‘Will affect us’: Treasurer’s dire warning

Addressing the nation in his budget speech on Tuesday night, Dr Chalmers made no secret of the fact that Australia was not immune to global economic pressures, which posed “immediate, near-term challenges” for the country and which will subject the population to “hard times”.

“Outside of the pandemic and the Global Financial Crisis, the next two years are expected to be the weakest for global growth in over two decades,” he said.

“This will affect us here in Australia.

“Our economic growth is expected to slow from 3 ¼ per cent in 2022–23 to 1 ½ per cent the year after, before recovering to 2 ¼ per cent in the next.”

However, he remained upbeat when it came to Australia’s ability to weather the storm during this “time of economic uncertainty”.

“Despite this, our economy will continue to create jobs and unemployment is expected to remain low by historical standards – 4 ¼ per cent in 2023–24, 4 ½ the year after,” he said.

Dr Chalmers conceded that inflation “remains our primary economic challenge”, with soaring cost of living pressures driving interest rate rises and eroding real wages, but said government policies were predicted to take three-quarters of a percentage point off inflation in 2023–24, “which is expected to fall from six per cent this year to 3 ¼ per cent next year” before “returning to the RBA’s target band in 2024–25”.

“Still higher than we’d like for longer than we’d like – but tracking in the right direction,” he said.

“So, while Australia may have a lot coming at us – we have a lot going for us too.”

‘Elevated risk of recession’

Meanwhile, the budget papers painted an even grimmer picture of things to come, providing extensive details on current international financial conditions which will impact Australia.

The papers noted that recent bank collapses in the US had “added additional uncertainty to the outlook” and that “further disruption” was possible as the economy adjusts to higher interest rates.

While regulatory responses have helped avoid a major widespread shock, “stresses have exposed vulnerabilities in parts of the global banking system, heightened investor risk aversion and generated tighter financial conditions for households and firms”, which will affect growth.

“The outlook for growth in advanced economies remains highly uncertain with risks firmly weighted to the downside,” the papers state.

“Financial conditions could deteriorate once again if markets become concerned about the health of financial institutions. The rapid rise in interest rates could also lead to a sharper slowdown in investment and consumer spending (and therefore growth) than currently anticipated.

“This outcome would be further compounded if inflation in advanced economies proves more persistent, requiring a more sustained tightening in monetary policy than currently expected.”

Despite easing energy inflation in the wake of Russia’s invasion of Ukraine, and a rebalancing of supply chains in the wake of the pandemic, inflation was remaining “sticky” in some countries, including the US, and was not expected to return to normal until 2025.

Meanwhile, while most big US and European banks have stabilised, “sentiment among investors and deposit holders also remains fragile” while commercial real estate exposure was seen as “another potential source of vulnerability, especially among small banks”.

And in emerging market and developing countries, “debt distress” was being triggered by higher borrowing costs and slowing growth, which could “contribute to further instability in the global economy”.

“The international outlook remains highly uncertain, with the balance of risks firmly tilted to the downside. There remains an elevated risk of recession across major advanced economies,” the budget papers note.

“An immediate and potentially significant downside risk to the global economy is an escalation of the recent banking sector stress.

“These events have complicated the task of central banks in setting monetary policy.”

Current uncertainty also increases the risk that central banks “over- or underestimate the amount of additional monetary policy tightening required to bring inflation sustainably back to target”.

Core inflation could also remain more persistent than expected, with energy and food markets both at risk from “extreme weather events” as well as the ongoing Ukraine situation.

Australia ‘not immune’

While the Aussie economy has so far remained relatively resilient in the face of global pressures, with strong household spending, employment growth, an increase in wages and elevated commodity prices, the budget papers stress that the economy “is not immune to the global slowdown”.

It also reports there are “clear signs” that higher interest rates and other cost of living pressures were starting to take a toll, with consumers and the housing sector “most exposed”.

“A key risk is a potential worsening of global financial conditions, which could impact confidence and global growth. Were this to materialise, lending conditions in Australia would tighten, households could become more cautious and businesses could delay investment decisions,” the papers state.

“More persistent global inflation than currently anticipated could result in tighter global monetary policy, which would further slow global growth, and dampen confidence and export earnings.”

If cost of living pressures don’t ease, households could end up cutting spending even more than expected, with the risk heightened if inflation were to stick around, keeping the cash rate higher for longer.

Finally, “further shocks cannot be ruled out” when it comes to global supply issues, which could in turn also drive up inflation.