IMF warns Chalmers as recession risks grow
Finance Minister Jim Chalmers has been warned not to use the budget to hand out cost-of-living benefits to deal with inflation fueled by the Iran war, while the International Monetary Fund fears the world could be tipped into a recession if hostilities end soon.
The Central Bank deputy governor said central banks were facing an economic “nightmare” as rising oil prices hurt shoppers and businesses, while the IMF said overnight the war had disrupted the world economy and increased inflation pressures that could take years to overcome.
While the Australian economy is expected to be one of the strongest in the world this year, it is also predicted to have some of the highest inflation; This will get worse if Chalmers goes on a spending spree on May 12 without balancing the budget with spending cuts.
The IMF lowered its outlook for the global economy, predicting that it will grow by 3.1 percent this year. This would be a decrease from 2025 and well below the 3.7 percent average between 2000 and 2019.
The international fund said it would have raised its outlook if there had been no war, but the combination of the contraction in key export supplies from the Middle East and the resulting rise in inflation would harm world economic activity.
The IMF has warned that its forecasts are based on a rapid resolution of the war, such is the uncertainty over the outlook. If the war continues, growth could fall to just 2 percent, which would be the first global recession since the pandemic, and inflation would rise above 6 percent.
The Australian economy is expected to grow by 2 percent this year; This will be the world’s third fastest economy among rich countries, behind the United States and Spain. But Australia’s inflation will be among the highest at 3.9 per cent, ranking alongside countries such as Russia (5.6 per cent) and Brazil (4 per cent).
Countries at the heart of the war face dire economic consequences. Iranians face an inflation rate of 69 percent this year, after 50 percent in 2025, while the economies of the United Arab Emirates, Qatar, Iraq and Bahrain are expected to contract in 2026.
At least 60 countries, including Ireland and Japan, have implemented cost-of-living reductions to cope with the rise in fuel prices. The Albanian government halved the fuel tax for three months and reduced gasoline prices by 32 cents per liter, at a cost of $2.5 billion to the federal budget.
But IMF chief economist Pierre-Olivier Gourinchas, who called on central banks to be “cautious” against any burst of inflation, said the spending spree would only exacerbate inflation problems.
“Where financial support is deemed necessary to protect the most vulnerable against extreme external shocks, this support should be targeted, timely, temporary and financed within existing budget limits through reprioritisation of expenditure and, if this is not possible, the way to restore fiscal balances should be clearly communicated,” he said.
“To replenish buffers against future shocks, governments…must mobilize revenues, reprioritize spending, make spending more efficient, and prudently manage unexpected outcomes.”
Chalmers, who will attend IMF meetings in Washington this week and hold bilateral talks with finance officials from South Korea, Japan, China, England, Indonesia and Singapore, said the fund’s forecasts underline the dangerous moment facing the global economy.
He said the cost of the war in the Middle East would weigh on the domestic and global economy for some time and the issue would be at the center of next month’s budget.
“The world expects slower growth, higher inflation and extreme volatility due to conflicts in the Middle East, and so do we,” Chalmers said.
“We are considering all of this extreme uncertainty as we prepare a budget focused on resilience and reform.”
Data released on Tuesday showed that business and consumer confidence have plummeted due to the war.
NAB’s closely watched measure of business conditions and Westpac’s similarly important consumer confidence tracker showed confidence had fallen to its lowest level since the depths of the pandemic.
Business confidence fell 29 points in March, according to NAB, but business conditions fell by only one point.
Westpac’s measure fell almost 13 points in April as consumers were particularly concerned about their current financial situation, while 80 per cent expect interest rates to rise in the next 12 months.
Nearly 40 percent think rates could rise by a full percentage point. If this happens, monthly repayments on a $600,000 mortgage will increase by $400.
Shadow treasurer Tim Wilson said the fall in confidence was an indictment of the government’s economic management.
“This collapse in consumer and business confidence is not abstract; they are a decision about the Albanian government’s active inflation agenda and its preparedness to counter international events,” he said.
At a conference in New York, RBA deputy governor Andrew Hauser highlighted the collapse in consumer confidence as well as the inflationary impact of rising oil prices.
“We are the country that uses the most diesel per capita in the world. So even if national income and fiscal coffers benefit from this export position, this is a big real income shock for Australia,” he said.
“I think if you put all of this together, it’s clear that inflation will rise in the short term and people are aware of that.
“Consumer confidence indexes have fallen. I don’t think these surveys tell you much about what consumption will do, but if they’re right we’re looking at a big income shock. It’s a central banker’s nightmare.”
Markets viewed Hauser’s comments as confirmation that the Reserve would consider a third consecutive rate hike at its meeting in May. The Australian dollar, which fell below 70¢ earlier on Monday, rose above 71¢ on expectations that interest rates might rise.
The RBA’s meeting will be held a week before Chalmers announces the budget.
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Shane Wright is senior economic correspondent for The Age and The Sydney Morning Herald.Connect with: X or email.
