Here’s something that should be required reading at the Daily Telegraph as it continues its disgraceful campaign to undermine the Reserve Bank and its Governor, Glenn Stevens.

The latest World Economic Outlook from the International Monetary Fund reveals that Australia is in a very special position: we, among all the advanced economies of the globe, have a problem.

Amid the doom and gloom of the US and a slowing Europe, Australia has the problem of a healthy, vibrant and growing economy … but growing a bit too quickly for comfort due to the resources boom.

Our solid position is in danger of being compromised by rising inflation and we are having to endure interest rates higher than we were used to a few years ago as the RBA looks to apply the brakes as gently as possible, without crash the car.

The IMF report says we will grow at 3.2% this year and 3.1% next year. In contrast the US is forecast to grow at 0.5% and 0.6%, Europe at 1.4% and 1.2%, the UK at 1.6% for the next two years and Japan at 1.4% and 1.5%.

According to the IMF there’s a 25% chance of a global recession next year — the world is effectively in recession if growth slows to less than 3%, which could happen if the US subprime and housing crises worsen, rather than stabilise.

If that happens we could be in the fortunate position of being ready to tackle an accelerating global slowdown by starting to cut interest rates: that’s what the Reserve Bank is aiming for at the moment. Business and consumer confidence are falling as Australians have started responding to the RBA’s warnings — retail sales and building approvals are down.

So even if the world economy slows further next year we could still be in a better position than many other advanced economies.

The reason for our strong position is easy to see: China and India will slow, but still be very strong compared to the rest of the world.

The latest forecasts for Chinese and Indian growth are down on the January update but still strong: China will grow at 9.3% this year (compared to 11.4% in 2007) and 9.5% in 2009, while India will grow 7.9% this year and 8.0% next year.

But the issue to keep in mind is the surge in commodity prices, especially oil and food. Rice, the staple food in Asia, has doubled in priced in a month and is being rationed across the region. We’ve had a credit crunch — Asia, Africa and parts of the Middle East are now experiencing a rice crunch!

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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