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The IMF's latest growth downgrade may push the RBA into action

John Lamparski/Getty Images
  • The IMF has downgraded its global growth forecast for this year to 3.3%, the lowest level since the GFC.
  • The fund sees Australian economic growth slowing to just 2.1% this year, well below the level many believe is required to keep unemployment and inflatiojn steady.
  • When the IMF last downgraded its global growth forecasts in January, the RBA switched to a neutral policy bias, implying the next move in Australia’s cash rate could be up or down.
  • With Australian economic growth expected to remain weak this year, the IMF’s lastest downgrade could be enough to see the RBA adopt an easing policy bias, indicating the cash rate is likely to be reduced again.

The International Monetary Fund (IMF) has become more pessimistic towards the outlook for the global economy, slashing its forecast for this year to 3.3%, the lowest level since the Global Financial Crisis.

A small part of that downgrade reflected a substantial downward revision to the funds’ forecast for the Australian economy this year, now seeing growth of just 2.1%, down from 2.8% just six months ago. The IMF also forecast that Australia’s economy would grow by 3.2% last year, nearly a full percentage point below where it actually ended up.

While financial markets priced in a weaker global and Australian economic outlook months ago, the downgrade could have implications for the Reserve Bank of Australia (RBA) and the outlook for official interest rates.

Firstly, the further downgrade to the IMF’s global growth forecast fits with the narrative expressed by the RBA in February that risks in the global economy had increased.

Indeed, when the IMF last downgraded its global growth forecast in January to 3.5% this year, it coincided with the RBA abandoning its mild tightening bias in early February, implying that the next move in Australia’s cash rate was likely to be higher. Instead, the RBA adopted a neutral policy bias, indicating the risks for the next move were more evenly balanced.

Secondly, the IMF’s downgrade to its Australian GDP growth forecast this year is substantial. It suggests that growth will be well below the 2.75% per annum pace that many regard as being trend, the level where the economy grows sufficiently to keep inflation and unemployment levels stable.

By the fund forecasting 2.1% growth, it points to the likelihood that unemployment will start to drift higher, creating renewed downside risks on already weak inflationary and wage pressures.

While the IMF’s forecast isn’t all that dissimilar to what many market economists already expect, if even a touch lower, it points to the likelihood that the RBA will also slash its Australian GDP growth forecasts when next updated in early May.

If that eventuates — and there’s a strong chance it will — it may also see the RBA adopt a more pessimistic view towards inflation and unemployment in the year ahead.

The RBA’s current neutral bias on policy rates is underpinned by the view that the economy will grow sufficiently to allow unemployment to fall gradually, helping to place gradual upward on inflation. However, if that view was to change, it would almost certainly pace the way for the RBA to adopt an easing bias and cut Australia’s cash rate again.

Financial markets already expect that outcome, remaining close to fully priced for the RBA to deliver 50 basis points of easing by the middle of next year. Many economists also believe the RBA will cut rates not once but twice this year.

Now that the IMF has joined financial markets in pricing in sluggish Australian and global economic growth this year, the RBA is looking increasingly like the odd one out given its current policy stance.

The RBA expressed heighten caution towards the Australian and global economy earlier this month, a view confirmed by the IMF on Tuesday. Given the fund’s prior growth downgrade came just before the RBA switched to a neutral bias in February, the latest downgrade could prove to be enough to push the RBA into an easing bias, and an eventual rate cut.

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