Chalmers Prepares to Cut Growth Forecasts as Oil Tops $113

Treasury officials are preparing to lower Australia’s economic growth and employment forecasts ahead of the December mid-year budget update. Treasurer Jim Chalmers confirmed the downward revisions on Friday, a shift from his comments last week that suggested the economy would improve over the next year. The change reflects a weakening outlook driven by global energy shocks and domestic economic headwinds.

The primary driver of the revision is the surge in global oil prices. The benchmark price rose to US$113 a barrel overnight, approaching its April high of nearly US$120. Australian drivers now pay 60 cents more per litre than before the United States and Israel attacked Iran. This price increase adds $36 to the cost of filling a standard 60-litre tank, amounting to an extra $144 per month for households that fill up weekly, compared to February levels.

Further escalation remains a risk. The New York Times reported that US and Israeli forces have developed plans to resume attacks on Iran following American midterm elections. Westpac analysts outlined a scenario where oil prices could reach US$150, a level the International Monetary Fund warned could trigger severe inflation and interest rate consequences. A fifth rate hike by the Reserve Bank is possible on 3 November.

Global markets are also facing stress from the artificial intelligence sector. While AI spending previously masked broader economic weakness, investors are now concerned about rising corporate debt linked to infrastructure builds. This anxiety contributed to a sharp sell-off on Wall Street overnight. Community opposition to datacenter construction may also slow the build-out, adding to short-term economic stress.

Reserve Bank Governor Andrew Hauser described the current combination of high inflation, low growth, and rising unemployment as a central banker’s nightmare. Chalmers acknowledged the pressure on households, telling Politico that the situation keeps him awake at night. He noted that while some causes are beyond Canberra’s control, the government can influence outcomes through cost-of-living assistance and responsible budget management. Chalmers said Australia is hostage to decisions made in Washington, Tehran, and Eastern Europe regarding two ongoing wars.

Domestic factors complicate the response. High government spending opposes the fight against inflation, while slowing productivity growth means the economy hits its speed limit earlier, keeping inflation higher at lower growth rates. The government faces difficult choices to address these issues. A temporary cut to fuel excise would lower petrol prices but reduce the Reserve Bank’s ability to rein in inflation. Conversely, large spending cuts in the December update would help the central bank but weigh on a weak economy and raise unemployment. Each option carries a distinct cost, creating a set of hard choices for policymakers.