Treasurer Jim Chalmers says Australia’s economy can stay out of recession, soft landing still possible

Treasurer Jim Chalmers will identify five key ways Australia will avoid recession in a speech set to give his critics plenty of ammunition if he fails.

Conceding the task is difficult — with several examples overseas — Dr Chalmers will outline how he sees Australia among the world’s best economies.

The Treasurer will also push back on critics of last month’s Federal Budget, saying it would be “irresponsible” to adopt a “slash and burn” approach to the nation’s financial books and cut too much.

Dr Jim Chalmers is adopting a “three Rs” approach — relief on cost-of-living, repair of the Federal Budget and reform of the economy.

He will tell the Morgan Stanley Australia summit in Sydney on Wednesday the Federal Government is “already helping” to bring down inflation — now at 3.6 per cent from highs in late 2022 of 7.8 per cent — and its Budget measures to bring it down further will show up in key metrics later this year.

Dr Chalmers will also detail what a “soft landing” — an economic term referring to avoiding recession — on a “narrow runway” looks like, referring to the slim opportunities for the soft landing to occur.

These are: an economy still growing, inflation coming back to the Reserve Bank of Australia’s target band of 2 to 3 per cent, the unemployment rate between 4 per cent and 4.9 per cent, tax cuts and growing wages supporting a gradual recovery in consumer spending, and a “sensible approach” to repairing the Federal Budget.

“This is the soft landing we are cautiously confident of, but not complacent about,” Dr Chalmers will say. “Just as a soft landing in the global economy is assumed but not yet assured.

“We only need to look abroad to see how difficult this is to achieve — the task of taming inflation has halted growth in Europe, raised unemployment in Canada to its highest level in two years and progress on inflation has slowed in the US.”

The economy grew by just 0.1 per cent in the first three months of this year, in large part attributable to subdued consumer spending outside big ticket sporting and entertainment events. This in turn is largely result of higher interest rates and rent prices and rising insurance and health costs pushing other prices higher, squeezing household budgets.

The RBA, which targets inflation at between 2 and 3 per cent, has raised interest rates 13 times since May 2022 to 4.35 per cent. Economists at ANZ on Tuesday pushed out their expectations for the first interest rate cut to February next year, having previously expected it in November.

Dr Chalmers will say household consumption is now dominated by essential spending, prompting the Budget cost-of-living relief such as tax cuts, energy bill relief and rebates, cheaper medicines and increased Commonwealth rent assistance.

But these measures have been criticised by the Opposition, which has said the Government has put too much stimulus in the economy at a time it cannot afford it, and drawn similar questions from economists.

In his speech, Dr Chalmers will say the low economic growth to date this year makes it “clear how misguided the hawkish pre-Budget commentary was”.

“In this environment it would be irresponsible to slash and burn and cut too much,” the Treasurer will say. “Our more balanced approach is tackling inflation without crunching the economy.”

The unemployment rate is now 4.1 per cent nationally and is expected to gradually increase over coming months. If it were to jump substantially ahead of the election due mid-next year, it would give Government critics a clear metric on which to attack.

The RBA next meets on Tuesday, when it is expected to keep interest rates on hold.