(Australian Associated Press)
The International Monetary Fund says any pickup in Australian economic growth is likely to be "modest" and has dimmed hopes for stronger wage growth.
The IMF's preliminary annual report on the Australian economy says global growth, low local unemployment and new infrastructure projects more than offset declining housing investment.
But any pickup will be modest until the economy has been operating at full employment for some time.
The Washington-based institution praised Australia's continued recovery under the transition from the mining boom despite setbacks, citing strengthened domestic demand and employment growth since the beginning of the year.
"But labor market slack remains present and wage growth has remained weak," the IMF said in a concluding statement on Monday.
It said Australia will need interest rates to remain low in order to achieve full employment.
"Securing the return to full employment and inflation objectives durably will require continued macroeconomic policy support," the IMF said, adding low wage growth has continued to weigh on household consumption.
The local housing market is expected to cool but affordability issues and household debt vulnerabilities are unlikely to be corrected soon, it said.
Driving the cooling down is the expectation that the building completion rate will catch up with demand in major eastern capital regions.
But given continued strong population growth and foreign buyer interest, the IMF expects demand growth for housing to remain robust and said prices should stabilise rather than fall significantly.
IMF mission chief Thomas Helbling told a briefing in Sydney that supply-side policies will be needed for a longer-term balance in the housing market.
"In an economy like Australia where much of the growth is housing, it is also about a balance of supply and providing an affordable space for urban areas to develop," Mr Helbling said.
The IMF also cited Australia's"notable" infrastructure gap compared to other advanced economies and said more government spending on infrastructure particularly roads, ports and public transport will be crucial for future growth.
"While the recent boost has helped to narrow the gap, it might not be enough to close it," the IMF said.
"Further increases in investment have the potential to improve physical and digital interconnectivity, both internally and with Australia's trading partners, thereby contributing to higher growth."