“The global situation is deteriorating” and “we won’t be completely immune from that”, Treasurer Jim Chalmers told the ABC on Monday.
While recession fears have previously been waved off by government ministers, Treasurer Chalmers admitted on Monday that challenges to the Australian economy “will continue to grow”.
Speaking on RN Breakfast, Mr Chalmers said that the challenges in the global economy are intensifying rather than dissipating as uncertainties surrounding the war in Ukraine continue to exert immense pressure on economies already rocked by the COVID pandemic.
“Our expectation is that the Australian economy will continue to grow, but so will the challenges to the Australian economy,” Mr Chalmers said.
Also on Monday, the OECD said it expected a sharp slowdown in Australian economic growth amid fears that central banks are driving the world into recession.
Globally, the OECD slashed its June forecast for global growth from 2.8 per cent to 2.2 per cent in 2023, and significantly downgraded Australia from 2.5 per cent to 2 per cent.
Compared to OECD forecasts from December 2021 — before Russia’s aggression against Ukraine — global GDP is now projected to be at least US$2.8 trillion lower in 2023.
According to the OECD, the US will experience muted growth of 0.5 per cent next year, while the UK will stall. Germany, which is heavily reliant on Russian gas, is predicted to enter a recession.
“Australia have somewhat stronger growth momentum currently than Europe and the United States, but that is projected to wane over the coming quarters, in part due to softer external demand,” the intergovernmental organisation said.
Commenting on the OECD’s findings, Mr Chalmers said “Australia is not spared from this darker and more dangerous global outlook”.
Turning to monetary policy, while the OECD acknowledged that higher rates would lead to “below-trend growth”, it judged that additional tightening is required in most major advanced economies to ensure that inflation pressures are reduced durably.
Recession risks high and rising
In his weekly economic and market update, AMP’s Shane Oliver evaluated that as central banks remain hawkish, “recession risks are high and rising”.
According to Dr Oliver, while the central banks’ commitment to driving inflation down is “good news”, the danger is that the Fed and other central banks have become locked into supersized hikes based on backward looking inflation and jobs data.
“This increases the risk of overtightening driving a deep recession,” the chief economist said.
Dr Oliver also warned the RBA against trying to match the Fed’s hawkishness and advised it to stop looking to the US for guidance.
“The combination of Australian households being far more vulnerable and hence responsive to rising rates than US households, lower inflation pressures in Australia and a desire to avoid overtightening means that RBA should not raise rates as aggressively as the Fed,” he explained.
“Overall, we think the RBA should scale back to 0.25 per cent at its October meeting, but it’s starting to feel like another 0.5 per cent is on the way.”
The OECD expects interest rates to end up at 3.6 per cent in Australia.
