Chalmers downgrades growth forecasts as oil surge and AI debt add to inflation risk

Australian treasurer Jim Chalmers has revealed that his officials are downgrading economic forecasts ahead of December's mid-year budget update, with slower growth and higher unemployment now expected.

The admission came days after Chalmers said in a speech that the economy would be "a bit better" in a year's time. In its analysis, the Guardian describes the outlook as getting worse, not better, and sets out the competing pressures behind his limited room to move.

Oil surge and war risks

Overnight, a broadening Middle East conflict pushed the global benchmark oil price to US$113 a barrel, within sight of its April high of nearly US$120. Motorists are paying 60 cents more a litre than before the US and Israel attacked Iran — an extra $36 to fill a 60-litre tank, and $144 more a month for a family filling up weekly compared with February.

The New York Times reported overnight that the US and Israel have drawn up plans to restart attacks on Iran after the upcoming American midterm elections. Westpac analysts have sketched an "escalation" scenario in which oil climbs towards US$150, echoing warnings from the International Monetary Fund earlier this month. Australia is already bracing for a possible fifth interest rate rise on 3 November.

AI spending hits a wobble

The one bright spot that has helped paper over cracks in the global economy — heavy spending linked to artificial intelligence — has hit serious wobbles. Investors are worried about a surge in debt among companies racing to build AI infrastructure, the trigger for another steep sell-off on Wall Street overnight. Community opposition to the massive datacentre build-out could also stall the rush.

Hard choices for the treasurer

Reserve Bank official Andrew Hauser has called high inflation, low growth and rising unemployment a central banker's "nightmare". Chalmers told Politico: "The pressures on people right now are very substantial and obviously that keeps me awake at night." He said some causes were outside the government's control and some it could influence, such as cost-of-living help and responsible budget management, adding that Australia was "hostage" to decisions taken in DC, Tehran or Eastern Europe about two wars pushing up inflation and weighing on growth worldwide.

High government spending is not helping the inflation fight, the opposition points out, and productivity growth has stalled — meaning more inflation at lower rates of growth. Chalmers' options are narrow: another temporary fuel excise cut would put money in motorists' pockets but make the central bank's job harder, while big spending cuts in December would help the central bank but drag on a weak economy and push unemployment higher.

That is the "world of hard choices" Hauser describes, one where the solution to one problem makes the other worse.

Source: The Guardian World.