‘A bigger scar’: prolonged war in Middle East could slash $16.5bn from Australian economy, Chalmers warns

Treasurer likens impact of conflict to recent major shocks, including global financial crisis and Covid pandemic
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Inflation could peak at 5% this year and petrol price hikes continue to slug motorists until 2029, according to new forecasts released by the treasurer, Jim Chalmers.

Ahead of Thursday’s meeting of national cabinet, set to discuss fuel disruptions and economic shocks emanating from the war in Iran, Chalmers released Treasury modelling suggesting a long lasting conflict in the Middle East could see Australia’s GDP 0.6% lower in 2027.

That hit could slash about $16.5bn from the national economy by 2027.

After suggesting at the weekend that inflation is to rise beyond 4.5% in Australia, up from 3.8%, Chalmers said “the prospect of inflation peaking in the high 4s or even higher this year is very real.”
He will use a speech on Thursday to warn a more prolonged conflict “would leave a bigger scar”, likening the crisis to recent major shocks, including the global financial crisis, the Covid pandemic and escalating trade tensions.

“Around half of the impact to GDP is due to the impact of higher oil.

The other half is due to broader consequences,” Chalmers will say.

The modelling considered two scenarios.

In the shorter version, the oil price would stay at $100 per barrel for the first half of the year, before gradually returning to pre-conflict prices by Christmas.

A more prolonged scenario has the oil price reaching $120 per barrel in the first half of 2026, and then taking three years to get back to prices from before the US and Israeli-led conflict.

Earlier Chalmers conceded government spending had played a role in fueling inflation.

He told Channel Seven he understood that public demand spending was “part of the overall calculation of aggregate demand” in the economy, and the government was reducing it.

Prime Minister Anthony Albanese and state and territory leaders will discuss coordination efforts to ensure fuel shortages are minimised amid a massive spike in demand, including in regional communities where some petrol stations have closed.

The government is expected to name a supply chain coordination tsar, as the oil shock wreaks havoc with planning for the May federal budget.

Albanese will chair Thursday’s virtual meeting with premiers and chief ministers from Tasmania.

“We want to make sure that we do everything we can to shield the Australian economy , households and businesses from the worst of global uncertainty,” he said.

“This new global challenge demonstrates that we must keep building Australia’s self-reliance and our economic resilience.”
The energy minister, Chris Bowen, said on Wednesday that Australia’s fuel supply remained “very solid”, with all deliveries into the country arriving as expected so far, despite uncertainty over passage through the strait of Hormuz.

As much as a fifth of global fuel supply comes through the strategic waterway , bordered by Iran and the United Arab Emirates.

He said panic buying and stockpiling were causing shortages.

“We’ve faced real shortages, particularly rural areas, as we dealt with a 100% increase in demand in a very short period of time,” Bowen told ABC TV.

“Any supply chain is going to struggle with that, regardless of … what commodity you’re talking about.”
The government has already directed fuel companies to release nearly one-fifth of reserve petrol and diesel supplies, and relaxed standards to allow higher sulphur levels in fuel.

That move was designed to inject an extra 100m litres a month into the system for 60 days.

The Greens leader, Larissa Waters, called for national cabinet to consider free public transport to help drivers struggling with higher fuel prices.

“They should discuss making public transport free for as long as the crisis goes on for,” Waters wrote on social media.

“And as the federal government is backing the war, they should pick up the tab.”
The opposition leader, Angus Taylor , said the agriculture sector would be hard hit by fuel shortages ahead of the next sowing season.

Taylor accused Bowen of failing at his job.

“He has to be across where the fuel is, working with the companies to get it to customers, to get it to farmers, to get it to truckies,” he said.

“We should have Australian fuel serving Australians and that has not been the case.”
The transport minister, Catherine King, is holding a fuel security roundtable with key stakeholders from the transport industry on Wednesday.