The IMF on Tuesday released its latest World Economic Outlook, suggesting “Resilience Under Strain, Urgent Choices”. But the choices are ones a government wishing to win an election would likely ignore.
The IMF, as a rule, always sees a need to cut spending and lower taxes. Given its history of lending money to countries in severe debt, that’s no shock, and, even if the austerity it prescribed ruined lives, the IMF is very much in the Margaret Thatcher “the medicine is harsh but the patient requires it” mould.
That’s important given what it thinks are “urgent choices”.
But first we always get a sense of how the IMF see the world when we look at the titles of its outlook. A year ago, it was Global Economy in Flux, Prospects Remain Dim, followed by Global Economy: Steady amid Divergent Forces. That, as I suggested at the time, was an extraordinary way to describe a world where Donald Trump was threatening Greenland and had just launched an insurgency into Venezuela.
Since then, of course, there has been nothing “steady”, and the IMF outlooks went from Global Economy in the Shadow of War to Global Economy in Crosscurrents of War and Technology.
Now apparently all is resilient despite the strain.
For Australia the update slightly downgrades forecasts for economic growth over the next couple years. The big downgrades, though, came last October, before the US and Israel’s war on Iran:
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The downgrades since April are all margin of error stuff.
The forecast for economic growth this year has Australia in the top half of the advanced nations of the OECD, and only behind the US among the G7 nations:
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Similarly, the forecast for inflation is not much changed from April – up a bit, but the IMF still thinks inflation will be below 3% by next year:
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There has been a report that this will mean Australia’s inflation is among the highest across the OECD next year. But, to be honest, so long at it is between 2% and 3%, arguing over who has the lowest is pretty silly.
And yes, Australia is expected to see its unemployment rise by more than most OECD economies but it will remain lower here than three of the G7.
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I also would happily take the IMF’s prediction for unemployment in 2026 of 4.4% and 4.7% next year, given currently (at least until Thursday) it is 4.6%.
Over the next five years (at which point predictions get very ropey) the IMF sees pretty weak growth, inflation within the target range and unemployment not going above 4.8%
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Would that be so bad? I’d prefer unemployment closer to 4% but, right now, given the ructions in the economy, steady inflation below 3% and unemployment lower than 4.8% is a pretty nice combination.
These things never come true though (see above), so perhaps more relevant are the “urgent choices” that the IMF thinks needs to be made.
One chapter of the outlook examines how governments respond to cost of living shocks such as the US-Israel war on Iran or Russia’s invasion of Ukraine.
It notes government can either provide income support to (mostly) low-income households or it can suppress prices by, for example, cutting the fuel excise or subsidising energy costs (two policies the Albanese government undertook).
The IMF found that (and prepare to be shocked) price-suppressing policies suppressed prices and thus lowered current inflation and also the inflationary expectations of the following year.
By contrast, providing households with income support raised consumption by more (again not a shock) but it actually raised inflation not only in the current year but the expectation for inflation in the following year:
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Now you might think that makes it obvious that if you want to lower the burden of inflation the best policy is to suppress prices and actually lower inflation.
But no.
The IMF says these figures show that “during cost-of-living crises, governments should preserve price signals and rely primarily on temporary, targeted income support for the most vulnerable”.
And why? Well mostly because price suppression costs more, and the IMF hates government spending – especially if it increases a budget deficit.
The IMF looked at measures by European countries in 2020 to 2023 and found income support helped the lowest 20% of households slightly more than price suppression – but the other 80% were all worse off.
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I have some sympathy with the IMF not worrying too much about higher income households but this ignores the reality that cutting fuel excise or subsiding energy costs actually lowers inflation and thus helps keep interest rates lower.
Does anyone really think the RBA would have kept rates down last year if the government increased income support and, as a result, increased inflation?
The IMF is not a body that needs to worry about elections or the political cost of interest rates or inflation.
As such, its advice is nice to consider but I suspect the Albanese government will look at the finding and thank the IMF for confirming that the best way for a government to lower inflation is to lower prices of things such as energy and petrol, and to do so again if needed.
