The federal treasurer, Jim Chalmers, will use the state of the economy speech to trim the national growth estimates, citing global economic “headwinds”.
“[T]he headwinds our economy is facing – higher inflation at the top of that list, along with slowing global growth – are now reflected in the revised economic outcomes and forecasts,” Chalmers will tell parliament on Thursday according to an excerpt of his speech.
Instead of the 4.25% growth in 2021-22 as estimated by Treasury before the election, GDP growth will come in at 3.75%.
Similar half-point reductions will apply to the current financial year, with the growth forecast now trimmed to 3% from 3.5%, and next financial year, when GDP will expand by 2% rather than the 2.5% forecast under the former government just months ago.
Australia’s inflation rate will accelerate further to “north of 7%”, Chalmers told ABC’s RN Breakfast on Thursday morning. That’s potentially higher than the 7% peak indicated for late this year by Reserve Bank governor Philip Lowe, and quicker than the 6.1% annual rate reported for the June quarter.
Chalmers also told RN that it remained the government’s “expectation” that workers would start to see wage increases faster than the inflation rate during this term of parliament. Slowing GDP growth, though, would result in a “modest increase” in the unemployment rate that now sits at a 48-year low of 3.5%.
Chalmer’s update will echo warnings from the International Monetary Fund earlier this week that rising inflation – and resulting interest rate hikes by central banks – will trim global growth rates this year and next. Pierre-Olivier Gourinchas, an IMF economist, said the world was “on the edge of a global recession”.
Growth in the two biggest economies was particularly marked down. The US, where interest rates were raised by 75 basis points for a second month in a row by the Federal Reserve on Wednesday, may already have entered a technical recession as assessed by two consecutive quarters of economic contraction, the IMF said. The pace of rate rises is the fastest since the 1980s.
For China, by far Australia’s biggest trading partner, growth may slump to 3.3% in 2022. That’s the lowest in more than four decades excluding the initial Covid-sparked drop in 2020, the IMF said.
“A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors,” it said. “[F]urther tightening of supply bottlenecks could cause higher consumer goods prices worldwide, but lower demand might ease commodity pressures and intermediate goods inflation.”
After the June quarter consumer price index came in at 6.1% – the highest in 21 years – Chalmers told journalists inflation would “get worse before it gets better, but it will get better”.
Chalmers’ speech to parliament will also outline details of how slowing growth affected the new budget he plans to release in October.
“Australia is outperforming much of the world, but that doesn’t make it easier to pay the bills at home,” he will say. “Our high inflation is primarily but not exclusively global. It will subside but not overnight.
“We have it within us to stare down these threats, steer our way through this difficult period, and seize the opportunities of this new age.”
Chalmers made it clear he was open to wage increases even if they contributed to further price rises.
“Inflation is high and in the near term will get higher – but the primary cause of this is not higher wages – nowhere near it,” he will say.
“We don’t have an inflation problem because workers are earning too much.”
The new treasurer will also use his statement to lay some of the blame for Australia’s predicament on the Coalition.
“Australians are paying a hefty price for a wasted decade,” the speech says. “They know their new government didn’t make this mess, but we take responsibility for cleaning it up.”
However, Chalmers has doused expectations that wage rises will soon reach the pace of price increases.
“The idea that we would be forecasting wages growth that keeps up with that, I think would not be credible in the near-term,” he told reporters on Wednesday.
