The Treasury is war gaming recession plans as the Iran conflict threatens long-term global economic turmoil.
Treasurer Jim Chalmers said on Wednesday the government was “still working through a number of scenarios” and that the “more substantial the oil shock, the longer that the war drags on, the longer it takes for the global economy to get the show back on the road”.
“Obviously, those are the key considerations … in that modelling, and the longer the shock drags out, obviously, the harsher the consequences for our economy, whether that’s measured by inflation or by growth or by impacts on the labour market,” Mr Chalmers told reporters.
He said Australia was going “into this quite severe global economic shock from a position of genuine relative economic strength”, pointing to recently released better-than-expected employment numbers.
“So we’ve got strengths as well,” Mr Chalmers said.
But he did note Australians are doing it tougher as a result of the conflict and that would continue for as long as the Iran conflict continued.
“Australians didn’t choose this war,” he said.
“They’re paying the price for this war at the petrol bowser and more broadly … from an economic point of view, this war can’t end soon enough.
“But the consequences will linger for longer, and that’s why we’re working very closely together to try and shield Australians from the worst the world can throw at us.”
The Paris-based Organisation for Economic Cooperation and Development (OECD) has revised down global economic growth as a result of the conflict.
It projected that global GDP was sent to drop from 3.3 per cent to 2.9 per cent in 2026 before edging up to 3.0 per cent in 2027.
Addressing reporters, OECD chief and former Australian finance minister Mathias Cormann warned the slump would be accompanied by higher inflation.
“There’s a high level of uncertainty around the duration and the magnitude of the current conflict in the Middle East and that means that this outlook is subject to significant downside risks that could result in lower growth and higher inflation,” Mr Cormann said.
Chalmers rejects ‘stagflation’ claim
During his Wednesday press conference, Mr Chalmers also rejected that Australia is facing stagflation – stagnant growth, high unemployment and high inflation.
It was in response to a National Press Club address from former Treasury secretary Martin Parkinson, who will call for urgent economic reform “as we stare into stagflation”, according to speech extracts.
“These windows of opportunity close quickly – when they are open, we need to strike, and strike hard,” Mr Parkinson will say.
“At a time of rising inflation and weak economic growth, it is imperative that government pulls all the levers that can significantly boost productivity.”
Mr Chalmers said he has “a lot of respect” for Mr Parkinson but that he disagreed.
“I’ve worked closely with him formally and informally for a really long time now,” Mr Chalmers said.
“But I think that that description of our economy doesn’t accurately capture our strengths, particularly in the labour market.
“Having unemployment in the low fours, with labour force participation at two thirds, wages growing above three per cent for the last fourteen or fifteen quarters, real wages growing for eight of the last nine.
“I think that more accurately captures the strengths in our economy as we face this uncertain period.”
