Chalmers Warns of Softer Growth, Higher Unemployment as Rate Hike Looms

SYDNEY, Oct 22 (The Wiregazette) – Australian Treasurer Jim Chalmers is set to warn of a deteriorating economic outlook on Friday, with Treasury revising its forecasts to show weaker growth and higher unemployment ahead of a likely interest rate increase.

In excerpts of a speech to the Citi A50 Economic Forum, Chalmers said “higher inflation is putting people under pressure, tighter monetary policy is weighing on domestic activity, and we can see that in the softening of the labour market.” The Treasury is in the process of updating its economic projections for the mid-year budget update due in December.

“Higher interest rates and higher inflation are likely to mean softer growth and slightly higher unemployment,” Chalmers will say, according to speech extracts reviewed by Reuters and Guardian Australia.

The warning comes as the Reserve Bank of Australia has raised its cash rate four times this year to 4.6%, with underlying inflation stuck at 3.6% for months. The unemployment rate hit a five-year high of 4.7% in September — a year ahead of the RBA’s own expectations.

Financial markets now see a 64% chance that the RBA will raise rates a fifth time next month to 4.85%, according to Reuters. Guardian Australia reported that ANZ economists put the probability at nearly 60% on Melbourne Cup day.

Economists Brace for More Pain

The outlook has prompted warnings from economists that the worst may still be ahead. Jonathan Kearns, chief economist at Challenger, told Guardian Australia that “things have to get worse before they get better.” He said the full impact of this year’s four rate hikes has yet to flow through, and that unemployment could reach 5%.

“The unemployment rate will increase further from here and we are yet to see the full decline in housing prices, so they are two pretty high-profile things that will impact how people feel about the economy,” Kearns said. “We could be seeing unemployment at 5% and that will be a difficult threshold for the government.”

ANZ economists now expect capital city home prices to eventually fall by 13.5% peak-to-trough — a record decline — before recovering some ground in 2028, Guardian Australia reported.

Sally Auld, NAB’s chief economist, agreed that “the next six to nine months will be pretty challenging.” She noted that “growth needs to slow” as the RBA faces an inflation challenge worse than anticipated in August. However, she said the economy should be in smoother waters by this time next year, with lower inflation.

Bright Spot in Business Investment

One positive in the economy has been business investment, which Chalmers said could more than double compared with expectations in May and rise more than 5% this year, according to Reuters. The resilience in capital spending stands in contrast to the broader slowdown.

Limited Policy Options

Kearns said the government’s policy options are constrained. Any additional cost-of-living relief risks exacerbating inflation, while pulling back on spending could worsen unemployment.

“The challenge is that the government has been criticised, and probably fairly, for contributing to inflation through high government spending,” Kearns told Guardian Australia. “But if they pull back on government spending to reduce inflation, they will be gonged for contributing to the rise in unemployment.”

The deteriorating economic picture is a blow to the Albanese government as it already faces fallout from its ambitious tax reforms, according to Guardian Australia. Households remain deeply pessimistic, and the treasurer’s updated forecasts will reinforce the difficult environment heading into the new year.