Australia's Treasury has updated its economic modelling to reflect the impact of the ongoing conflict in the Middle East, finding that the disruption has triggered a global oil shock and lifted commodity prices, including liquefied natural gas (LNG), coal and fertilisers.
Policy officials analysed two possible scenarios that both feature weaker global growth and higher commodity prices, Treasurer Jim Chalmers said. The scenarios differ in the magnitude and persistence of oil price increases and in the duration required for markets to return to pre-conflict levels.
Short-term elevated oil price scenario
Under the first, shorter-lived scenario, oil remains around $100 per barrel through the first half of the year and then drifts back to pre-conflict levels by the end of the year. Treasury's modelling indicates that, in this case, inflation would peak 0.75 percentage point higher than otherwise expected, while economic output would be about 0.2% lower.
Prolonged oil shock scenario
The second scenario assumes a larger initial spike, with oil hitting $120 per barrel in the first half of the year and then taking three years to revert to pre-conflict prices. That path, according to Treasury, would lift inflation by about 1.25 percentage points at its peak and produce a deeper, longer-lasting drag on the economy. On this trajectory, gross domestic product would be roughly 0.6% lower around 2027.
Scope and sectors affected
The Treasury's work explicitly incorporates higher prices for LNG, coal and fertilisers in both scenarios and factors in an associated slowdown in global growth. These inputs point to direct effects on the energy and commodity sectors and to broader second-round effects on overall inflation and economic activity.
What Treasury said
Treasurer Jim Chalmers noted that the new analysis considered both lower global growth and higher commodity prices as central elements of the updated outlook.
The modelling presents two clear paths: one where the shock is concentrated and economic effects are relatively modest, and another where a more severe and persistent shock produces larger inflationary pressures and a deeper hit to output over several years.