Australia faces the biggest increase in unemployment in the developed world next year – even as the country’s economy remains one of the globe’s fastest growing and inflation cools – with warnings the AI boom and soaring government debt is a growing risk to all nations.
The International Monetary Fund (IMF), in its six-monthly updated economic outlook, on Tuesday warned that the good luck that had helped the world economy overcome the turmoil caused by the US-Israel war against Iran could soon run out.
The monetary fund is forecasting the global economy to expand by 3.1 per cent this year before accelerating by 3.4 per cent in 2027. Inflation is expected to hit 4.7 per cent this year, largely due to a surge in prices for commodities including oil and food, before easing slightly to 4.1 per cent.
Australia’s economy is tipped to grow by 1.9 per cent this year and 1.6 per cent in 2027. Both forecasts are 0.1 of a percentage point lower than what the IMF forecast in April.
At that level of growth, only the United States, Spain, Singapore and New Zealand are expected to expand faster than Australia.
But unemployment in Australia is expected to climb by 0.3 of a percentage point, from 4.4 per cent this year to 4.7 per cent in 2027. Almost all other developed nations are expected to enjoy either no change in unemployment or a small fall between this year and next.
At 4.7 per cent, the number of Australians out of work would approach 800,000.
Despite the increase, Australia’s jobless rate remains lower than most other rich nations: it is 5.3 per cent in Britain, 8.1 per cent in Sweden and 6.3 per cent in Canada.
The lift in unemployment is expected to help reduce Australia’s inflation rate, which is forecast to fall from 3.9 per cent this year to 3.1 per cent in 2027. At that level, only a small number of nations would have face price pressures higher than Australia, including Austria and Greece.
International Monetary Fund chief economist Silvana Tenreyro said the global economy had aced an “exceptional sequence of events” over the past seven years including the pandemic, the disruption to global supply chains, the wars in Ukraine and Iran and challenges to the world’s trading system.
She said the economy had got through all of this. The recent surge in oil prices, for instance, would have ordinarily hurt the global economy, but a rundown in inventories, re-routing of new supplies, plus a sharp lift in renewable energy sources had all helped to offset the expected macroeconomic fallout.
But Tenreyro said the way the world had responded to the lift in oil prices, on top of the economic boost produced by the AI construction boom, was now under threat.
“This resilience is under strain. Without shoring up supply capacity and replenishing policy buffers, the global economy could soon test the limits of resilience,” Tenreyro said.
“With gains clustered in a small number of firms, sectors and economies, global expansion is heavily reliant on a narrow set of technological and financial conditions.
“More generally, resilience has been uneven, varying noticeably with economies’ exposure to the war and the AI boom, and causing divergent outcomes.”
Tenreyro said the lift in government borrowing costs, which have pushed interest rates on public debt to their highest levels in more than a decade, meant governments had to find ways to reduce their debt levels.
“The interaction of higher financing costs with elevated debt levels exposes a key margin of vulnerability,” she said.
“Strong and deliberate actions are required to rebuild [budget] buffers and shore up the capacity to withstand future shocks – new or the same.”
Tenreyro also said central banks had to remain focused on using interest rates to bring inflation under control. The Reserve Bank last month pushed official interest rates in Australia to a 15-year high of 4.6 per cent.
Treasurer Jim Chalmers said the IMF report confirmed the global economy was under significant pressure because of the war in the Middle East.
“The war is pushing up global inflation while pressures in financial markets, high global debt and reassessments of AI expectations all pose considerable downside risks,” he said.
“We are not immune from these global factors, but we are better placed than many others. We are well positioned to benefit from the global AI investment boom and our efforts to strengthen supply chains are helping to buffer us in a fragmenting world.”
Chalmers said the government was already undertaking many of the IMF’s recommendations, including by making cuts in spending and investing in energy security policies.
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