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A tick of approval for Australia but IMF warns of ‘hard landing’ risks

Australia gets an ‘A’ for Awesomeness.

Not really, but the International Monetary Fund (IMF) says that the Australian economy has been growing faster than most advanced countries, benefiting from our trade linkages with Asia, in particular China. The IMF also reported that it was supportive of the government’s efforts to return the budget to surplus.

GDP growth has accelerated in the first half of 2012 to 4%, and our economy is expected to grow at around 3.25% this year, driven by continuing strong demand for our natural resources, and buoyed by still-high growth in China.

On the other hand, the high Australian dollar, an uncertain global environment and sluggish housing construction means investment outside of the resources sector is likely to remain weak in the near term.

The IMF also says that if a downside global scenario materialises, the importance of the resources sector to the Australian economy makes the country vulnerable.

As an example, the IMF suggests that a hard landing in China would reduce demand for Australia’s exports, worsen the terms of trade, reduce household income and could trigger a fall in house prices. That in turn would then weaken consumer demand and growth, and negatively effect banks’ balance sheets.

In addition, the IMF stresses that our big four banks, Australia and New Zealand Banking Group (ASX: ANZ)National Australia Bank (ASX: NAB)Westpac Banking Corporation (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA) are systemic (read too big to fail), with broadly similar business models, and their reliance on wholesale and offshore funding remains a risk.

The IMF also noted that while our banks are well capitalised, residential mortgages are their biggest single asset, but household debt is high and house prices are elevated. While the banks could withstand extreme macroeconomic shocks, they would need RBA and government assistance to withstand an extreme funding shock – likely at the expense of shareholders.

Still, with unemployment at around 5%, well below most other countries, and government efforts to return a budget surplus, Australia should be fairly well protected from any major global economic shocks – such as the US ‘fiscal cliff’. As usual, the world’s best Treasurer, Wayne Swan picked up on the report, and says the IMF had given Australia the ‘big tick’ of approval.

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Motley Fool writer/analyst Mike King doesn’t own shares in the big four banks. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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