Chalmers warns ‘we won’t be immune’ as world teeters on brink of recession

Chalmers said the downgrade to global growth had “implications” for Australia’s GDP and unemployment forecasts.

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The IMF’s economic counsellor, Pierre-Olivier Gourinchas, said more than a third of the global economy was likely to contract next year, with the United States, European Union and China all continuing to stall.

There were severe economic storm clouds ahead, he said, noting the impact of Russia’s invasion of Ukraine, the slowdown in China and the cost-of-living crisis caused by broadening inflation pressures.

“In short, the worst is yet to come, and for many people, 2023 will feel like a recession,” he said.

Gourinchas said while central banks were “laser-focused” on bringing inflation under control, this ran the risk of lifting interest rates so high they drive the world into an “unnecessarily harsh recession”.

“The risk of monetary, fiscal, or financial policy miscalibration has risen sharply at a time when the world economy remains historically fragile and financial markets are showing signs of stress,” he said.

The last global recession was in early 2020 as countries shut down their economies to stop the spread of COVID-19.

Overnight, rating agency S&P Global said it believed the increase in US interest rates would result in the world’s largest economy suffering a recession next year. It is forecasting the American economy to contract by 0.5 per cent, after previously expecting it to expand by 0.9 per cent.

Chalmers will return from the US at the weekend, in time for the final preparations of his first federal budget.

In 2008, then-treasurer Wayne Swan toned down some expected budget cuts in his first budget after the IMF’s early May meetings of that year. Four months later, the global financial crisis started.

Chalmers said he would make changes to budget settings if necessary.

“If there are tweaks that need to be made more broadly, whether it is forecasts or in other ways, we will make them, but Australians should expect us to implement those policies and plans and investments that we announced.”

The new government has to make space for more than $2 billion of election promises due to start this financial year. It is also expected to slice spending pledges made by the Morrison government, particularly in infrastructure, as part of plans to reduce “rorts and waste”.

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In March, then-treasurer Josh Frydenberg forecast a combined $224.7 billion in budget deficits between 2022-23 and 2025-26, including a deficit this financial year of $78 billion.

Deloitte Access believes high commodity prices and low unemployment has sharply improved the budget bottom line. It expects Chalmers to reveal cumulative deficits of $179.1 billion, a near-$46 billion improvement.

This year’s deficit is expected to be $60.7 billion, falling to $42.5 billion in 2023-24.

Deloitte Access partner and report author Stephen Smith said there had been an astonishing improvement in the budget bottom line over the past two years, with an extra $114.4 billion in revenue tipped to flow into Canberra’s coffers over the next four years.

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But he said this was probably the last time there would be such a surge in revenue. Future improvement in the budget would have to come from changes in government policy.

“This is likely to be the last budget to unveil an unanticipated write-up in government revenue
for the foreseeable future. Continuing to repair the budget from here will require a more active
strategy,” he said.

“That means making some difficult decisions. Those decisions will involve navigating the
stand-off between ‘good policy’ and ‘good politics’ that keeps most treasurers up at night.”

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