Chalmers downgrades forecasts for slower growth and higher unemployment

Possible fuel-excise cuts and spending cuts carry different economic trade-offs

Federal Treasurer Jim Chalmers said Friday morning that his officials were downgrading forecasts ahead of December’s mid-year budget update to show slower growth and higher unemployment. In a speech last week, he had said the economy would be “a bit better” in a year’s time. Friday’s disclosure replaced that limited reassurance with a weaker outlook.

“The pressures on people right now are very substantial and obviously that keeps me awake at night,” Chalmers told Politico.

He continued: “And there’s a number of reasons for that, some of them are outside our control, and some of them we have some influence over. You know, providing some cost-of-living help, managing the budget in a responsible way,” he said.

He added: “Those are the things that we can do, but in lots of ways we’re hostage as well to decisions taken in DC or Tehran or in Eastern Europe about two wars which are pushing up inflation around the world and weighing on growth around the world.”

The Guardian said high government spending was not helping the inflation fight, a point the opposition was keen to raise at every opportunity. Commins wrote: “Productivity growth is, if not dead, then resting, and shows no signs of springing back to its perch. That means more inflation at lower rates of growth as the economy hits its speed limits sooner.” The Guardian also said Chalmers was right that a lot was outside the government’s control.

The Guardian said the government could temporarily cut the fuel excise again to lower petrol prices, but the billions of dollars directed to motorists’ pockets would make it harder for the Reserve Bank to bring inflation back under control. Separately, Labor could announce plans for big spending cuts in the December mid-year economic and fiscal outlook; the Guardian said those cuts would help the central bank’s job but drag on an already weak economy and push unemployment higher. The Guardian questioned whether the spending cuts would win any plaudits.

Commins said Chalmers’s options to alleviate voter discontent were limited and that he frequently fell back on platitudes and lines such as “you think we have it bad? You should see other economies.”

The Guardian reported that overnight a broadening Middle East conflict pushed the global benchmark oil price to US$113, within sight of its April high of nearly US$120. Motorists were paying 60 cents more per litre for petrol than before the US and Israel attacked Iran. That difference meant an extra $36 to fill a 60-litre tank and, for a family filling once a week, $144 more a month than in February.

The New York Times reported overnight that the US and Israel had drawn up plans to restart attacks on Iran after the upcoming American midterm elections. Westpac analysts sketched an “escalation” scenario for the Middle East conflict in which oil climbs toward US$150, echoing warnings from the International Monetary Fund earlier this month. The Guardian said that worst-case path would have large implications for inflation and interest rates, even as Australia braced for a potential fifth interest rate hike on 3 November.

Patrick Commins, Guardian Australia’s economics editor, described spending associated with artificial intelligence as “the one bright spot that has helped paper over many of the cracks in the global economy” but said it had “hit some serious wobbles.” Investors were worried about the huge surge in debt among companies racing to build infrastructure for an AI future, which the Guardian said triggered another steep Wall Street sell-off overnight.

Commins wrote: “Community opposition to the massive datacentre build-out could stall the headlong rush towards an AI future. That is likely a good thing in the longer term, but in the short term is another stress to add to the wall of worries. Rising chatter of a new tech stock bubble is naturally accompanied by talk of an imminent bust.”

Commins wrote that Australians were seeking evidence of an end to years of disruption. He also said Australian wages could not keep up with high and rising prices. Andrew Hauser of the Reserve Bank called the combination of high inflation, low growth and rising unemployment a central banker’s “nightmare.” Commins wrote: “It’s also a nightmare for a federal treasurer who is increasingly unpopular and desperate for a win in the court of public opinion.”

Hauser described a “world of hard choices” in which “the solution to one problem makes the other worse.” Commins wrote: “A world with which Australians are becoming all too familiar.”

MSI previously reported that Chalmers had warned of intensifying budget pressure while the government worked on additional savings for December’s mid-year update. The current downgrade adds slower growth and higher unemployment to the economic pressure surrounding that update.