The International Monetary Fund's latest World Economic Outlook has confirmed the risks ahead for the Australian and global economy. According to a senior economist from UNSW's Australian School of Business, these risks are made more prominent by the on-going US shutdown.
Professor Fariborz Moshirian, Director of the
Institute of Global Finance said "this report confirms the downsides of the US fiscal stalemate - and they could be more than transient."
The IMF has trimmed its global outlook, down from 3.1 per cent to 2.9 per cent after factoring in the US government shutdown.
"There could be long term negative consequences for the US dollar as a global currency," he said. The outlook projects US economic growth will be down 0.1 percentage points from its July forecast and will now only grow by 1.6 per cent this year before accelerating to 2.6 per cent in 2014.
The IMF says the sharp spending cuts - that were aimed at trimming the federal deficit - instituted by the government earlier this year are the cause, and it warned the economic forecast could turn worse if the US government shutdown continues much longer.
"There was a Standard and Poor's downgrade of the US from its AAA credit status in 2011 because of a stalemate between the Republicans and the Democrats over the US debt ceiling. That slight blip led to a decline in foreign investors' confidence in the US economy - however this is much more serious," said Professor Fariborz Moshirian from the Australian School of Business. "At the time, foreign investors considered the US a better financial option than Europe, thanks to the financial turmoil there. Now however we have a different situation - Europe is dragging itself out of recession and China is once again in a strong situation. It is the US that looks in worse shape."
The latest World Economic Outlook also downgrades Australia's growth rates by 0.5 percentage points from the previous April forecasts, to 3 per cent this year and 3.3 per cent next year, and that Australia's unemployment rate is forecast to rise to 6 per cent next year, up from 5.2 per cent in April.
He said "the Reserve Bank of Australia issued a downgraded growth forecast of 2.25 per cent in August, and so the IMF is more optimistic than the RBA. If this is true, the downturn we have in Australia may turn out to be smaller than expected."
For further comment call Fariborz Moshirian on 02 9385 5859 , or email email@example.com
Media contact: Julian Lorkin: 02 9385 9887
AGSM Scholar, Professor, Director of the Institute of Global Finance
School of Banking & Finance