Global headwinds will continue to buffet Australia’s economy as Treasurer Jim Chalmers sets a course for a final approach towards low inflation.
Dr Chalmers is confident Australia remains on track for “a soft landing on a narrow runway”, although low economic growth and persistently high inflation are still cause for concern.
Australia’s economy grew at an insipid 0.1 per cent in the March quarter. While still not a contraction in real terms, it was the fifth consecutive quarterly fall in gross domestic product on a per capita basis.
Viewed in combination with tepid consumer spending and a weakening labour market, the path for the government to bring inflation down to the Reserve Bank’s two to three per cent target while avoiding a recession is narrowing.
But Dr Chalmers is optimistic – and he says his latest budget is the reason why.
Tax cuts, investment in the green energy economy and cost-of-living measures such as energy bill relief put Australia in good stead to weather the global storm.
“This is what a soft landing on a narrow runway looks like,” he will say in a speech to the Morgan Stanley Australia Summit on Wednesday.
“An economy still growing, inflation coming back to band, unemployment with a four in front of it, tax cuts and rising wages supporting a gradual recovery in consumption, and a sensible approach to budget repair to buffer us against uncertainty,” Dr Chalmers will say.
“This is the soft landing we are cautiously confident of, but not complacent about.
“Just as a soft landing in the global economy is assumed, but not yet assured.”
While the global economy is stabilising, it is far from finding a path to prosperity.
In its latest Global Economic Prospects report, released on Wednesday, the World Bank predicted global growth to stabilise at 2.6 per cent in 2024 before edging up to an average of 2.7 per cent in 2025/26 – well below the 3.1 per cent average in the decade before COVID-19.
Global inflation is also taking longer to get under control than previously hoped, causing many central banks to keep interest rates higher for longer.
The figure is expected to moderate to 3.5 per cent in 2024 and 2.9 per cent in 2025.
“Although food and energy prices have moderated across the world, core inflation remains relatively high – and could stay that way,” said Ayhan Kose, the World Bank’s deputy chief economist.
“An environment of ‘higher-for-longer’ rates would mean tighter global financial conditions and much weaker growth in developing economies.”
ANZ broke ranks with the other major banks on Tuesday, pushing back its forecasts for an RBA interest rate cut until 2025.
ANZ head of Australian economics Adam Boyton said higher interest rates were clearly working to slow the economy, but demand was taking longer than expected to bring back into balance with supply.
Jacob Shteyman
(Australian Associated Press)
