Incoming treasurers invariably discover “black holes” in inherited budgets and then accentuate the economic negatives to lower the bar for future comparisons.
In Jim Chalmers’ case, expect an array of perceived budgetary bungles over the past decade of Coalition rule to be revealed ahead of his October debut budget.
But on the economic front the dark clouds are rapidly gathering on their own.
The International Monetary Fund’s updated 2022 World Economic Outlook, released on Tuesday night, warned that global output shrank in the second quarter of this year, prompting the IMF to shave full-year forecasts further.
On the face of it, the slowdown is not yet precipitous. The fund tipped global economic expansion in 2022 of 3.2%, or about half of last year’s 6.1% spurt.
The forecast is only 0.4 percentage points slower than its outlook in April. Next year’s projection is for 2.9% global growth, down 0.7 percentage points from its earlier tip.
But the caveat is the outlook remains “extraordinarily uncertain”. A range of things could turn out to be worse than expected, such as Russia turning off more of its gas supplies to Europe in response to the sanctions for its invasion of Ukraine, or that inflation expectations no longer remain stable.
“Disorderly adjustments” – that is, crashes – in financial markets, as central banks jack up interest rates to keep inflation fears in check, might also shatter those forecasts.
Indeed, the IMF report offered ample ammunition for Chalmers, should he want to fire a few warning shots during his “state of the economy” speech to parliament on Thursday. He should be armed with fresh domestic data by then, with Wednesday’s release of June quarter headline consumer price index figures likely to start with a “6”.
That figure – while the highest in more than three decades – may look modest alongside the 9.1% inflation pace in May for the UK and in June for the US, but nobody expects it to mark the peak in Australia.
Chalmers’ Treasury minions will also have appraised him of the implications of a possible “supersized” interest rate hike by the US Federal Reserve when its board meets on Wednesday morning.
The US, still the largest economy in the world, fared poorly in the latest IMF outlook. The fund slashed America’s growth outlook by 1.4 percentage points since its April estimate, in part because of the Fed’s sharply tighter monetary policy.
Chalmers is getting used to his own drill. By next Tuesday, he’ll be giving his third post-rate rise comments – a script likely to updated for months to come – when the Reserve Bank of Australia again hikes its cash rate.
The RBA’s first rate increase in a decade began fortuitously for Labor’s election campaign during the final weeks of the Morrison government. The size of next week’s rate climb will hinge on how spiky those CPI numbers look.
But seasoned economists including Chris Richardson have said Chalmers will have good news to go with the bad. For one thing, the Australian economy maintains more momentum than most rich nations, in part because of tailwinds from higher commodity prices after Russia’s disruptions to energy and food markets.
Unemployment levels, already down to a half-century low of 3.5%, are likely to fall further if the vacancy to jobseeker ratio is any guide. Even so, it hasn’t been wages fuelling inflation but rather shortages of goods and services – some of them Covid-related.
“I’m not particularly scared of a wage price spiral in Australia, and I don’t think Treasury will be either,” Richardson said. If that holds true “some of the expectations about where rates will hit may be overdone”, he added, which is why he’s not expecting a recession in Australia.
Still, as the IMF implied, risks do seem to be gathering on the downside. Take China, Australia’s biggest trade partner by far, where the economy actually contracted in the June quarter from the previous three months.
The fund has sliced its prediction for China’s 2022 GDP growth by about a quarter from its April estimate, to 3.3%. Excluding the initial Covid contortion, that would be the country’s slowest pace in more than four decades.
The IMF blamed rolling Covid shutdowns and the nation’s “deepening real estate crisis”.
Tales of “mortgage strikes” may continue, especially if more big developers battle to meet debt repayments in the coming months, much like not-so Evergrande last year with its US$300bn (AUS$430bn) debt mountain.
Real estate, as it happens, may also be on Chalmers’ worry list.
According to the Australian research director for CoreLogic, Eliza Owen, property values in Sydney are down almost 5% since mid-February’s peak.
“This is the fastest decline in dwelling values across Sydney since the 1980s, when dwelling values fell 5.1% in the four months between October 1984 and February 1985,” she said. “Perhaps it is not all that surprising, given it is coming off the largest upswing in values since the 1980s.”
Melbourne’s 3% decline from its peak over about four months is not quite at the pace of the post-Global Financial Crisis crunch in 2008.
Nationally, property values have dropped 1.9% in a little under three months, Owen said, the biggest decline since the 1980s. But for now it’s shy of the 8.4% fall between 2017 and 2019.
Still, Chalmers won’t need to look far for tales of economic woe – if that is his plan.
