Australia cuts growth forecasts as oil prices hit $113

Treasury officials are lowering their economic forecasts for Australia ahead of the December mid-year budget update. The changes point to slower growth and higher unemployment. Treasurer Jim Chalmers acknowledged these shifts on Friday. This follows a speech last week where he suggested the economy would be 'a bit better' in a year.

The primary driver of this downward revision is the widening conflict in the Middle East. Global benchmark oil prices rose overnight to US$113 a barrel. This level is close to the April peak of nearly US$120. The conflict began after the US and Israel attacked Iran. Australian motorists are now paying 60 cents more per litre than they did before those attacks.

The cost increase has a direct impact on household budgets. Filling a standard 60-litre tank now costs $36 more. For a family that fills up their car weekly, the expense is $144 higher per month compared to February. These rising costs are feeding into broader inflation pressures.

Analysts warn that the risks are not limited to current price levels. The New York Times reported that the US and Israel have drawn up plans to resume attacks on Iran after the American midterm elections. Westpac analysts have outlined a scenario where oil prices head toward US$150. The International Monetary Fund issued similar warnings earlier this month. Such an outcome would have major consequences for inflation and interest rates. A fifth rate rise is possible on 3 November.

Global economic supports are also weakening. Heavy spending on artificial intelligence has helped mask weakness in other sectors. However, investors are becoming uneasy about a sharp rise in debt among companies building AI infrastructure. This anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to datacentre construction may also slow the rush. Talk of a tech stock bubble is increasingly paired with talk of a bust.

Reserve Bank of Australia governor Andrew Hauser described the current mix of high inflation, low growth, and rising unemployment as a central banker's 'nightmare'. Chalmers admitted that the pressures on people are 'very substantial'. He told Politico that these issues 'keep me awake at night'.

Chalmers noted that some causes lie beyond Canberra's control. He said the government is 'hostage' to decisions made in Washington, Tehran, and Eastern Europe. These geopolitical factors are pushing up global inflation and weighing on growth. High government spending also works against the inflation fight, a point the opposition raises frequently. Productivity growth is slowing, meaning the economy reaches its speed limit sooner.

Chalmers has two main options to ease voter discontent. The government could cut the fuel excise tax temporarily. This would lower petrol prices but make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in the December budget update. This would assist the central bank but weigh on an already weak economy. It is unclear if this move would earn the government any political credit.

Hauser has called this environment a 'world of hard choices'. In such a world, fixing one problem often worsens another. Chalmers faces these trade-offs as he prepares to present the updated economic outlook to the public in December.