International Monetary Fund slashes Australia’s growth forecast, sounds global recession warning

The IMF has slashed economic growth forecasts for Australia as it issued a warning for aggressive interest rate rises. This is what it means.

Treasurer Jim Chalmers. Picture: John Gass/NCA NewsWire

The International Monetary Fund has slashed Australia’s economic growth forecast as it sounds a dire warning about the risk of a global recession.

More than a third of the global economy is expected to shrink next year, according to the IMF’s latest outlook, while growth is stalling in the United States, Europe and China.

“In short, the worst is yet to come, and for many people 2023 will feel like a recession,” IMF economic counsellor Pierre-Olivier Gourinchas said.

The report, to be released on Wednesday, tips Australia’s economy will grow by 3.8 per cent this year and 1.9 per cent next year – compared to 4.2 per cent and 2.5 per cent in the IMF’s April update.

Mr Gourinchas said the IMF expected inflation to peak later this year at 8.8 per cent and that it would remain elevated “for longer than previously expected” as central banks tried to rein in the cost of living spiral with interest rate increases.

He said that if central banks were too slow to act, high inflation would be further entrenched in the economy, while moving too quickly risked “pushing the global economy into an unnecessarily harsh recession”.

International Monetary Fund economic counsellor Pierre-Olivier Gourinchas. Picture: Olivier Douliery/AFP

According to the report, inflation is still expected to be running at 4.8 per cent in Australia next year.

The IMF’s updated outlook comes as economic leaders including Treasurer Jim Chalmers meet in Washington DC for the fund’s annual meeting this week.

The report confirmed the global economy was already in a “broad-based slowdown” driven by “three powerful forces”: Russia’s invasion of Ukraine, the cost of living crisis, and problems in China including Covid lockdowns and a “rapidly weakening” property sector.

Australia’s economic forecast compared unfavourably to predictions of annual growth hitting 4 per cent this year and 4.3 per cent next year across Asia more broadly.

But growth was tipped to be just 0.6 per cent across Europe next year, with the economies of Germany, Italy and Sweden contracting, while the growth rate in the United States was pegged at 1.6 per cent in 2022 and 1 per cent in 2023.

Other than the global financial crisis and the start of the Covid pandemic, the IMF said this forecast was the weakest in two decades.

As the Treasurer finalises this month’s federal budget, the IMF report urged governments to “rebuild fiscal buffers” to prepare for future crises, avoid unnecessary spending that would “only prolong the fight to bring inflation down”, and recognise the energy crisis caused by the Ukraine war was causing a “broad and permanent” shift in power supplies.

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