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Treasurer Jim Chalmers has delivered a grim warning that “rampant inflation, falling real wages” heralds a period of extreme global economic uncertainty.
Speaking after the release of the OECD’s latest economic forecast, he’s warned that Australia is “not spared from this darker and more dangerous global outlook” amid fears of a global recession.
“The OECD report shows the global economy is treading perilous terrain – with slowing global growth, rampant inflation, falling real wages, and extreme uncertainty,” Dr Chalmers said.
“These challenges are intensifying, not dissipating, and Australia is not spared from this darker and more dangerous global outlook.
“Despite significant economic and budget challenges here at home, Australians should be optimistic about the longer term future of our economy and our country.”
The OECD Interim Economic Outlook warns that “taken together, the shocks could reduce growth in the European economies by over 11⁄4 percentage point in 2023, relative to baseline, and raise inflation”.
“This would push many countries into a full-year recession in 2023,” it states.
“Real household disposable incomes would be hit further, reflecting the drag exerted by higher prices and the decline in hours worked, and business investment would also be severely affected.
“Outside Europe, the impact of the shocks would be smaller, but there would still be adverse impacts from higher inflation on real incomes.”
Dr Chalmers said the October budget was designed to build resilience by delivering responsible cost-of-living relief, making vital investments and beginning the hard yards of budget repair.
“The OECD highlights the benefits of governments increasing their support for childcare,” he said.
“The biggest new investment in our budget in October will be cheaper childcare, a game-changing investment which delivers cost-of-living relief with an economic dividend.”
The OECD’s latest report notes that the global economy has been hit by Russia’s invasion of Ukraine.
“The war has pushed up energy and food prices substantially, aggravating inflationary pressures at a time when the cost of living was already rising rapidly around the world,” it states.
“Inflation has become broadbased in many economies. Tighter monetary policy and easing supply bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher labour costs are likely to slow the pace of decline.
“Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.”
The OECD suggests that support is needed to help cushion the impact of high energy costs on households and companies.
However, this should be temporary, concentrated on the most vulnerable, preserve incentives to reduce energy consumption and be withdrawn as energy price pressures wane.
“Energy prices have risen sharply, particularly for natural gas,” the report states.
“Coal prices are also near record levels, as electricity generators and some industrial sectors substitute from gas to coal and oil. These phenomena have been most acute in Europe, but have affected prices in other regions as well, especially Asia.”
The OECD also warns that the fallout from the war remains a threat to global food security, particularly if combined with further
extreme weather events resulting from climate change.
“The automatic fiscal stabilisers provide some help in moderating the impact of the shock, but additional discretionary measures would be needed to fully cushion household incomes,” it states.
