Australia would be pushed to the brink of recession and inflation would surge past 7% if the oil crisis sparked by the Middle East conflict dramatically worsened, according to new Treasury modelling.<\/p>\n
The budget papers reveal the scale of the economic damage that the US and Israel\u2019s war on Iran has already caused Australia and the rest of the world \u2013 and how much worse it could get.<\/p>\n
\u201cWar in the Middle East has been pushing up prices, pushing down growth, and punishing Australians,\u201d the treasurer, Jim Chalmers, said in his budget speech on Tuesday night<\/a>.<\/p>\n The federal government is now expecting inflation to peak at about 5% in the June quarter as the closure of the strait of Hormuz continues to wreak havoc on global fuel supplies<\/a>.<\/p>\n The new inflation forecast is based on an assumption that the global oil price remains around US$100 a barrel until the end of next month before falling to US$80 a barrel by the end of the year.<\/p>\n But Treasury has also modelled a more \u201csevere\u201d scenario in which oil prices peak as high as $200 a barrel in the September quarter and don\u2019t fall to $80 a barrel until mid-2029.<\/p>\n Inflation would reach 7.25% in the year through to December \u2013 a shock comparable to the end of the Covid pandemic, when price growth peaked at 7.9%.<\/p>\n Unemployment would also increase to 5%.<\/p>\n The economy would shrink in the September quarter under Treasury\u2019s worst-case scenario but Chalmers said in the speech that Australia would avoid a recession.<\/p>\n Sign up for the Breaking News Australia email<\/a><\/p>\n The treasurer said the assessment that Australia would escape two consecutive quarters of negative growth was a \u201cforecast rather than an undertaking\u201d, conceding the economy was \u201chostage to developments\u201d overseas<\/a>.<\/p>\n The International Monetary Fund has warned that a further escalation of the US-Israel war with Iran could trigger a worldwide recession<\/a>.<\/p>\n The budget papers show that global growth is expected to slow to 3% in 2026, down from 3.5% in 2025.<\/p>\n \u201cAs Australians, we confront these serious challenges together and from a position of strength,\u201d Chalmers said. \u201cWe are much better placed and better prepared than most countries to deal with this global crisis.\u201d<\/p>\n A 32.8% surge in fuel prices after the outbreak of the war was a major factor in the headline inflation rate rising to 4.6%<\/a> in the 12 months to March 2026.<\/p>\n The budget papers show that prices are expected to rise in other areas over coming months, including food and housing construction.<\/p>\n While the government stayed committed to property investor tax reforms<\/a> despite the global uncertainty, the Middle East conflict did force significant changes to Chalmers\u2019 budget plans.<\/p>\n The budget sets aside $11.9bn over five years for a suite of previously announced measures to shore up fuel supplies, including funding to help increase the nation\u2019s reserves to a 50-day supply.<\/p>\n