Global bloodshed biggest threat to economic recovery: Chalmers

An escalation of war across the Middle East threatens the global economy, Treasurer Jim Chalmers has warned fellow finance ministers, saying no nation would avoid the hit to growth and inflation caused by increased bloodshed.

Chalmers used an address to the International Monetary Fund in Washington to argue there was already evidence the economic consequences of a broader Middle East conflict could threaten the expected fall in Australia’s inflation rate and easing of cost-of-living pressures.

The ancient Lebanon city of Tyre was bombed by Israel on Wednesday. Treasurer Jim Chalmers says an escalation of the conflict in the Middle East will hurt the global economy.Credit: AP

Oil and gold prices have spiked in recent weeks due to growing concerns among investors and economists that war in the Middle East could escalate, with fears a direct conflict between Israel and Iran could erupt. Iron ore prices have slipped below $US100 a tonne as sluggish demand in China weighs on markets.

Chalmers said the soft economic landing that most economists and policymakers had expected globally this year was at risk because of growing military tensions in the Middle East.

He said while the world was focused on the humanitarian costs of war, there was a real threat of a large economic hit from the unsettling global outlook.

“In seeking ceasefire and de-escalation, we are focused on the human catastrophe, but there are economic consequences, too. We know that more bloodshed is one of the biggest threats to the global economy,” he said.

“None of us will escape the economic consequences of an escalating war in the Middle East.

“Conflict is the biggest risk to the progress we’ve made since the depths of COVID. And while these conflicts in Europe and the Middle East had very different causes, they threaten very similar consequences.”

This week, the IMF used its six-monthly world economic outlook to note the growing risks caused by conflicts around the world.

“Intensification of regional conflicts, especially given the wider span of conflict in the Middle East, or the war in Ukraine, could further disrupt trade, leading to sustained increases in food, energy and other commodity prices,” it said.

Treasurer Jim Chalmers says spikes in oil and gold prices highlighted the growing risks facing the global economy.Credit: Alex Ellinghausen

“Commodity price volatility may result in higher inflation, especially for commodity-importing countries, and restrict central banks’ room to manoeuvre.”

The fund only expects Australia’s inflation rate to ease to 3.3 per cent next year. This is well above the forecast of the Reserve Bank, which has inflation at 2.8 per cent by June 2025.

Data out next week is expected to confirm inflation pressures easing over the past three months, in part due to the sharp fall in oil prices since the middle of the year. Some economists are tipping annual inflation to be within the Reserve Bank’s 2-3 per cent target band for the first time in three years.

Chalmers said an escalation of the war across the Middle East risked “persistent inflation” across the globe.

“Within a week of tensions re-escalating in October, oil prices spiked 10 per cent. And over the past year, demand for safehaven assets has seen the price of gold rise by around 48 per cent,” he said.

“A broader war could put upward pressure on oil prices, prolong the fight against inflation and threaten the soft landing that we all seek.”

But Liberal leader Peter Dutton said the government had to take responsibility for inflation, comparing interest rate settings in Australia to those in other countries.

“Interest rates are already started [sic] to come down in comparable economies around the world,” he told Sydney radio station 2GB.

“The countries that we should be compared to – the United States, United Kingdom, Canada, New Zealand etc – are all coming back. Interest rates have dropped in all of those countries and they should have dropped here by now.”

Official interest rates have been cut to 4.75 per cent in New Zealand, which has been in recession for the past 15 months, while in Canada the cash rate is 3.75 per cent after a spike in the nation’s jobless rate to 6.5 per cent.

Dutton said government spending was increasing debt and putting at risk the nation’s official credit rating.

Last month, ratings agency S&P Global maintained Australia’s AAA credit rating while noting that the budget deficit and net debt would remain modest over the next two years.

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