As our economy faces soaring petrol prices, collapsing consumer confidence and an IMF sounding the alarm on recession, is Treasurer Chalmers running out of time to get his response right?
The Albanese Government has been warned by the International Monetary Fund (IMF) to avoid untargeted spending and to get ready for a recession if this Iran war is not over soon. Against that scenario, Wall Street continues to buy stocks indicating that key stock players are betting that a peace deal is not far away.
It comes as The Australian reports that AMP chief economist Shane Oliver said the next few weeks would be “crunch time” for oil supplies and the risk of “recession” for us this year was now “high.
It also follows the news that consumer confidence has collapsed with petrol prices spooking Australians, with the consumer sentiment reading at a historic low.
This is how AMP economist My Bui reacted to the data drop: “Australian consumer sentiment nosedived by 12% over the last month to 80.1, the lowest level since late 2023 (when the cash rate was also at 4.1% and the RBA also maintained a hiking bias). The only other times sentiment fell to a similar level were during the GFC and Covid pandemic”.
This is a serious slump in confidence and a prelude to a recession, if the Middle East war is sustained and oil prices remain elevated. That’s why the IMF is in warning mode. It expects a global recession if this war isn’t over soon, and it means Treasurers like Jim Chalmers need to be able to spend to avoid a big dip in economic growth and a spike in the jobless rate.
The only possible good news about the war and high petrol prices is that it will hose down the fired-up Reserve Bank, which was inferring two rate rises were coming to kill inflation. They know a fair dinkum recession will KO inflation and should bring rate cuts rather than rises.
Of course, inflation data will rise because of the petrol price increases, but these act like interest rate rises and stop consumers and businesses from spending. This, in turn, helps reduce prices and therefore inflation readings.
Signs of an economic slowdown, which precedes a recession, are already showing, as seen by the following:
- The collapse of consumer confidence.
- NAB’s business confidence indicator in March posted the second largest monthly fall in history, dropping 29 points to -29.
- Forward orders in the NAB survey are now falling to -1 from the previous month’s reading of 6.
- Qantas and Jetstar will reduce domestic capacity by about 5% as their fuel bill rises by $800 million.
- Milk products are tipped to rise by 20% because fertiliser and diesel costs for dairy farmers are going through the roof.
The Australian’s Matt Cranston reports that “the IMF downgraded its baseline scenario for the world economy by 0.2 percentage points to 3.1 per cent this year, while under its ‘severe’ scenario annual growth plunges from its current 3.4 per cent to 2 per cent this year and inflation hits 6 per cent”.
The latter sad story would be a consequence of a war that drags on and keeps oil prices above US$100 a barrel, which represents a 60% plus rise in oil prices from before February 28, when the US and Israel started bombing Iran.
By the way, the IMF’s base case for Australia is that we don’t go into recession and growth drops from 2.1% to 2%, which is a pretty good scenario and actually implies no recession.
Cranston also looks at the observations of economist Chris Richardson, who calculates that the war is good for Jim Chalmers’ budget!
How’s that happen? Well, the war is pushing up commodity prices of companies such as Woodside and Santos and that gives a tax collection windfall for the Treasurer.
The IMF is warning the Treasurer to bank these gains, lower the deficit and make sure these one-off boons are saved for possible rainy recession days. It also advised that the budget should not add to demand because oil price rises are already increasing inflation.
It also implied that this might be a crisis that could be used to introduce reforms to improve the foundations of the budget that lead us into deficits most of the time, and also to get productivity up, which is at historically low levels.
As Winston Churchill once advised: “Never let a good crisis go to waste”.
For someone like Jim Chalmers, who dreams of being a prime minister, this upcoming budget will be the Churchillian test he has to pass with flying colours — or he could end up being another Peter Costello, who never got the shot at the top job.
Finally, for those worried that the worst case scenario — that is, a long war and a global as well as a local recession — Wall Street again bought stocks as though they knew something about a peace deal that most of us don’t.
I don’t usually say this, but I hope these US stock buyers have inside information on a peace deal all the way from the Oval Office!
