‘Fragile’ global outlook casts shadow over economy

The Budget papers warn that China’s property market woes and softening demand present significant risks for Australia.

China’s economy is starting to slow as property market there faces pressure. Picture: AFP

The federal budget has been framed against a backdrop of “fraught and fragile global conditions” with a “subdued” world economy, according to Federal Treasurer, Jim Chalmers.

“Inflation is lingering in North America, growth is slowing in China and tepid in Europe, tensions have escalated in the Middle East and persist in Ukraine, (and) global supply chains are fragmenting,” he warned in his Budget speech.

The Budget papers are based on a global economic outlook which the Treasury says is “highly uncertain” warning that developments in China “present significant risks to global demand, particularly for key trading partners including Australia.”

“Sharper or more persistent weakness in Chinese domestic demand associated with deleveraging in the residential property sector, represents a downside risk to growth, particularly if it leads to more acute pressures in the Chinese financial system that adversely affects the balance sheets of households and local governments,” it warns.

In its cautious outlook for the world economy, the Treasury says most advanced economies have recorded subdued outcomes last year with around a third of OECD countries recording a technical recession.

It says the US had been the notable exception with a combination of lower inflation and a strong recovery in productivity producing an economy which has consistently grown at higher than expected levels.

The Budget forecasts that global economic growth will remain flat at around 3 ¼ per cent in 2024, 2025 and 2026.

The Treasury is expecting the same growth rate in Australia’s global trading partners.

But the global growth rates are still well above the Treasury’s conservative forecasts for the Australian economy with expectations that the local economy will only record growth of 1.75 per cent in 2024, rising to 2.25 per cent in 2025 and 2026.

The Treasury sees India as the fastest growing major economy with growth expected to come in at 6.5 per cent, easing back from 7.7 per cent last year.

It is expected growth in China, the world’s second largest economy and Australia’s major trading partner, to come down from 5.2 per cent last year to 4.75 per cent this year and 4.25 per cent in 2025 and 2026.

“If realised, this will be the slowest period of economic growth since the Chinese economy began opening up in the late 1970s,” it says.

It warns that the Chinese economy faces increasing structural changes from slowing urbanisation, an ageing population and lower productivity growth.

“Authorities are attempting to address these structural challenges by supporting new industries such as electric vehicles and green energy, while pivoting away from traditional growth drivers such as property.”

The Treasury says most central banks around the world are expected to have reached the peak of their monetary tightening and will begin easing policy later this year.

But it warns that the policy easing is expected to occur later than expected earlier as a result of more persistent inflation.

The major exception is the Bank of Japan which has begun to withdraw its long standing money policy stimulus after emerging from decades of deflation and weak growth.

“Inflation in advanced economies has declined significantly since peaking in the mid to late 2022,” the Treasury says, but it warns that “inflation generally remains elevated and is not expected to return to central bank targets until 2025.”

The Treasury notes that the fall in inflation in advanced economies has not been associated with a significant increase in unemployment “which is consistent with a soft landing.”

It says key risks to the global economic outlook include heightened geopolitical tensions in the Middle East, which it says have added to the risks associated with the Russian invasion of Ukraine.

It warns that “a further escalation in geopolitical tensions remains a key risk to inflation and global growth, with the potential to disrupt energy and commodity markets and increase shipping costs by compromising trade routes.”