The Australian economy confronts the most difficult set of global economic circumstances in a quarter of a century, with the IMF overnight highlighting the major global economic challenges we face.
In its World Economic Outlook (WEO) update released overnight in Washington, the International Monetary Fund (IMF) concludes that 'the global economy is in a tough spot, caught between sharply slowing demand in many advanced economies and rising inflation everywhere'.
The IMF's report highlights the difficult global challenges we face, in particular the global credit crunch, rising global oil prices and rising global inflation. Higher borrowing costs and rising fuel prices are putting pressure on businesses and families both here and abroad.
These difficult conditions underscore the importance of responsible economic management. That's why the Rudd Government delivered a responsible budget that puts downward pressure on inflation and invests in strengthening our economy to help withstand the challenges now unfolding.
The IMF expects GDP growth in the global economy to slow to 4.1 per cent in 2008 and 3.9 per cent in 2009, following growth of 5.0 per cent in 2007. While this forecast has been revised up since the April WEO, the IMF still expects growth to slow over the second half of 2008, especially in advanced economies. The US economy is expected to 'contract moderately' over that time, while growth in the euro area and Japan is also expected to slow.
The IMF notes that further financial market turbulence remains 'a significant downside risk' - as recent events in the US demonstrate.
Inflation is another rising concern, with risks from second round effects from the surge in commodity prices. Influenced by higher oil and food prices, the IMF observes that global inflationary pressures have continued to build. The IMF has increased its inflation projections for both advanced and emerging economies, and noted that "the top priority for policymakers is to head off rising inflationary pressure, while keeping sight of risks to growth".
Notably, the IMF strongly endorsed the inflation-fighting qualities of the Rudd Government's first Budget, as well as its long-term agenda to build the economy's productive capacity, in its recent Concluding Statement from its staff mission to Australia.
While Australia is not immune from global economic developments, we are better placed than most other countries to withstand the fallout. We have highly regarded regulators and do not face the same problems being experienced in the US sub-prime mortgage market.
Despite concerns about inflation, the IMF's latest forecasts for growth in Asian and emerging economies remain robust. In particular, the growth outlook for China remains supportive of continued growth in Australia.