Budget surplus improves despite high chance of recession this year

Strong commodity prices and a super-tight jobs market have swelled the federal budget surplus beyond the $4.2 billion forecast just seven weeks ago, but economists are warning there is now a 50-50 chance of a recession this year.

Treasurer Jim Chalmers will reveal in a speech in Darwin on Wednesday that the larger-than-expected surplus will take some of the heat out of the economy that has forced the Reserve Bank into its most aggressive tightening of monetary policy since the late 1980s.

Treasurer Jim Chalmers delivering his May budget speech. The forecast $4.2 billion surplus has increased since then.Credit: Alex Ellinghausen

In May, Chalmers used his budget speech to forecast what would be the first surplus in 15 years. The strong jobs market, a lift in wages growth and high prices for key exports helped deliver an extra $28.2 billion in revenue above what had been expected.

But in the seven weeks since the budget, commodity prices – particularly for iron ore – have remained elevated. The strong jobs market and growth in nominal wages have also pushed more revenue into Canberra’s coffers.

Chalmers will tell NT business leaders that the budget is in a “significantly” better position than expected, arguing it would help in the effort to bring down inflation.

“It means delivering on what we’ve set out to do – rebuilding our buffers and taking more heat out of the economy just as it’s needed to combat inflation,” he will say.

“A better budget position will help us to build a better economy and a better country, one that gives working people the security, stability and prosperity they deserve.”

The better bottom line is despite this month’s decision to pump $2 billion by July 1 into social housing through the states in a bid to alleviate problems across the country’s property sector.

A stronger surplus this financial year would also improve the starting position for the 2023-24 budget, which in May Chalmers forecast would show a deficit of $13.9 billion.

Chalmers will admit that inflation remained the biggest challenge facing the government and the budget.

Monthly inflation figures due to be released on Wednesday by the Australian Bureau of Statistics are expected to show price pressures easing through May but still well above the Reserve Bank’s 2-3 per cent target band.

Chalmers will say the 4 percentage point increase in official interest rates will contribute to a slowdown in the national economy.

“This, along with global challenges, will significantly slow our economy with our expectations for growth going from 3.25 per cent this year to 1.5 per cent in the next,” he will say.

But AMP Capital chief economist Shane Oliver is one of a growing number of economists who believe the economy will under-perform Treasury’s predictions. He is forecasting economic growth this year of just 0.7 per cent.

AMP Capital chief economist Shane Oliver says the chance of a recession is now 50-50.Credit: Dominic Lorrimer

He said the Reserve Bank’s large increases in interest rates had now made the chances of Australia avoiding a recession little better than a coin toss.

“As a result of ongoing rate hikes, we see the risk of recession starting around late this year as now very high, at about 50 per cent,” he said.

“Consumer spending is almost certain to start going backwards later this year as the 4 per cent plus cash rate will push debt servicing costs into record territory as a share of household income. On the RBA’s analysis, 15 per cent of households with a variable rate mortgage (about 1 million people) will be cash flow negative by year end at a 3.75 per cent cash rate and we are now well beyond this.”

Oliver believes the RBA will have to cut interest rates a full percentage point in 2024 to protect the economy.

The impact of higher interest rates is now filtering through to the manufacturing sector, with the long-running Australian Chamber of Commerce and Industry-Westpac Survey of Industrial Trends now showing the economy close to stalling.

The survey, released on Tuesday, showed broadly flat new orders and employment, a drop in overtime and a slowdown in output growth. Costs and inflation pressures remain high while manufacturers continue to struggle to find workers and materials.

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