Australia's time to steer: IMF Economy International Monetary Fund says productivity growth must be improved Rose Powell After years of rapid growth Australia faces a slowing economy unless policy changes are made. Photo: Bloomberg Australia is set to lose its charmed position that has seen it grow at double the rate of other developed nations, and will have to make significant policy changes to bolster its economic outlook, says the International Monetary Fund. 
The warning comes as the impact of China's slowing economy on commodity prices is beginning to hurt Australia's terms of trade and the profits of its mining companies, causing havoc in equity markets.
The IMF remained optimistic about Australia's growth potential but said the country would require more steering than during the mining boom years, and policy changes if it was to avoid a radically slower economy.
"After years of rapid growth, Australia's outperformance is fading with a soft real economy, a maturing financial cycle and slowing potential growth," the IMF said in its latest report card on the Australian economy.
The report highlights the risks for Australia as it faces weak domestic demand, a housing market correction, a slowing China and a more volatile global economy.
"Fiscal consolidation has become more difficult and public debt is rising, albeit from a low level. Lower export prices and weak wage growth are denting nominal tax revenues; unemployment is adding to expenditures," the report said.
These changes combined would lead to lower annual GDP growth, which in turn would have a negative effect on foreign investment.
The IMF said keeping income growth above the rate of inflation as well as creating more opportunities for growth would require improving productivity growth.
But the IMF's executive board said it was optimistic these changes could be made, citing Australia's "strong institutions, flexible economy, track record of undertaking comprehensive structural reforms, and the opportunities created by Asia's rapid growth".
The IMF also raised the increasing likelihood of a housing price correction, and called for greater investment in infrastructure to "relieve bottlenecks and housing supply constraints".
"Buoyant housing investor lending has recently prompted regulatory action to reinforce sound residential mortgage lending practices," the report said.
Similarly to the Australian Prudential Regulation Authority, the report said the big banks' strength and profitability would need additional support if a severe adverse scenario occurred, such as a housing bubble collapse. The report described housing prices as only moderately inflated, rather than in full bubble territory.
While political rhetoric about the need for a surplus has cooled over the past few months, the IMF supported the outlook in the 2015 budget that predicted a return to a small surplus in 2019 to 2020.