Economy set to worsen, with higher unemployment and weaker growth on the way, Jim Chalmers reveals

Australia’s mid-year budget update is a scheduled check on the government’s economic forecasts and budget position. It revises earlier expectations using newer information about growth, inflation, jobs and government finances. This matters because the update shows whether the economy is performing better or worse than expected, and it can shape future policy decisions.

In December, Treasury will revise all the numbers for the update. Chalmers is expected to say that higher interest rates and higher inflation will probably produce softer growth and slightly higher unemployment. The update therefore reflects economic pressure rather than announcing one isolated measure.

The article indicates a difficult near-term outlook. Unemployment had reached 4.7% in September, while markets saw a nearly 60% chance of another rate rise. The government faces limited choices because extra relief could worsen inflation, but spending cuts could add to unemployment.

Australia’s unemployment rate measures the share of people seeking work who do not have a job. A rising rate signals that the labour market is weakening. It matters politically and economically because joblessness can reduce household confidence, spending and income, while making the government’s economic performance more vulnerable to criticism.

The latest jobs data in the article showed unemployment reaching 4.7% in September. That was the highest level in nearly five years. Jonathan Kearns, Challenger’s chief economist, said unemployment could reach 5%. He described that level as a difficult threshold for the government.

The risk is that more weakness is still coming. Kearns said this year’s four interest-rate increases had not fully affected the economy. The article also says housing prices had not fully declined. Together, rising unemployment and falling property values could make households feel more pessimistic about the outlook.

Interest rates affect how costly it is to borrow money. When rates rise, households with mortgages may have less income left for shopping and other expenses. Businesses also face higher financing costs, which can discourage investment. Together, these effects reduce demand across the economy, slowing economic growth.

For example, a household paying more interest may postpone a renovation, restaurant meal or new purchase. A business facing higher loan costs may delay expansion or hire fewer workers. Lower sales can then reduce the need for staff. This is the main link between tighter monetary policy, weaker activity and higher unemployment.

The article says higher rates are already weighing on domestic activity and softening the labour market. It also warns that the full effects of four rate rises have not yet flowed through. A possible fifth increase could therefore create more pressure before inflation eventually eases.

The Reserve Bank of Australia, or RBA, is Australia’s central bank. It sets the official interest rate and uses monetary policy to influence borrowing, spending and inflation. Its decisions affect households, businesses and financial markets, so the bank can influence the economy even without controlling government spending.

The RBA may raise rates when inflation is too high. Higher borrowing costs reduce demand, which can ease pressure on prices over time. That decision can weaken growth and employment in the short term. The trade-off is deliberate: the bank may accept slower activity to prevent inflation from becoming more persistent.

The article says the RBA faces an inflation challenge worse than expected as recently as August. Financial markets placed the chance of a Melbourne Cup day rate rise near 60%. The prospect of another increase comes even though unemployment is rising and households are already deeply pessimistic.

Interest-rate rises affect households mainly through borrowing costs. People with variable-rate mortgages may face larger repayments, leaving less money for everyday spending. Potential buyers can also borrow less, while businesses may postpone investment. These changes reduce demand and can slow economic growth.

Housing is especially sensitive because higher rates make mortgages more expensive and can reduce what buyers are willing or able to pay. If demand weakens, prices may fall. The article says ANZ economists expect capital-city home prices eventually to decline 13.5%, described as a record peak-to-trough fall, before recovering some ground in 2028.

The effects do not arrive immediately. Jonathan Kearns said the full impact of this year’s four interest-rate rises had not yet flowed through. Further repayment pressure, weaker spending and falling housing prices could make households more pessimistic over the next several months.

Government cost-of-living support can protect households from rising prices. However, if assistance increases spending while the economy already faces strong price pressures, businesses may continue raising prices. That can make inflation harder to reduce, especially when the government is already criticised for contributing to inflation through high spending.

The policy dilemma works in both directions. More relief may support household incomes but add demand to the economy. Cutting government spending may reduce inflationary pressure, yet it also removes spending that supports economic activity. Businesses may then sell less, slow investment or reduce hiring, increasing unemployment.

The article says Chalmers’ policy options are limited. Kearns said the government would be criticised for supporting inflation if it spent more, but “gonged” for contributing to unemployment if it pulled spending back. The challenge is balancing price stability with jobs and household support.

Inflation means prices are rising across the economy. Economic growth means the economy is producing more goods and services over time. Unemployment measures people who are seeking work but do not have jobs. These measures describe different conditions, but together they show whether households and businesses face rising costs, expanding activity or weaker job prospects.

The measures are connected through spending and monetary policy. When inflation is too high, the RBA can raise interest rates. More expensive borrowing usually reduces household spending and business investment. That can slow growth. If businesses face weaker demand, they may hire fewer people, causing unemployment to rise.

The article illustrates this chain. Higher inflation is putting people under pressure, while tighter monetary policy is weighing on domestic activity. Growth is expected to soften, unemployment reached 4.7% in September, and it could reach 5%. Lower inflation next year would signal some improvement.