Australia’s economic outlook is darkening as hostilities in the Middle East drag on.
Consumer confidence registered its biggest fall since the onset of the COVID pandemic in April as soaring fuel prices sapped household budgets. The price of unleaded petrol in Sydney has now been above $2 a litre for more than six weeks and uncertainty over fuel supplies persists.
Business sentiment has also soured.
The longer the Iran crisis lingers, and the longer petrol prices stay high, the greater the risk that the slump in confidence will result in actual economic weakness.
While the jobs market has been fairly resilient so far, the Westpac-Melbourne Institute Unemployment Expectations Index rose sharply in April, meaning a growing share of workers believe unemployment will rise in the months ahead.
Treasurer Jim Chalmers, who has been in Washington this week consulting economic officials from other major economies, emerged from the meetings to warn that the consequences of the Middle East conflict were already “very serious for Australians” and that they risk becoming severe.
“It’s a time of uncertainty,” he said. “There’s a lot of pressure and peril in the global economy.”
That peril has raised the stakes for Chalmers’ fifth budget, due in a little over three weeks. It looms as a defining moment for the treasurer.
Earlier this week, the International Monetary Fund urged governments not to shower voters with cost-of-living handouts in a bid to soften the financial blow caused by higher fuel costs.
Those budget policies are often “poorly designed and costly” and add to inflationary pressures.
Higher fuel costs are already stoking inflation in Australia, and doling out taxpayer cash to households will only make the problem worse.
The scale of Labor’s election victory last May means the Albanese government is in a strong political position and it does not need to resort to populist policies that weaken the budget and threaten to harm the economy in the medium term.
Chalmers must heed the IMF’s advice; the current situation calls for careful budget discipline.
The Reserve Bank will also be tested by the economic fallout following the US military’s intervention in Iran. It faces a thorny policy challenge as higher fuel prices put upward pressure on inflation and dampen activity across the economy at the same time.
This week, RBA deputy governor Andrew Hauser described that kind of “stagflationary shock” – which pushes inflation up and pushes activity down – as a “central banker’s nightmare”.
At the same time, Hauser reiterated RBA concerns about the “medium-term impact” on inflation from the Middle East crisis, and how it might affect consumer expectations of future inflation.
The RBA has lifted interest rates twice this year and many economists expect the bank’s monetary policy board will order a third hike for 2026 when it meets in early May.
But the RBA must proceed with caution, given the uncertain economic consequences of the energy shock.
There is a real risk it will lift interest rates too high and cause unnecessary and lasting economic damage.
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