Australia faces prolonged inflation, the IMF believes, while the global economy risks an AI boom reversal.
The International Monetary Fund (IMF) has flagged Australia’s inflation challenge in its latest World Economic Outlook update, arguing it is “projected to see some drawn-out persistence” in above-target levels.
It comes despite Australia’s headline CPI cooling faster than expected to 3.4 per cent in November, according to Australian Bureau of Statistics (ABS) data. At present, Treasury expects both underlying and headline inflation in Australia to remain below global averages.
Commenting on the report, Treasurer Jim Chalmers said high inflation is not unique to Australia and is a challenge facing policymakers globally.
“The global economy is incredibly uncertain, with persistently high inflation still a challenge for many countries around the world,” Chalmers said.
“The three big economic priorities for the Albanese Government this year are addressing inflation, productivity and global uncertainty, and this report shows why that’s the right approach.”
In the report, the IMF urged central banks in countries with persistent inflation to rely on clear evidence when deciding on interest rate policy.
“Where inflation is still above target, a more cautious approach that maintains data dependence is warranted,” it stated.
With rates currently sitting at 3.6 per cent and the market pricing in two rate hikes from the Reserve Bank of Australia (RBA) this year, Australia stands out as most other countries move into a rate-cut cycle.
However, that view is not unanimous: AMP’s chief economist, Shane OIiver said he expects the RBA to keep rates on hold this year, while FIIG Securities’ head of research, Philip Brown said the market is likely pricing in the full extent of rate rises.
December quarter inflation data, scheduled for release on 28 January, will be key for the next few months while the RBA will also release updated economic forecasts for growth and inflation on 3 February.
Despite the negative outlook, the IMF nevertheless kept Australia’s growth forecast unchanged, predicting GDP growth of 2.1 per cent this year and 2.2 per cent in 2027.
Global outlook
Globally, the IMF was broadly upbeat, forecasting that inflation will continue to ease, with headline inflation at 3.8 per cent in 2026 and 3.4 per cent in 2027 – essentially unchanged from its October outlook.
With a slight upward revision for 2026 and no change for 2027, the IMF also projected global growth to remain resilient at 3.3 per cent in 2026 and 3.2 per cent in 2027.
“With pass-through from higher tariffs gradually materialising, US core inflation is projected to return to the country’s 2 percent target during 2027,” the report stated.
However, it said that risks to the global economy “remain tilted to the downside,” noting that resilience so far has been driven by a narrow set of sectors – including the boom in IT investment in the US – and is often supported by monetary and fiscal stimulus.
In particular, the IMF warned that global growth could be disrupted by a reversal in the AI investment trend as well as persistent geopolitical uncertainty.
“Should expectations about AI-driven productivity gains turn out to be overly optimistic and outcomes disappoint, a sharp drop in real investment in the high-tech sector as well as in spending on AI adoption in other sectors and a more prolonged correction in stock market valuations – which have increasingly been lifted by only a few technology firms – could ensue,” the report stated.
It said this could trigger a costly reallocation of capital and labour and weaken business dynamism, while negative wealth effects could weigh on private consumption and investment. Spillovers could then spread globally through tighter financial conditions.
Meanwhile, the annual PwC Global CEO Survey, released on 19 January, found only 14 per cent of Australian CEOs say AI adoption has boosted profits – echoing Morningstar’s concerns last year about overconcentration in AI investment.
