Global fund tips Australia to lead world in inflation
Australia is predicted to have one of the highest inflation rates in the developed world as conflict in the Middle East threatens a global recession, according to the International Monetary Fund’s dire scenario forecasts.
In the latest update to its World Economic Outlook published late Tuesday AEST, the global lender of last resort said the world economy faces further pain if there is no quick resolution to the conflict.
The IMF revised its economic growth forecasts for Australia slightly downwards compared to January.
The national GDP growth rate is expected to fall from 2.1 percent to 2 percent in 2026 and from 2.2 to 1.7 percent in 2027.
But Australia’s inflation outlook has been revised significantly higher, with consumer price growth of 4 per cent in 2026 expected to exceed most developed economies including the US, UK and New Zealand.
The IMF was preparing to revise its growth forecasts upwards before the war.
But IMF chief economist Pierre-Olivier Gourinchas said the closure of the Strait of Hormuz and attacks on oil and gas facilities had halted positive momentum and raised the possibility of a major energy crisis if hostilities continued.
In a severe scenario where a protracted conflict would further damage energy infrastructure, global growth would fall to two percent in 2026, coming dangerously close to global recession.
“What should we avoid?” Mr. Gourinchas said.
Above all, governments should avoid wasteful and untargeted fiscal measures, such as energy caps or subsidies, designed to ease cost pressures on households and businesses.
“While such measures may be popular, evidence shows that they are often both poorly designed and too costly for the public purse,” he said.
“Furthermore, avoiding fiscal stimulus during a period of rising inflation is another critical component to not complicate the role of central banks.”
Economists have warned that the Albanian government’s cuts to fuel taxes will keep inflation higher for longer and reduce price signals that encourage Australians to save fuel by driving less, using public transport or cycling.
“It is important to maintain price signals: high prices signal scarcity, encouraging demand restriction and supply expansion,” Mr. Gourinchas said.
He called on central banks to pay attention to the rise in energy prices as long as inflation expectations remain firmly fixed and monetary policy settings have already been adjusted.
Regarding inflation expectations, RBA deputy governor Andrew Hauser said in a speech in New York on Tuesday that inflation expectations had picked up in the short term but remained stable in the long term.
But he admitted he wasn’t sure the rates were at the right level.
Looking beyond the conflict, the AI revolution holds promise of higher economic growth, productivity and ultimately living standards, but the scars of war will be long-lasting, the IMF said.
Finance Minister Jim Chalmers will travel to Washington DC on Wednesday to discuss the economic maelstrom with international counterparts, including British counterpart Rachel Reeves and Chinese Finance Minister Lan Foan, at the IMF-World Bank Spring Meetings.
Dr Chalmers said the report showed this was a “dangerous moment for the global economy”.
“We are considering all of this extreme uncertainty as we prepare a budget focused on resilience and reform.”
