Bank should consider more interest
rate cuts.

On Friday, the RBA board gave a very clear signal that it would keep interest rates on hold but
suggested it may raise them if there were signs of a durable economic recovery. The IMF though is
not so upbeat and it's warning that there is still a risk of a sharp fall in house prices over the
next few years.

Finance reporter, Sue Lannin.

SUE LANNIN: The International Monetary Fund says economic stimulus and lower interest rates limited
the fallout from the global recession in Australia. But it does have some reservations. It says the
Australian economy will shrink by half a per cent this year, and the main risks to growth come from
our trading partners. The fund says there is the scope for more interest rate cuts.

But the Reserve Bank now thinks that the economy will grow by half a per cent, and says it may
raise rates if a recovery takes hold.

Shane Oliver is the chief economist at AMP Capital Investors.

SHANE OLIVER: Bear in mind that the IMF would have finalised their estimates a fair bit before the
Reserve Bank figures were. The report from the IMF, I think, was finalised on July 22nd, and of
course the minus 0.5 per cent forecast was put out by the IMF back in June.

So yes, the IMF has revised up its numbers, but my feeling is that more recent information,
particularly data for the labour markets, consumer and business confidence and also the export
sector, would warrant a more optimistic take on the economy, more consistent with what the Reserve
Bank is saying in its latest statement on monetary policy.

SUE LANNIN: The IMF notes that its report that its medium-term outlook is more pessimistic than the
Government's. It thinks the Budget won't return to surplus until the 2017/2018 financial year. The
Government thinks it will return to surplus two years earlier.

Shane Oliver says he thinks it will be somewhere in between.

SHANE OLIVER: Well at the time of the Budget, many economists felt that the medium-term growth
forecasts embedded into the Budget and therefore underpinning the return to a Budget surplus were a
bit too optimistic.

Against that, I would probably say that the IMF forecast was probably a little bit too pessimistic.
So my feeling would be that it's likely to be somewhere in between. I think that at the end of the
day all of this highlights that sooner or later the Government will have to announce a tougher
stance in terms of the Budget, both in terms of either raising taxes or cutting spending.

SUE LANNIN: Professor of finance at the University of New South Wales, Fariborz Moshirian, says the
IMF's outlook for Australia is too pessimistic.

FARIBORZ MOSHIRIAN: Every time we get the forecast from the IMF we need to be cautious. Simply
because the Reserve Bank and the Australian Treasury have more resources, more insight about the
Australian economy and also we need to look at the forecasts in a dynamic process rather than in a
static environment, where for instance, in the next two to three years, we do not know the massive
amount of demand which might come at our port from China, India and other parts of Asia.

SUE LANNIN: But the professor of economics at the University of Newcastle Bill Mitchell thinks the
IMF is more on the money.

BILL MITCHELL: We're significantly exposed to the revision of all of the export contracts, even
though China looks like growing and Japan has got good figures out this morning on its trade and
manufacturing. We are facing lower contract prices and that will affect our receipts, our volumes
may well hold up, but our revenues will fall.

And I think it also still depends upon what happens in the US. I think the benefits of the low
interest rates on growth have been overrated. I think the major benefits have been taking the
pressure off the indebted households and I think right now if the RBA was to increase interest
rates, that would be a fairly, in my view, irresponsible way to go.

SUE LANNIN: The IMF is also worried by the high level of borrowing by Australian households. It
thinks house prices are overvalued by up to 20 per cent and they could fall over the next few

Bill Mitchell says the level of borrowing is a real concern.

BILL MITCHELL: Period of Budget surpluses really was associated, in Australia, was associated with
a massive escalation in household debt. That's really the only way the economy maintained its
growth as the Government was contracting through those surplus periods.

I think that was a fairly myopic growth strategy. I think that we are still highly exposed to that
household debt and at the moment the low interest rates and the strong fiscal intervention is
stopping major bankruptcies in the household sector and that's why we need to ensure that our
growth continues now.

ELEANOR HALL: That's the professor of economics at the University of Newcastle, Bill Mitchell,
ending that report by Sue Lannin.