Economic growth nothing to celebrate in federal budget forecasts

The federal budget forecasts anaemic economic growth in coming years, well below the long-term average and lagging global peers.

The budget documents say there are recent indications that steel demand in China has likely peaked.

Australia’s economic growth rate will remain anaemic in coming years, well below the long-term average and lagging the global performance by a long shot.

And, while Treasurer Jim Chalmers says inflation could return to the Reserve Bank of Australia’s desired levels of 2-3 per cent by as soon as the end of this year – bringing with it an increased chance of cuts to official interest rates – this prediction is significantly more optimistic than that offered by the RBA just this month.

While Australia appears to have moved beyond fears that it would slip into a recession – fears that were quite live at this time last year – Treasury’s forecast for economic growth of just 1.75 per cent this financial year, increasing gradually to 2.5 per cent over the next three years, is nothing to celebrate.

This figure is well below Australia’s long-term average of 3.37 per cent over the period from 1960-2023, according to Trading Economics, and will lag the expected global growth rate of 3.25 per cent by a significant margin.

Treasury forecasts also tend to lean towards the optimistic, with the government this time last year predicting the economy would grow at 3.25 per cent in 2022-23, with the actual figure coming in at 3.1 per cent, the budget documents show.

This makes the Treasurer’s prediction for a rapid fall in inflation all the more ambitious.

Dr Chalmers said in his budget speech on Tuesday that “Treasury is now forecasting inflation could return to target earlier, perhaps even by the end of this year.”

“Annual inflation has more than halved from its peak in 2022 and it’s now lower than anticipated in the mid-year update, but we know people are still under the pump,’’ Dr Chalmers said.

“That’s why we designed our cost-of-living policies to ease these pressures and take another three-quarters of a percentage point off inflation this year, and half a percentage point next year.’’

The budget documents say the cash rate, which is set by the RBA, is expected to “gradually ease” from around the middle of next year to reach 3.6 per cent by the middle of 2026. The official cash rate is currently 4.35 per cent.

Dr Chalmers’ call on the inflation rate hitting the desired band by as soon as the end of this year is distinctly at odds with the RBA’s most recent forecast, which predicts the key measure of inflation, the consumer price index, will remain high at 3.8 per cent at the end of this year, and not return to the 2-3 per cent target range until December next year.

AMP chief economist Shane Oliver said this week the near-term risk for interest rates was actually “on the upside”, although his prediction was for a 25-basis point cut in the official cash rate, to 4.1 per cent, in November or December.

Dr Chalmers said the budget was “framed in fraught and fragile global conditions’’, with “the world economy … resilient in parts but subdued overall’’.

“Slower growth means a softer labour market, with unemployment expected to rise slightly to 4.5 per cent next year, even as we create tens of thousands of new jobs,’’ the Treasurer said.

“I want Australians to know that despite everything coming at us, we are among the best-placed economies to manage these uncertainties and maximise our opportunities.

“We have an envied combination of moderating inflation, record new jobs, near-record participation, real wages growth, the lowest-ever gender pay gap, and expanding business investment.’’

The unemployment rate of 3.9 per cent is expected to increase to 4.5 per cent next financial year, where it will remain for three years, the budget documents forecast.

Wages are expected to grow at 4 per cent this financial year, before moderating to 3.25 per cent for the following two years.

On the international trade front, uncertainty is high, with commodity prices expected to drop back to their “long-run fundamental levels’’.

“Australia’s terms of trade, the ratio of export to import prices, are forecast to decline by 15 per cent over the next three years,’’ the budget documents state.

“The outlook for the terms of trade is highly uncertain, reflecting potential volatility in commodity prices.

“Recent developments in the outlook for demand for steel in China and a modest improvement in iron ore and metallurgical coal supply have driven a sharp correction in iron ore and metallurgical coal prices.’’

The budget documents say there are recent indications that steel demand in China has likely peaked, “and a recovery in the supply of iron ore and metallurgical coal has put downward pressure on prices’’.

Originally published as Economic growth nothing to celebrate in federal budget forecasts