Two years ago Joe Hockey and Tony Abbott basked in the glare of favourable publicity for the Group of 20 meeting that was held in Brisbane at the end of 2014 — the key recommendation was the call for member countries to adopt policies to add 2% growth over the next five years. In the run-up to the first G20 finance minsters meeting of the year this weekend in Shanghai, the IMF has warned it will be cutting its global growth forecast for a second time this year in the World Economic Outlook to be issued in April. Turmoil on sharemarkets and low output in developed countries countries may force the fund to cut its growth forecast a little over a month after it downgraded its estimate for global growth this year to 3.4%.
In Australia, economic growth is struggling to reach 3%, Treasury has downgraded its growth forecasts, and wages growth has slumped to its lowest recorded levels. Yesterday’s wage price index data from the Australian Bureau of Statistics showed annual wages growth at its lowest levels since the series began in 1998. If it weren’t for Finance Minister Mathias Cormann flagging last week that weak wages growth undermined the urgency for addressing bracket creep, the government would be looking very silly — or even sillier — in the wake of that data.
Data out on Friday night will confirm the slowdown in the world’s biggest economy was deeper than first thought. Most economists reckon the first estimate of US fourth-quarter growth of 0.7% (annual) will be cut to just 0.5% or lower, down from 2.0% annual in the third quarter and 3.9% annual earlier in the year. And a survey of services activity overnight shocked with a dip under a reading of 50 — the level that separates contraction (below) from growth (above). The 49.8% reading was the first negative reading for the huge US service sector since late 2013. The services sector accounts for 77% of US GDP.
The IMF doesn’t offer much good news for the government on the fiscal front. It proposes that the world’s largest economies should agree to a co-ordinated increase in government spending to counter the growing risk of a deeper global economic slowdown. “The G20 must now for coordinated demand support using available fiscal space to boost public investment,” IMF staff said in the report. The IMF obviously wants governments to do more than what central banks are doing (or can do) — the huge spending and negative interest rate regime in the eurozone has worked to a point in stabilising the area after the succession of euro crises, but now more government spending is needed, not the falling spending that has characterised recent years and is still going on. China is spending more and has been for 18 months and has cut interest rates five times, but demand remains sluggish, price growth is weak, real estate remains in deep depression and more of the same is expected this year. The Japanese economy is sluggish and hasn’t been stirred by government spending or by the central bank’s huge easing program. Now the Bank of Japan is trying negative interest rates, a move that has helped fuel the destabilising slide in markets, on top of the plunge in global oil and energy.
The IMF report said global economic growth was slowing and financial conditions were tightening for emerging economies, where commodity exporters have been hard hit by an economic slowdown in China. “These developments point to higher risks of a derailed recovery,” according to the report. That also has lessons for commodity-reliant Australia.
In this context, the government’s seeming inability to make any sort of progress in terms of economic reform, or even offer a coherent narrative around the budget (beyond “we want to get back to surplus in a few years’ time, but we’re not going to rush it”) looks increasingly serious. Fortunately, employment has held up well despite poor growth, but if anything that has obscured the case for the prosecution of serious reform — and not just, or even particularly, on tax, but on infrastructure, on health and education outcomes, on the transition to renewable energy, on encouraging new investment in the non-resources sector of the economy — all areas of spending the IMF would be very happy to see.