Australia’s economic growth will slow as the global economy faces “perilous” challenges, persistently high inflation and risks of further financial turmoil, the International Monetary Fund said in its latest global outlook report.
The country’s gross domestic product grew last year by 3.7% but is expected to expand just 1.6% this year and 1.7% in 2024, according to the IMF’s forecast – potentially less than population growth.
Its figures are similar to those from Australia’s Treasury and the Reserve Bank, the latter predicting 1.5% growth this year and next.
“The situation in the world has become more complex and more challenging even over the course of the last few months,” Jim Chalmers told the ABC on Wednesday. “And so we won’t be completely immune from that.”
Chalmers heads to Washington DC this week for a gathering of G20 finance ministers before returning to Australia to prepare for his second federal budget on 9 May.
“The Treasury does expect our own economy to slow considerably later this year,” he said. “Because of that combination of a slowing global economy and the impact of higher interest rates here at home as well. So we’ve got a lot coming at us from around the world.”
Globally, growth will ease from 3.4% in 2022 to 2.8% this year before “settling at 3% five years out – the lowest medium-term forecast in decades”, the report said. The slowdown will be particularly evident in advanced economies, with 1.3% growth expected this year, and the UK and German economies shrinking.
What is the IMF?
The International Monetary Fund, created in 1945, is an organisation of 189 countries based in Washington DC. It is governed by, and accountable, to member countries.
Its goals are to ensure the stability of the international monetary system (exchange rates and international payments), to secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty.
The IMF has bailed out scores of countries over the years, including the UK in 1976 when the minority Labour government borrowed £2.3bn from the fund to stabilise the value of the pound; Iceland in 2008; and Greece in 2010, 2012 and 2015.
The number of bailouts of African countries has also increased in recent years as states became more vulnerable to commodity price crashes.
The IMF was conceived at a UN conference in Bretton Woods in the US in July 1944 to build a framework for economic cooperation to avoid the devaluations that contributed to the Great Depression of the 1930s.
Most funds for IMF loans are provided by members via payments based on their position in the world economy, although the IMF can also borrow. Its decision-making also reflects members' relative influence. The Fund, as it is known, is one of the world’s biggest holders of gold.
“The anaemic outlook reflects the tight policy stances needed to bring down inflation, the fallout from the recent deterioration in financial conditions, the ongoing war in Ukraine, and growing geo-economic fragmentation,” it said.
Headline inflation internationally will ease from 8.7% last year to 7% this year as commodity prices fall but underlying, or core inflation, will decline more slowly. Price increases are unlikely to return to targets set by central banks before 2025 in most cases.
For Australia, consumer price increases are projected to slide from 6.6% in 2022 to 5.3% this year and 3.2% in 2024. That compares with the RBA’s latest estimates for CPI to come in at 4.75% this year and 3.5% in 2024.
IMF’s chief economist, Pierre-Olivier Gourinchas, said higher interest rates and slowing growth could expose more banks to the risk of failure, as seen last month, with some nations also struggling to repay debt.
“We are therefore entering a perilous phase during which economic growth remains low by historical standards and financial risks have risen, yet inflation has not yet decisively turned the corner,” Gourinchas said.
While the global economy has regularly endured cycles of increasing growth and slowdown, the recent strains “may also reflect more ominous forces”, the IMF said.
These include “the scarring impact” of the Covid pandemic, a slower pace of structural reforms and a rising threat of the global economy fragmenting into blocs resulting in rising trade tensions.
Among the positive recent developments has been China “rebounding strongly following the reopening of its economy” after extensive rolling lockdowns to contain the spread of Covid, the IMF said.
The IMF’s expectation is for China’s economy to quicken to 5.2% GDP growth in 2023 from 3% last year. It will slow, though, to 4.5%, in forecasts unchanged since the Fund’s January outlook.
The IMF report notes China is less likely to be the engine of global economic growth as it has been in recent decades.
Worsening US-China relations have also added to trade headwinds. The IMF noted recent US actions are “explicitly aiming to hinder China’s advancement in sectors such as semiconductors and green energy equipment”.
While there are some “upside risks”, such as unemployment rates staying lower than expected, supporting consumption and growth, “risks to the outlook are squarely to the downside”, the IMF said.
“With debt levels, inflation, and financial market volatility elevated, policymakers have limited space to offset new negative shocks, especially in low-income countries.”
Chalmers told ABC Radio that despite “these gloomy forecasts from the IMF”, Australia had “a lot going for us as well”.
“We’ve got low unemployment, we’re getting good prices for our exports, we’re seeing the beginnings of wages growth, which is really important,” he said.
