Treasury Cuts Growth Forecasts as Oil Hits US$113 and Fuel Costs Rise

US$113. That is the current price of a barrel of oil, a level that has pushed Australian fuel costs up by 60 cents per litre since the United States and Israel began their campaign against Iran in April. For a family that fills a 60-litre tank every week, the difference amounts to $144 more per month compared to February.

Treasurer Jim Chalmers acknowledged on Friday that Treasury officials are lowering their forecasts for the December mid-year budget update. He said slower growth and higher unemployment are now expected. This marks a shift from a speech he gave last week, where he suggested the economy would be "a bit better" in a year.

The primary driver of the change is the widening conflict in the Middle East. The current oil price is close to the April peak of nearly US$120 a barrel. Analysts at Westpac have outlined a scenario where prices could reach US$150 if the US and Israel resume attacks on Iran after the American midterm elections, a plan reported by the New York Times. The International Monetary Fund issued similar warnings earlier this month.

Global economic conditions are adding to the pressure. Heavy spending on artificial intelligence has helped mask weakness in other sectors, but investors are growing uneasy about a sharp rise in corporate debt. This anxiety triggered a steep sell-off on Wall Street overnight. Community opposition to new datacentre construction could further slow the rush, adding to short-term stress.

Reserve Bank Governor Andrew Hauser described the combination of high inflation, low growth, and rising unemployment as a central banker's "nightmare." Chalmers, who faces a difficult political environment, told Politico that the pressures on people are "very substantial" and keep him awake at night. He noted that the government is "hostage as well" to decisions made in Washington, Tehran, and Eastern Europe.

Domestic factors are not helping the outlook. High government spending works against the fight against inflation, a point the opposition raises frequently. Productivity growth is also slowing, which means the economy reaches its speed limit sooner. Chalmers has limited options to ease voter discontent without incurring further costs.

The government could cut the fuel excise tax temporarily to lower petrol prices, but the billions of dollars returned to motorists would make it harder for the Reserve Bank to rein in inflation. Alternatively, Labor could announce large spending cuts in December to assist the central bank, but that would weigh on an already weak economy and push unemployment higher. Hauser has called this a "world of hard choices".