IMF warnings about Australian economy

I wonder how Key and English will respond to this - no doubt we are doing better than Australia!

Australia: Sharp drop for economy, IMF warns

Sydney Morning Herald,

21 September, 2011

THE International Monetary Fund has slashed its economic forecasts for Australia, warning of a new global recession that would hit commodity prices and drive millions worldwide into unemployment.

Hours before the fund published its unexpectedly gloomy update in Washington, the Reserve Bank of Australia released a statement expressing concern about the global outlook and opening the way for interest rate cuts should things deteriorate.

The Australian dollar slid to a five-week low of US102¢ over renewed concerns about Europe after Italy lost its A+ credit rating. Australian shares fell 1 per cent.

The fund says Australia will grow at only 1.8 per cent this year, down from its previously forecast 3 per cent. The figure is way below the May budget forecast and only half the most recent Reserve Bank forecast, suggesting it will be harder than expected to reach the promised budget surplus in 2012-13. For 2012 the fund forecasts 3.3 per cent, down from 3.5 per cent.

But it points out that these are best-case forecasts, made on the assumption that almost everything goes right.

Its best case is for "anaemic" growth in the advanced economies of 1.6 per cent and for global growth of 4 per cent.

"However, this assumes European policymakers contain the crisis in the euro area periphery, that US policymakers strike a judicious balance between support for the economy and medium-term fiscal consolidation, and that volatility in global financial markets does not escalate," the fund says.

If one or more of its best-case scenarios does not eventuate, the US and much of Europe could slide back into recession, commodity prices could fall "abruptly" and much of the rest of the world would face a repeat of the global financial crisis.

The update is prefaced by an unusual apology. The chief economist, Olivier Blanchard, says he "largely failed to perceive" the slowdown as it was happening this year, wrongly blaming it at first on one-off events such as the earthquake and tsunami in Japan.

"Now that the numbers are in, it is clear there was more going on," he says. "What was going on was the stalling of two rebalancing acts; the shift from fiscal stimulus to private demand within nations and a rebalancing of trade between them.

"Markets have clearly become more sceptical about the ability of many countries to stabilise their public debt. As time has passed their worries have extended to countries from Japan to the United States. These worries have led to a partial freeze of financial flows."

So uncertain is the fund of the best way forward it stops short of offering advice, saying merely that the right approach depends on "individual country circumstances". The usual advice of tighter budgets could "lead to even lower growth".

The fund says Australia is in about the best fiscal position of any developed country, having the second-lowest government debt of 29 advanced economies, being beaten only by Estonia.

The Treasurer, Wayne Swan, who is about to go to Washington for the annual meetings of the IMF and World Bank, said the update was a "stark warning" that indicated the global economy had entered "a dangerous new phase".

The Reserve expressed concern about "extreme volatility in financial markets" reflecting fears about a global slowdown and an escalation of debt troubles in the US and Europe. It would note these developments in deciding how to move rates.