The International Monetary Fund cautioned that Australia still faces "significant risks and uncertainties" and has warned about the country's housing market and the slowdown in Australia's main trading partners, including China.
In a consultation paper, the IMF said the balance of risks to the growth outlook has improved, but significant risks and uncertainties still remain.
For 2017, the IMF expects real GDP growth to come in at 2.6 per cent, edging slightly higher to 3 per cent in 2018 and 2019, before dipping back to 2.9 per cent in 2020 and the subsequent years after.
"With inflation below target, still elevated underemployment, and remaining economic slack, the monetary policy stance should remain accommodative," the paper concluded.
The Reserve Bank kept interest rates on hold, as widely expected, at its first policy meeting for 2017 earlier this week.
While the cash rate remains at an historic low of 1.5 per cent, some analysts anticipate the central bank will hike rates in the second half of this year.
Meanwhile, the IMF forecast the unemployment rate to gradually fall over the next five years, from 5.7 per cent in 2017 to 5.1 per cent in 2022.
More support needed for transition from mining
The IMF noted that support is needed for a transition to non-mining growth, and also warned that a rise in protectionist policies in the global economy could pose a risk for the country.
The IMF said it saw scope for an increase in infrastructure investment, and supported the Federal Government's plans to balance its budget over the next four years.
The IMF's director said authorities, including the Australian Prudential Regulation Authority (APRA), should remain vigilant and increase the resilience of Australia's financial system to any shocks, including further strengthening how much capital banks hold.
"Financial regulatory authorities would need to stand ready to intensify targeted prudential matters, if lending or housing price growth were to reaccelerate," the IMF warned.
House prices in Sydney have surged by more than 70 per cent over the past five years and, in a speech given last night, Reserve Bank governor Phillip Lowe said housing affordability is an "increasingly important issue", while also backing the Government's campaign to lower the corporate tax rate.
Meanwhile, Treasurer Scott Morrison told reporters today at a press conference changes to tax laws are critical to Australia's competitiveness.
"I think his [RBA governor Philip Lowe] clear articulation of the challenges that are in front of the Australian economy ... I think set out clearly for Parliament as they consider not only the enterprise tax plan, but also the measures to fix the budget and make sure we meet the projection of a balance in 2021," Mr Morrison said.
"Cutting taxes for business supports wages, supports jobs, supports growth."
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