The International Monetary Fund’s latest report on global growth makes for some sobering reading, with the outlook over the next five years the weakest in more than three decades.
Entitled A Rocky Recovery, the report tells us the world is facing a “perilous phase”, with “feeble and uneven growth” partly blamed on “ominous forces” that could drag on growth and living standards for the rest of the decade and beyond.
What should Australians make of the findings and forecasts?
What’s new in the IMF report?
Arguably, not a lot.
The IMF, a Washington DC-based institution set up to foster growth after the second world war, routinely provides global economic forecasts.
Its baseline forecast is for growth to fall from 3.4% in 2022 to 2.8% in 2023, before settling at 3% in 2024. That’s a 0.1 percentage point trim from the fund’s forecasts in January for both this year and next – not a major shift.
This latest iteration is gathering more attention than most as the release coincides with spring meetings of the IMF and World Bank but also a G20 meeting of finance ministers from the world’s largest economies.
The treasurer, Jim Chalmers, is leading Australia’s delegation, which also includes the Reserve Bank governor, Philip Lowe, and the Treasury secretary, Steven Kennedy. With Chalmers’ second federal budget due on 9 May, interest in the IMF’s views are higher.
How does Australia’s economy stack up?
The IMF predicts Australia’s gross domestic product growth will more than halve this year to 1.6% and then hover around 1.7% in 2024.
When population growth is taken into account, there may even be a decline in per capita economic activity, private economists say.
Given the IMF team consults the RBA and Treasury in developing forecasts, we shouldn’t be surprised if they align. The central bank, for instance, expects GDP growth this year and next will be about 1.5%.
There is some discrepancy, though, with the IMF forecasting consumer price inflation of 5.3% for 2023 compared with the RBA’s estimate of 4.75% in its latest statement on monetary policy. By 2024, however, they converge again, with the IMF predicting 3.2% and the RBA 3.25%.
Alan Oster, NAB’s chief economist, is among those downplaying the importance of IMF reports, telling Guardian Australia they are “useful for benchmarking but little else”.
“We are lower than the RBA and I suspect the IMF” in GDP forecasts, Oster says.
How did markets respond?
Investors took in their stride the IMF’s gloomy prognosis for the global economy to remain in its worst funk for at least three decades.
European stocks ended higher on Tuesday while US counterparts ended mixed with attention directed instead towards Wednesday night’s release (Australian time) of US CPI figures for March.
These will likely determine what the US Federal Reserve board does with its key interest rate when it meets early next month.
Australian stocks rose at their opening and have traded higher through the day, continuing a general rebound that’s lasted about three weeks. The Australian dollar barely budged from its recent valuation of about two-thirds of a US dollar.
“The latest IMF global outlook agrees with our view of a likely soft landing of the global economy after the rapid increase in interest rates through 2022 and this year,” said Adelaide Timbrell, an ANZ senior economist.
“Despite recent global banking events, we do not expect a recession in Australia nor do we expect a hard landing for the global economy as our central case.
“ANZ still expects one more 25 basis-point cash rate hike later this year, in August.”
Is there a wider value of the IMF report?
Much as Intergovernmental Panel on Climate Change reports help focus the minds of governments on the threat from global heating (also without providing much that is new), IMF reports detail some of the big economic challenges facing governments.
Jameson Coombs, an economist with St George Bank, said the IMF’s “insights, analysis and forecasts are well-regarded and provide a very good overview of global economic conditions and expectations”.
“Beyond Australia, the report provides very useful insights for international economies,” he said.
Coombs said: “The latest report, for example, covers off the neutral interest rate which of course is a very useful for us economists,” referring to a rate that is neither contractionary nor expansionary for the economy.
For Chalmers, the latest assessment provides evidence Australia’s sliding economic fortunes are not his government’s fault. Indeed, dousing some of the excessive consumer demand might bring inflation down sooner and mean the RBA’s rate rise pause becomes a peak.
Investors continue to bet the RBA's interest rates have peaked at 3.6%, with the next move a cut by early next year. pic.twitter.com/vPA9M9vmhy
— @phannam@mastodon.green (@p_hannam) April 12, 2023
“We’ve got a lot coming at us from around the world but we’ve got a lot going for us as well,” Chalmers told ABC’s RN Breakfast. “We’ve got low unemployment, we’re getting good prices for our exports, we’re seeing the beginnings of wages growth, which is really important.”
However, some trends aren’t promising.
Will US-China relations continue to spiral towards the formation of two separate and potentially hostile blocs? Could the ongoing increases of interest rates by advanced economies’ central banks trigger more bank failures like Credit Suisse? Could the Russian war against Ukraine escalate?
Authorities “took quick and strong action” to head off recent financial turmoil, the IMF said, while noting some investors are actively hunting for the next failure.
“[The] financial system may well be tested again,” it said.
Remaining vigilant may prove to be a useful takeaway from the IMF.
