Treasury to Cut Growth Forecasts as Oil Hits US$113 and Fuel Bills Rise

Australian households will pay an extra $144 per month for fuel compared to February levels, driven by a surge in global oil prices that has forced the Treasury to lower its economic outlook. The global benchmark crude price reached US$113 a barrel overnight, approaching its April peak of nearly US$120. This price point translates to a 60-cent increase per litre at the pump for Australian motorists relative to pre-conflict levels.

Treasurer Jim Chalmers confirmed on Friday that Treasury officials are revising their forecasts downward ahead of the December mid-year budget update. The revision includes expectations for slower economic growth and higher unemployment. Chalmers, who suggested last week that the economy would be "a bit better" in a year, now faces a tougher reality as the December update approaches.

The primary driver of this economic shift is the widening conflict in the Middle East. Following US and Israeli attacks on Iran, fuel costs have risen sharply. The New York Times reported that Washington and Israel have drafted plans to resume attacks after the American midterm elections. Westpac analysts have modeled an escalation scenario where oil prices could reach US$150, a projection that aligns with warnings issued by the International Monetary Fund earlier this month. Such a spike would significantly impact inflation and interest rates, with a fifth rate rise possible on 3 November.

Global financial markets are also reacting to growing concerns over the sustainability of artificial intelligence spending. Investors are increasingly anxious about the sharp rise in corporate debt required to build AI infrastructure, leading to a steep sell-off on Wall Street overnight. Community opposition to new datacentre construction may further slow this investment, adding to short-term economic stress while potentially benefiting long-term stability.

Reserve Bank Governor Andrew Hauser described the current mix of high inflation, low growth, and rising unemployment as a central banker's "nightmare." Chalmers admitted the situation keeps him awake at night, noting that while some causes are outside Canberra's control, the government must manage the budget responsibly and provide cost-of-living assistance. He stated that Australia is "hostage" to decisions made in Washington, Tehran, and Eastern Europe regarding two ongoing wars that are pushing up global inflation.

Domestic factors are complicating the response. High government spending works against inflation control, a point frequently raised by the opposition. Productivity growth has also stalled, meaning the economy hits its speed limit sooner and inflation remains higher at lower growth rates. Chalmers has limited options to ease voter discontent without incurring costs. A temporary fuel excise cut would lower petrol prices but complicate the Reserve Bank's inflation fight, while large spending cuts in December would assist the central bank but weigh on an already weak economy and raise unemployment.

The government faces a dilemma where fixing one problem tends to worsen another. Hauser has termed this environment a "world of hard choices." As the December budget update nears, the Treasury will finalize these lower growth projections, setting the stage for difficult policy decisions in the coming months.