Global Stagflation a Risk Warns Australian Finance Minister

Finance Minister Katy Gallagher and Treasurer Jim Chalmers during a doorstop at Parliament House in Canberra, Australia, on May 11, 2021. Sam Mooy/Getty Images

Australian Finance Minister Katy Gallagher has warned that Australia and the world are facing the risk of global stagnation and high inflation, a situation known as stagflation.

In its latest annual report, the Bank for International Settlements (BIS), also known as the central bank of central banks, said the world’s economic developments in the past year were shaped by the COVID-19 pandemic and the Russia-Ukraine war.

“This combination of forces makes for a challenging outlook,” the BIS said.

“The mix of high inflation, high and volatile commodity prices and significant geopolitical tensions bears an uncomfortable resemblance to past episodes of global stagflation.”

In addition, the report pointed to the uncertain growth outlook in China as a risk factor to the prospect of the global economy.

“Unlike in the past, stagflation today would occur alongside heightened financial vulnerabilities, including stretched asset prices and high debt levels, which could magnify any growth slowdown,” the institution warns.

After reading the report, the finance minister said while the stagflation raised by the BIS was a worst-case scenario, it was true that the Australian economy was facing many difficulties.

“We have got cost of living going through the roof, we have got rising interest rates, we have got wages still stagnant, and that is presenting some real challenges to people,” she told Sky News.

“The job of the government is to look at how we can make our policies. Our sensible investments drive the productive capacity of the economy.

Shoppers walk around Pitt Street Mall in Sydney, Australia, on June 07, 2022. Brendon Thorne/Getty Images

The investments proposed by the Labor government include the child care reform, skills training and spending on renewable energy.

“They are things that will help the economy in the long term without adding to inflation in the short term,” Gallagher said.

Nevertheless, the investments promised by the Labor party during the federal election were expected to put a $7.4 billion (US$5.19 billion) dent in the federal budget over the next four years.

Australian Economy Benefits From High Commodity Prices

Despite bringing many unstable factors to the world economy, Russia’s invasion of Ukraine has pushed commodity prices to very high levels, directly benefiting Australia.

The Department of Finance has released its financial statement for May 2022, revealing an underlying budget deficit of $33.4 billion.

The figure was less than half of the 2021-2022 deficit of $79.8 billion predicted in the March budget and was attributed to the high commodity prices.

While the finance minister welcomed the budget improvement, she said it would not last long.

“We are seeing improvements. It is in those areas that are highly volatile, around commodity prices, and we have seen some softening in those in the past week,” Gallagher told ABC radio.

“We don’t expect (the budget improvement) will continue at this rate.”