The incoming Federal Treasurer, Jim Chalmers, has delivered an update on the economic situation and outlook in a statement to Parliament. In line with other countries, forecasts for economic growth have been downgraded and forecasts for inflation have been upgraded.

The Treasurer noted that “once again Australia is outperforming much of the world”. Further, the final Budget outcome for 2021-22 “is likely to show a dramatically better-than-expected outcome.”

The Reserve Bank will update its economic forecasts on August 5.

What does it all mean?

Unsurprisingly the Federal Treasurer has today released downgraded forecasts for economic growth and upgraded forecasts for inflation. These type of revisions have been outlined by other governments and central banks across the globe. Central banks are lifting interest rates in response to higher rates of inflation that have been caused by supply chain difficulties and the Ukraine war. The lift in the local inflation rate has also been boosted by floods, as well as strong domestic economic growth – demand outpacing supply.

In response to the global challenges it is clear that Australia is starting from a position of strength. The budget is in far better shape than expected at the time of the March statement. And local inflation hasn’t lifted to the heights in other countries like the US, UK, Europe and Canada.

Despite inflation challenges and higher interest rates, the Australian economy likely grew by 3.75 per cent last financial year and may grow 3 per cent this year (“normal” growth is 2.3 per cent).

Economic plan

Every government has to have a fiscal (budget) plan. The previous government had one and so with the
government before. And while priorities change, the underlying advice from Federal Treasury and the Reserve Bank doesn’t. They assess the economic situation and provide their views or forecasts on where things are headed. And armed with that information the Government of the day determines what spending and revenue measures can be prioritised.

The Federal Treasurer has outlined an economic plan to lift the speed limit on the economy: cost of living relief; grow wages over time; deal with supply chains including “investing in cleaner, cheaper more reliable energy; by addressing skills and labour shortages; and with a National Reconstruction Fund to make us more self-reliant.” The Government is also committed to action on climate change and a focus on budget repair and quality spending”

More detail on the economic plan will be provided in October’s budget.

What do you need to know?
Economic Statement from the Federal Treasurer, Jim Chalmers

Selected points from the statement:

“The Treasury is forecasting global growth of 3¼ per cent in each of the next three years, which is half a percentage point weaker in 2022 and 2023 than expected in the Pre-Election Economic and Fiscal Outlook.

In the pre-election forecasts – released a little more than three months ago – inflation was expected to peak at 4¼ per cent. It’s already 6.1 per cent through the year to June, and now forecast to peak at 7¾ per cent in the December quarter this year. The current expectation is that it will get worse this year, moderate next year, and normalise the year after.

Treasury expects headline inflation at 5½ per cent by the middle of next year, 3½ per cent by the end of 2023, and 2¾ per cent by the middle of 2024 – back inside the RBA’s target range.

It’s expected that real GDP grew by 3¾ per cent in 2021-22, instead of 4¼ per cent as was estimated pre-election. The pre-election forecast for GDP growth in 2022-23 was 3½ per cent. This has now been revised down to 3 per cent growth. And growth is expected to slow further in 2023-24, at 2 per cent – down from the 2½ per cent previously predicted.

A key part of this weaker growth outlook is due to weaker consumption, reflecting higher inflation and higher interest rates.

Net exports will also be a bigger-than-expected drag on growth in the near term – as flooding hits commodity exports, and as imports increase with businesses restocking.

Weaker dwelling investment is also part of the story – because of higher interest rates, but also the capacity constraints in construction.

The unemployment rate is expected to remain low through the latter half of this year before returning to 3¾ per cent by June 2023 and 4 per cent by June 2024.

At the same time, the forecast for nominal wages growth is being upgraded – from 3¼ per cent to 3¾ per cent – both for this financial year and next financial year.

Based on current forecasts, real wages are expected to start growing again in 2023-24.

While the final Budget outcome for 2021-22 – published soon – is likely to show a dramatically better-thanexpected outcome. Temporary factors like supply chain disruptions, capacity constraints and extreme weather have delayed some spending – and low unemployment and volatile commodity prices boosted revenue.

A full set of fiscal forecasts will be ready for the October Budget. But we already know that additional
COVID-related expenditure so far costs the Budget an extra $1.6 billion this year. We expect that
government payments will be around $30 billion higher over the forward estimates than was forecast pre-election, because of inflation and wage expectations and how they flow through.”

Originally published by Craig James, Chief Economist, CommSec