Echoes of stagflation in low growth and high inflation

The latest IMF outlook for Australia is an ominous set of numbers for anybody who remembers the stagflation times of the 1970s. Economic growth has been downgraded from 1.4 per cent to 1.2 per cent and the 2025 consumer price index projections for Australia revised up from 2.8 per cent to 3.6 per cent.

The missing ingredient to fit the textbook definition of stagflation is rising unemployment. But as we have seen in recent days, the good employment figures are being buoyed by a high number of new jobs in the public sector. The private sector is in poor shape, with record levels of insolvencies as companies are hit by high rates of interest, high energy prices and competition for workers from government-paid jobs in the so-called care economy. The news gets worse because increased numbers of public sector workers are acting as a drag on national productivity at a time when productivity urgently needs to improve. The IMF says much more needs to be done to improve growth prospects and lift productivity, as this is the only way we can address the many challenges we face.

This is a global issue but made more pressing for Australia because our economic good fortune has been tied to a continuation of high commodity prices, which have boosted the nation’s terms of trade to record highs. As China battles to stimulate its economy there are signs that the enduring minerals boom may have peaked and the super cycle will come to an end.

On the IMF numbers, mortgage holders and small business should brace themselves for a continuation of high rates, and possibly an increase, as the RBA is pressured to bring inflation to heel as government continues to borrow and spend. Australia now has the dubious distinction of being on track for inflation to exceed the level in all advanced economies except Slovakia. According to the IMF, Australia’s 2025 projection of 3.6 per cent is well ahead of Japan (1.8 per cent), the US and Canada (1.9 per cent), Britain, South Korea and the Euro Area (2 per cent), and New Zealand (2.2 per cent).

The IMF prescription is for government discipline to rein in spending to stabilise exploding levels of debt.

Australia is not alone on this score but, as a heavily exposed trading nation, we are particularly vulnerable to the potential for a new round of trade wars should Donald Trump be successful in his attempts to return to the White House for a second term as president.

The IMF warns that downside risks are rising and now dominate the outlook: an escalation in regional conflicts, monetary policy remaining tight for too long, a possible resurgence of financial market volatility with adverse effects on sovereign debt markets, a deeper growth slowdown in China, and the continued ratcheting up of protectionist policies.

Jim Chalmers is flying to Washington DC for the annual IMF and World Bank meetings. He will find plenty of people to commiserate with about the state of global affairs. But his attention must be focused on what the IMF tells us about ourselves. We have poor growth and a stubbornly high rate of inflation. Like the RBA, the IMF has seen through the gimmicks of using energy rebates to curtail the headline inflation figure as having only a temporary effect.

All leaders, state and federal, must focus on spending discipline and not squeezing out the private sector with jobs that are only possible because of other people’s money, which more likely than not will have to be repaid by taxpayers with interest.