Budget to reveal biggest economic slowdown since COVID shutdowns
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The Australian economy will suffer its biggest slowdown since the depths of the COVID pandemic as the combination of high interest rates and high inflation sharply reduces the spending power of the nation’s consumers.
Treasurer Jim Chalmers on Tuesday will use his second federal budget to unveil a $4 billion surplus this financial year alongside fresh economic forecasts showing a lift in unemployment over the next two years, a decline in inflation and continuing pressure on the housing construction sector.
A sharp slowdown in household spending will be a key factor in a downgraded outlook for the economy to be unveiled in Tuesday’s budget.Credit: Edwina Pickles
The economy is expected to grow by between 1.25 per cent and 1.5 per cent in the 2023-24 financial year. It would be the slowest annual growth rate since the country largely reopened after the early pandemic shutdowns of 2020.
It would be a sharp slowdown compared to 2022 when the economy expanded by 2.7 per cent.
There are already signs the economy is responding to the Reserve Bank’s aggressive tightening of monetary policy, with the actual volume of sales of retail goods and services falling through the first three months of this year.
The slowdown will be driven by cash-strapped consumers. The budget is expected to show household consumption, which grew by 5.4 per cent through 2022, to more than halve in the coming financial year.
The drop in spending will feed into the jobs market. Unemployment, still at an equal 50-year low of 3.5 per cent, will be forecast to climb over the next 12 to 18 months. By 2025, it is expected to be above 4 per cent.
Inflation, which peaked at 7.8 per cent in December, will be forecast to fall over the next 18 months in part due to the impact of the government’s $14.6 billion energy relief package.
Global ratings agency Moody’s Investor Service on Monday warned all advanced economies would struggle in the coming year.
It said that this year Australia, Japan and South Korea would be the only nations among the world’s major economies to escape a recession caused by falling consumer demand caused by high interest rates and inflation.
According to Moody’s, a global shortage of workers would ease in line with the slowing economy, but a recovery next year would again put pressure on businesses to find enough staff.
Small and medium-sized businesses are also preparing for a tough 12 to 18 months.
A survey by business management platform company MYOB found 48 per cent of businesses want the budget to deliver cost of living relief, compared to 31 per cent who want less red tape and 30 per cent who want a cut in the company tax rate.
More than a third of businesses said their top pressure was the cost of utilities, with 34 per cent ranking fuel prices as their most pressing concern while 32 per cent ranked interest rates.
The survey, of 1000 small and medium-sized firms, found 44 per cent expect a recession within the coming year.
“While they’re still showing signs of resilience, increasing rates and input costs will only make operating a business harder for the country’s 2.4 million SMEs.”
Chalmers will use the budget to announce more policies to help lift home building construction across the country.
Data from the Australian Bureau of Statistics released on Monday showed a 0.1 per cent drop in dwelling approvals through March. Over the past 12 months, approvals have fallen by 17.3 per cent.
New figures have highlighted the troubled housing construction sector.Credit: Glenn Hunt
In trend terms, approvals are now at their lowest level since 2009.
BIS Oxford Economics senior economist Maree Kilroy said the start of 2023 had been poor for the building sector and may require more government assistance.
“A protracted downturn for dwelling approvals is forecast that extends through 2023 and into 2024. We believe the probability of government intervention to support housing supply is increasing,” she said.
HSBC Australia chief economist Paul Bloxham, who is forecasting economic growth to slow to 1.25 per cent through 2023-24, said both the government and Reserve Bank were largely working together to deal with the economy’s inflation pressures.
Bloxham, who expected Chalmers to reveal a budget surplus for the current financial year, said there would be dangers from the government spending too much money.
“Fiscal policy has a difficult balancing act in this environment – supporting parts of the economy that need it, while attempting to not add to the inflation challenge, as that will likely result in higher interest rates, slower GDP growth, and a worse off fiscal position,” he said.
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