Australia’s Swan Says IMF Forecasts Will Hurt Budget

By Jacob Greber and John McCluskey

April 23 (Bloomberg) -- Australian Treasurer Wayne Swan said International Monetary Fund forecasts for his nation’s economy are “bleak” and will have severe consequences for the government’s budget, due to be released next month.

Australia’s gross domestic product will fall 1.4 percent this year, before rising 0.6 percent in 2010, the IMF predicts in its world economic outlook released in Washington. Unemployment will jump to 7.8 percent from the current rate of 5.7 percent.

“The deepening global recession will have severe consequences for the budget’s forecasts for economic growth, unemployment and revenue, which will be substantially worse than reported in February,” Swan said in Canberra today.

The predictions reflect the assessment of Governor Stevens, and Australia’s Prime Minister Kevin Rudd, both of whom this week said for the first time the economy is in its first recession since 1991. Swan told reporters today a recession is inevitable.

“The IMF’s bleak assessment, together with the substantial downgrades in its global growth forecasts, present the most challenging global backdrop to an Australian budget in living memory,” he said. The IMF expects the global economy will contract by 1.3 percent in 2009.

Swan will release the 2009-10 federal budget on May 12 in Canberra. He has said the budget will be in deficit for the first time in seven years.

Job Losses

Asked today if he could guarantee that the jobless rate won’t hit the double-digit levels seen in the early 1990s, Swan said: “There are no guarantees when you are amidst the most savage global recession since the Great Depression.”

The IMF said Australian and New Zealand central banks can cut interest rates further, making them better placed than counterparts to cushion their economies from the global recession.

“Conservative monetary and fiscal policy management in these economies now leave policy makers better placed than those in other economies to mitigate further declines in demand,” the IMF said. “Policy rates have been cut rapidly and can be cut still further.”

Australia’s central bank Governor Glenn Stevens cut his benchmark lending rate this month to a 49-year low of 3 percent, the same level set on March 12 by Alan Bollard, who heads the Reserve Bank of New Zealand, where rates are now at a record low. New Zealand’s economy will also contract this year before expanding again in 2010, the IMF predicts.

Government Aid

“The slump in demand in the U.S. and Asia and the drop in commodity prices are weighing on activity,” the IMF said. “Households are also suffering wealth reduction as equity markets and, to a lesser extent, house prices have fallen after rapid rises through 2007.”

To spur domestic demand, Stevens has cut borrowing costs by a record 4.25 percentage points since September, and Rudd in February said his government will spend A$42 billion ($30 billion) on cash handouts to taxpayers and on infrastructure.

“After years of running surpluses, fiscal positions are robust and substantial fiscal stimulus is being provided,” the IMF said.

“However, owing to the relatively high dependence on demand from the U.S. and Asia, and on external financing, there are limits to what domestic policy measures can achieve,” the IMF said, referring to both New Zealand and Australia.

New Zealand’s economy will probably contract 2 percent this year and expand 0.5 percent in 2010, it said.

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net