The International Monetary Fund has downgraded Australia’s economic growth forecasts by 0.4% to 1.7% in 2019 amid rising geopolitical turmoil, the US-China trade war and stalling economic growth globally.
The world economic outlook forecasts, released on Wednesday, show growth is expected to recover to 2.3% in 2020, providing some support to the Reserve Bank’s view when it cut interest rates earlier in October that Australia’s economy has reached a “gentle turning point”.
But the shadow treasurer, Jim Chalmers, has seized on the figures – which follow a downgrade in April – to call on the government to provide fiscal stimulus and invest in infrastructure to support the economy and improve productivity, in line with IMF advice.
The IMF downgraded its global growth forecast by 0.3% since April to 3% for 2019, its lowest level since 2008-09. “Monetary policy cannot be the only game in town and should be coupled with fiscal support where fiscal space is available,” it said.
Growth in the 19-nation euro area is predicted to slow to 1.2% this year, after a 1.9% gain in 2018. The IMF expects the pace to recover only slightly to 1.4% next year. Growth in Germany, Europe’s biggest economy, is expected to be a modest 0.5% this year before rising to 1.2% next year.
China’s growth is projected to dip to 6.1% this year and 5.8% next year. This would be the slowest rates since 1990, when China was hit by sanctions after the brutal massacre of pro-democracy demonstrators in Beijing’s Tiananmen Square.
For Japan, the IMF expects growth of just 0.5% next year. It foresees an expansion in Russia of 1.9%, up from 1.1% this year.
Kristalina Georgieva, who will preside over her first IMF meetings after succeeding Christine Lagarde this month as the fund’s managing director, said last week that the various trade disputes could produce a loss of about $700bn in output by the end of next year, or about 0.8% of world output.
IMF economists said one worrisome development was that the slowdown this year had occurred even as the Federal Reserve and other central banks, including the Reserve Bank, had been cutting interest rates and deploying other means to bolster economies.
The IMF estimated that global growth would have been about one-half percentage point lower this year and in 2020 without the central banks’ efforts to ease borrowing rates.
“With central banks having to spend limited ammunition to offset policy mistakes, they may have little left when the economy is in a tougher spot,” Gopinath said.
In addition to trade and geopolitical risks, the IMF envisions threats arising from a potentially disruptive exit by Britain from the EU on 31 October. The IMF urged policymakers to intensify their efforts to avoid economically damaging mistakes.
“As policy priorities go, undoing the trade barriers put in place with durable agreements and reining in geopolitical tensions top the list,” Gopinath said. “Such actions can significantly boost confidence, rejuvenate investment, halt the slide in trade and manufacturing and raise world growth.”
Australia’s treasurer, Josh Frydenberg, emphasised the IMF’s comments that global growth had slowed due to “rising trade and geopolitical tensions taking a toll on business confidence, investment decisions, and global trade”.
“The Australian economy remains resilient and continues to grow,” Frydenberg said.
He cited the fact that Australia was still growing faster than any G7 economy over the next two years, except the US, and did not experience negative growth in the June quarter, unlike Germany, the UK and Singapore.
Despite the Reserve Bank governor Phil Lowe’s calls for further fiscal stimulus, the Morrison government has persisted with a plan of relying on income tax cuts legislated in July and leaning on the states to accelerate small-scale infrastructure to stimulate growth.
Government talking points – sent by accident to reporters on Monday – suggest that those measures, along with three interest rate cuts in five months and an improving housing market “will be reflected from the September quarter onwards”.
In April the budget forecast Australia’s economy would grow by 2.75% in 2019-20 and 2020-21.
Chalmers said the IMF forecasts “make a mockery of Josh Frydenberg’s claims that the Morrison government has the right policy settings”.
“Collapsing confidence and weak growth are the inevitable consequence of a Liberal-National government which has a political strategy but not an economic policy,” he said.
“It is time Josh Frydenberg and Scott Morrison brought forward a budget update to fix their forecasts and properly outline an economic plan that supports the floundering economy and better safeguards Australians from global turbulence.”
The Morrison government has boasted that the budget returned to balance in 2018-19 and will be in surplus in 2019-20 but it has not ruled out further stimulus if the outlook continues to worsen.
“We will continue to closely monitor global economic events and will take the necessary actions to ensure our economy continues to grow to the benefit of all Australians,” its talking points said.