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Ahead of his economic statement to parliament, Treasurer Jim Chalmers gave a series of television and radio interviews.
Almost all of his interlocutors this week asked whether Australia was headed for recession.
Leave aside the current economic fundamentals. Unemployment is at 3.5 per cent, interest rates remain historically low, there are a record number of Australians in work and annual GDP stands at 3.3 per cent.
Treasurer Jim Chalmers, shrugging off questions about a possible recession, has set out a big economic agenda for the government’s first year in office. Credit: Alex Ellinghausen
The fear is of the future.
Chalmers, who has tried to paint what he calls a realistic picture of the challenges ahead, drew the line when it came to the recession.
“I’m personally pretty confident that we’ll weather the storm, but we have to prepare for this bad weather in the short term in the meantime,” he said.
These challenges were shown in the treasurer’s parliamentary speech. That the Albanian government’s first ministerial statement was about the state of the economy says something about its importance over the next three years.
Chalmers revealed substantial changes to the now all-but-forgotten March budget delivered by then-Treasurer Josh Frydenberg.
War, floods, supply chain problems, rising inflation and a sharp rise in official interest rates have combined to dramatically change the economic landscape facing Chalmers and the finance minister Katy Gallagher.
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The biggest takeaway from Chalmers’ statement was around real wages. With inflation tipped to hit 7.75 per cent by the end of the year, most Australians will see another drop in their real wages.
It could be 2026 or beyond before wages return to where they were just before COVID-19.
A few hours after his address, data from the United States showed that the world’s largest economy contracted for the second quarter in a row.
But like almost everything in the economic sphere in the last two years, it is a strange slowdown in the US. The economy’s 0.2 percent decline over the past three months was driven overwhelmingly by businesses not being able to replenish their inventories (this accounted for 2 percentage points of negative economic activity). U.S. unemployment is still at 3.6%, while annual wage growth is around 5%.
Even Chalmers’ downbeat forecasts for Australian economic growth (3% this financial year and 2% in 2023-24) are a long way from suggesting mass unemployment and businesses closing their doors.
On Friday, the International Monetary Fund, in a projection on the Asia-Pacific, in fact confirmed Chalmers’ view.
It is tipping Australian growth at 3.8 per cent in 2022 before slowing to 2.2 per cent in 2023. The fund’s forecast is a step down from April, when growth was expected to 4.2 percent this year and 2.5 percent in 2023.
The director of the IMF’s Asia and Pacific department, Krishna Srinivasan, said events unfolding in Europe and elsewhere would weigh on the region’s economies.
“The global economic outlook has darkened and growth in Asia and the Pacific is poised to slow further amid the continued impact of Russia’s invasion of Ukraine and other shocks,” he said.
These bleak omens, plus the Reserve Bank’s rapid rise in official interest rates (which is likely to add another half a percentage point to the cash rate on Tuesday), are weighing on consumers.
New research conducted for ANZ Plus provides insight into these impacts.
One-third of respondents said they sometimes had a hard time or difficulty keeping up with their finances. This included 1.5 million who said they “don’t feel controlled at all.”
Lockdowns in China, like this one in Shanghai, are weighing on global supply chains and adding to inflationary pressures. Credit: Bloomberg
Young people (under 30), women, people living outside capital cities and those earning less than $2,000 a month are more likely to say they are struggling.
The same research found that 71 percent of people said they were already cutting back on their spending or planning to do so to cope with the recent rise in the cost of living.
About three in five said they would cut back on their non-essential spending, including a third who said they would cut back on their spending on life’s essentials.
And when it came to spending patterns, three-quarters of those surveyed said they thought they were spending too much even before the price of most goods and services began to skyrocket.
Going to a restaurant or takeout was the most cited spending “vice” (by 53 percent of people), followed by online shopping. Other areas people thought they spent too much on were streaming services (19%), socializing, family gifts and personal care.
According to this type of survey, people are cooking dinner at home, ending their Netflix or Binge subscriptions, and cutting back on the birthday gifts they give.
That’s enough to embitter any consumer, a problem Chalmers is awake to.
The economy and the budget aren’t the only challenges facing Chalmers and Gallagher.
The treasurer and the government have set themselves other substantial tasks, not least of which is the review of the RBA announced a week ago.
The review, driven in part by concerns about the bank’s monetary policy setting ahead of the COVID-19 pandemic, will offer some substantial proposals that could easily turn into an ideological battle with the Liberal Party and others.
In addition, the Productivity Commission is conducting the second of its five-year reviews of the country’s productivity, which will provide a series of recommendations for far-reaching economic reforms.
His latest report, 2017’s Shifting the Dial, is gathering dust because of the controversial proposals it contained. But the issue he raised, Australia’s underperformance in productivity, demands attention.
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Chalmers knows that one of the missing elements in Australia’s economic performance since the global financial crisis has been productivity.
The PC report will contain ideas that, if implemented, could provide a much-needed boost to the economy that would flow to workers through real wage increases. But the politics surrounding these ideas will be contentious.
There is also a shortage of workers across the country.
ANZ’s economics team predicted this week that the unemployment rate will fall below 3% early next year. The last time unemployment was 2 years ago, Australians watched TV in black and white.
Finding ways to get more Australians into the workforce will be a key part of the government’s jobs summit in early September. The resulting ideas will emerge in the run-up to the October budget.
Shortly after that, the government will begin work on next year’s May budget.
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It would be a complete economic agenda even for an established, long-term government, let alone one in its first year in office.
Chalmers and Prime Minister Anthony Albanese know that economic events can make or break a government.
Economists believe Chalmers is off to a good start in the treasury position. But events in recent months that have surprised most policy experts show that nothing can be taken for granted.
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