In its recently released World Economic Outlook (WEO), the International Monetary Fund (IMF) has downgraded its Australian growth forecast from 2.1 per cent to 1.7 per cent in 2019. This is lower than the projection provided for Greece’s economy (2 per cent), which has experienced many years of depression in the past.
The IMF has also slashed the 2020 real GDP projection by 0.5 percentage point to 2.3 per cent.
In addition, the organization has also lowered the global growth forecast from 3.2 per cent to 3 per cent for 2019, stating that the global economy is in a synchronized slowdown. As per IMF, the 3 per cent projection represents the world’s slowest economic growth since the global financial crisis. Declaring it as a major setback from 3.8 per cent growth in 2017, the IMF mentioned that this subdued growth is a result of:
- Elevated uncertainty around geopolitics and trade;
- Structural factors like ageing demographics and low productivity growth in advanced economies;
- Idiosyncratic factors triggering macroeconomic pressure in many emerging market economies; and
- Soaring trade barriers.
Let us take a look at the IMF economic growth forecasts for some other countries in the below table:
Coalition Government’s Take on IMF Forecasts
Despite the IMF’s gloomy outlook for the Australian GDP growth, the federal government has refused to inject fiscal stimulus in the economy, stating that they would not endanger the proposed budget surplus this financial year.
According to Prime Minister, Mr Scott Morrison, the IMF forecast for Australia’s GDP was the second highest relative to the other major G7 countries of the world. Staying firm on its budget surplus plan, he called their policies as sound, stable and certain, not getting spooked by the international circumstances.
Treasurer Josh Frydenberg added that the federal government had delivered record infrastructure spending and tax cuts to boost the Australian economy. He believes that the IMF projections were pointing to the harsh international headwinds currently being faced by Australia and the rest of the world.
On the other hand, Shadow treasurer, Jim Chalmers, backed the RBA and the IMF’s call for fiscal stimulus to improve productivity and support the economy. According to him, the downgraded Australian growth forecasts indicate that the economy is losing strength.
Three Highlights from IMF Projections
Now, let us discuss the three key takeaways from the Australian growth forecasts provided by the IMF:
Pessimistic than RBA Forecasts
In its August 2019 Statement on Monetary Policy, RBA provided the Australian GDP projections as 2.5 per cent for 2019, 2.75 per cent for 2020 and about 3 per cent for 2021. The IMF’s recent forecasts are more pessimistic than the RBA’s estimates, being 32 per cent weak for 2019 and 16 per cent soft for 2020.
RBA’s projections were driven by the accommodative monetary policy and expectation of a revival in household income growth, inspired by tax cuts. In addition, the RBA projected Australia’s unemployment rate and inflation rate at 5.25 per cent and 1.75 per cent, respectively during 2019 and 2020.
The RBA highlighted the following domestic and global uncertainties around its August forecasts:
- Increase in downside risk to the outlook of global growth, emerging from the possibility of further escalation of a trade war between the US and China.
- Uncertainties over the resolution of a number of policy trade-offs that are being faced by the Chinese authorities.
- Possibility of tightened global financial conditions that could impact growth.
- Expected moderation in employment growth could result in lower than expected growth in consumption and household incomes.
- Weaker conditions in the initial stages of residential development inducing the risk of deterioration in dwelling investment greater than the forecast.
Influenced by Tough International Headwinds
The IMF’s weak Australian growth outlook was majorly driven by the tough international headwinds like Brexit tensions and the US-China trade war.
The ongoing trade war between the US and China has shaken the global economy, persuading the IMF to lower its forecasts. As per the IMF, the sluggish growth forecast for 2019 was induced by the geographically broad-based slowdown in global trade and manufacturing. The persistent uncertainty surrounding trade policy and higher tariffs have impacted the investment and demand for heavily traded capital goods.
Reacting to the gloomy outlook, Mr Frydenberg confirmed that the Australian economy does face headwinds despite its strong fundamentals. However, he mentioned that though Singapore, Germany, the United Kingdom and other economies witnessed negative economic growth in the June 2019 quarter, Australia’s economy stayed resilient and continued to grow.
The treasurer applauded the record labour market participation, AAA credit rating and 30-year low welfare dependency level of Australia. He cited that Australia has entered its 29th year of successive economic growth, which is a record incomparable to any other developed nation.
In Line with June Quarter GDP Results
Some economists believe that the current projections provided in the IMF’s World Economic Outlook are in line with Australia’s June quarter GDP results, that demonstrated a growth of 1.4 per cent in annual terms.
Australia reported a terrible economic growth figure through the year to the June quarter, slowing to its most sluggish pace since the global financial crisis. As per market analysts, the figures demonstrated weakness in the economy, driven by narrowing exports and government spending.
In response to the weaker economic growth and high unemployment rate, the RBA has recently reduced its interest rates to 0.75 per cent in October. Previously, the US Federal Reserve lowered its federal funds rate to give a boost to the economy.
The IMF estimated that without the central banks’ efforts to ease monetary policy, the global growth forecast would have been 0.5 per cent lower in 2019 and 2020. However, the organization has urged for greater government spending, warning that further easing of monetary policy (taking interest rates close to zero) won’t be enough to boost economic growth.
Amidst the current economic scenario in Australia, wherein the expectations of further rate cut have been reduced post the RBA minutes release, economists consider fiscal stimulus as an urgent need.
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