Australia facing biggest jobless rate spike of developed world

Australia faces the biggest unemployment increase 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 that the AI boom and soaring government debt pose a growing risk to all nations.

Amid signs the Reserve Bank will accept higher unemployment and slower economic growth to help bring down inflation, the International Monetary Fund warned on Tuesday 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 IMF is forecasting the global economy will expand by 3.1 per cent this year before increasing 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 the IMF forecast in April.

At that level of growth, only the US, 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 and would be almost 150,000 more than unemployment at 4.4 per cent.

Despite the increase, Australia’s jobless rate remains lower than most other rich nations: the rate 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 faced price pressures higher than Australia, including Austria and Greece.

IMF chief economist Silvana Tenreyro said the global economy had faced 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 and a sharp lift in renewable energy sources had all helped to offset the expected macroeconomic fallout.

However, 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,” she 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.”

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.

“Strong and deliberate actions are required to rebuild [budget] buffers and shore up the capacity to withstand future shocks – new or the same,” she said.

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.”

Shadow treasurer Tim Wilson said the IMF’s report, which applies to all nations, was an indictment against the Albanese government’s economic management.

“The Albanese government keeps pouring debt petrol on the inflation fire, and families and small business are paying the price through rising interest rates and higher prices at the supermarket,” he said.

The report followed the release of the minutes of the Reserve Bank’s most recent monetary policy committee meeting at which the official cash rate was pushed to a 15-year high of 4.6 per cent.

The bank seeks to hold inflation between 2 and 3 per cent while maintaining as many people in work as possible. For several years, it has noted the importance of trying to hold the jobless rate down while pushing up interest rates to bring inflation under control.

But the minutes suggest the bank is now prepared to accept higher unemployment if it means a quicker fall in inflation.

“Members acknowledged that the trade-off between inflation and full employment had deteriorated because of global cost pressures,” the minutes showed. “They confirmed that their strategy was still to return inflation to target in a timely manner, while preserving as many of the gains in employment as possible.

“However, executing this strategy in an environment of more persistent adverse supply shocks would require accepting slower growth in demand and employment than would otherwise be the case.”

The Commonwealth Bank’s head of Australian economics, Belinda Allen, said the comments suggested the RBA believed it may no longer be able to maintain the recent strength of the jobs market.

Financial markets put the chance of a follow-up rate rise by the Reserve Bank at its November 2-3 meeting at 30 per cent.

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