Australians cannot afford to shun the IMF's warning
A report from the International Monetary Fund (IMF) is disconcerting despite the Reserve Bank of Australia (RBA) this month dropping the cash rate 0.25% to 4.10% and predicting that inflation will be down to 2.8% by June.
It’s now 3.2%, but the RBA’s preferred rate for what it perceives as a healthy economy is around 2.5% and the bank’s governor Michel Bullock says it’s unwise to assume that because inflation has eased, Australians can expect a succession of further rate cuts given the inflationary risk of bumper jobs growth.
Indeed, the IMF report warns of a risk of elevated inflation worldwide that raises prospects of higher-for longer-interest rates that will add to increasing global danger of a major financial fallout.
The report says the biggest risk is that higher American interest rates “disrupt capital inflows and impede planned monetary policy easing, which could adversely impact growth”.
Even worse, “persistently high interest rates could raise borrowing costs further and affect financial stability, if fiscal improvements do not offset higher real rates amid lower potential growth”.
The IMF report warns services inflation is still too high internationally as indeed it is in Australia. Here we’re making headway in the battle to hold prices of some goods in check, but the cost of services is an increasing worry.
Almost to the end of July global stock markets had been roaring ahead, smashing previous record levels almost daily, convinced the US Federal Reserve (the Fed) would soon cut interest rates.
Because of better-than-expected US consumer price numbers, much of the developed world was seemingly convinced the battle against inflation had almost been won.
However, the IMF’s report dampens all such optimism, flatly declaring the bringing down of the inflation monster and keeping it down will remain a difficult task.
So, where lies the problem?
Behind the IMF’s warning is its concern at persistent growth in prices of services, particularly across the developed world.
True, soaring prices for goods, notably fuel, may have triggered inflation, but other things have worsened the situation – and in Australia they include just about everything from haircuts to rent to insurance and health care.
Latest available data indicates prices for services in recent months have surged by almost 5%.
The RBA is aware rate hikes won’t reduce underlying price pressures. Reduction of those pressures is clearly a government responsibility.
And there’s obviously much that governments should be doing to correct a situation where renters who want to keep a roof over their heads have no alternative -- in a market where there’s only a 1% vacancy rate for rental properties -- but to pay what owners demand.
Then there’s the Trump factor
After Donald Trump avoided death from a would-be assassin’s bullet in July by a few millimetres, his chances of re-election to the US presidency rose sharply from about 50/50 to 70% as political pundits asserted his return to the White House seemed likely.
Ans when likelihood became reality, the IMF’s fears that Trump’s re-election could see the world fall victim to his proclaimed intention to introduce trade barriers, have persisted.
While it now seems Australia may escape the worst of these barriers, the IMF report warns of “negative spillovers for the rest of the world that would increase uncertainty”. It could “entail fiscal policy risks that would worsen debt dynamics by adversely affecting long-term yields, while also ratcheting up protectionism.”
According to the report Trump’s promised tariffs “could raise near-term risks to prolonged inflation by increasing the cost of imported goods along the supply chain”.
Meanwhile in Australia
It’s evident that while PM Anthony Albanese may hope his ministerial reshuffle will yield political advantage, it’s apparent it will do nothing to solve the nation’s entrenched economic problems.
In the past financial year business failures surged to a record high – 11,049 insolvency appointments, a 40% increase on the previous year, and 124% up on those in 2022.
Cafes, restaurants, small retailers and accommodation providers were among those hardest hit by the state of the economy, and still are.
Escalating power costs, higher prices for business inputs, and consumers’ cutbacks in discretionary spending as they struggle to pay service their mortgages, have contributed to the record-breaking insolvencies.
Furthermore, building and construction companies also appear about to exceed the industry’s historically high insolvency rates, new analysis by rating agency S&P Global predicting Australia’s state and territory piles of debt are set to triple from pre-pandemic levels to $750b by mid-2027.
According to S&P, Australian state deficits – resulting from irresponsible spending that costs consumers dearly -- far outstrip the comparable “subnational” government deficits of Japan, Germany, Canada and Nordic states
Where inflation blame lies
Australia’s Treasurer Jim Chalmers has dismissed as “ridiculous” concerns that big-spending governments have been maintaining inflationary pressures, adding that budgets aren’t primary determinants of inflation or prices.
While Macks Advisory of course doesn’t deny Dr Chalmers’ right to express his opinion, we nonetheless feel bound to point out for the benefit of our newsletter readers that the RBA in its end-of-financial-year -statement declared “recent budget outcomes may also have an impact on demand” – which of course always affects an economy and has a salutary effect on an economy in the grip of inflation.
And don’t forget the start of stage three tax cuts together with newly announced federal and state spending, means an extra $46b will be poured into the economy this financial year –which is about 2% of national income.
According to top independent economist Chris Richardson, that’s “huge”, relative to the amount of money RBA rate rises have taken out of the economy.
Thus we ask readers whether they believe the Federal Government is doing all it should be doing to curb inflation, and given we suspect their answer would probably be no, we ask this supplementary question: “Would you agree it’d be wise to heed and make business decisions in the light of what the IMF says is ahead of us, namely increasing risk of ‘a major global financial fallout’ ”?
