IMF warns countries, including Australia, against cost-of-living handouts as Middle East fuels higher inflation

The International Monetary Fund has urged governments, including Australia, to avoid spending up big to ease cost-of-living pressures as the US-Iran War pushes the global economy to the brink of recession. The IMF, in its latest Global Economic Outlook, warns government spending would make it harder for central banks to combat inflation. “While such measures are popular, evidence suggests they are often both poorly designed and very costly for the public purse,” IMF chief economist Pierre-Olivier Gourinchas said. said. “Avoiding fiscal stimulus is also critical when inflation is rising, so as not to complicate central banks’ task.” The Albanese government has flagged potential cost-of-living help in its May 12 budget, as the fuel shock caused by the war pushes up prices domestically. The IMF painted a grim economic forecast for the Australian economy, with the country being “tested’ by higher oil prices and cost of living pain. In the latest economic outlook, released overnight, the IMF now predicts Australia’s inflation will remain above the Reserve Bank’s 2 to 3 per cent target range for at least another two years – rising to 4 per cent in 2026, before cooling to 3.2 per cent in 2027. At the same time real gross domestic product – which is economic outlook minus inflation – is tipped to slow to just 2 per cent in 2026 before sliding to 1.7 per cent in 2027. Following the release of the report, Treasurer Jim Chalmers – who is headed to Washington DC for finance minister talks at the G20 and IMF Spring meetings – said Australians were paying a hefty price for events on the other side of the world. “The costs and consequences of the conflict in the Middle East will be felt for some time, in Australia and around the world,” Mr Chalmers said in a statement. “We’re taking decisive action to address this global fuel challenge, by halving the fuel excise to help with the cost of living, holding petrol companies to account, working to secure more fuel and get it to where it’s needed in our economy, and engaging internationally.” He later told reporters on Wednesday the May 12 budget would be “responsible”. “One of the reasons why there will be savings in the budget, one of the reasons why this will be another very, very responsible budget is because we need to make sure, that we’re not putting additional upward pressure on inflation,” he said. “We also need to make sure that we have room to respond, should some of these more serious and more severe scenarios, published by the IMF, play out.” Meanwhile, RBA deputy governor Andrew Hauser has warned the conflict could have a flow on impact to Australian interest rates, flagging further hikes above the current 4.1 per cent. “I wouldn’t say we have high confidence that we’ve set interest rates at the right level because you never do have that high confidence. But we’re going to have to monitor this new shock pretty carefully,” Mr Hauser said. The conflict between the US/Israel and Iran has led to the blockage of the Strait of Hormuz, a critical waterway where one-fifth of the world’s oil once passed daily. Before the conflict in the Middle East started six weeks ago oil prices were roughly $US56 ($A80) a barrel, before trading around $US100 ($A143) a barrel. For every $10 increase in the price of oil, roughly equals 10 cents more Australians pay at the fuel pump. The IMF grimly warns global economies will be tested again due to the Middle East conflict. “The global economy has, to date, withstood a series of shocks, yet another one – this time a military conflict engulfing the Middle East since the end of February – is testing this resilience,” the IMF said. “The conflict has already inflicted humanitarian costs, damaged critical infrastructure, and severely disrupted maritime and air traffic in the affected region.” The IMF further warns prices across the globe will rise. “Economies around the world face repercussions through the direct impact of higher commodity prices, indirect second order effects on inflation expectations – which tend to be especially sensitive to energy and food prices – and amplification effects coming from risk-off sentiment in financial markets.” RBA rates warning In a separate announcement on Tuesday, RBA deputy governor Andrew Hauser warned mortgage holders the Middle East conflict could have a flow on impact to Australian interest rates as costs rise above the bank’s 2 to 3 per cent band. “I wouldn’t say we have high confidence that we’ve set interest rates at the right level because you never do have that high confidence. But we’re going to have to monitor this new shock pretty carefully,” Mr Hauser said. “I think it’s easy to see that upside inflation pressure. More important for us now is to think through what the medium-term impact might be.” Mr Hauser warned inflation is “too high” with the energy price spike from The Gulf conflict adding a “big income shock for Australia”. Prior to the start of the conflict in the Middle East on February 28, Australia’s Consumer Price Index rose to 3.7 per cent in February, down 0.1 per cent from the previous month. Australians already feeling the pressure Ahead of the IMF warning, two of Australia’s big four banks warned oil prices have already smashed consumer and business confidence. In its latest consumer confidence survey, Westpac-Melbourne Institute found sentiment crashed 12.5 per cent to 80.1 in April. A score above 100 is considered optimistic about the future, while anything below suggests a pessimistic outlook. Meanwhile, NAB found business confidence had its second biggest fall in 37 years due to the outbreak of the Middle East conflict and higher fuel prices. In its first full reading since the conflict began, NAB said business confidence crashed 29 points, thanks to higher price pressures. NAB head of Australian economics Gareth Spence said Tuesday’s reading shows how quickly sentiment can fall, even if business activity remains stable. “The outbreak of the conflict in the Middle East saw business confidence fall 29 points to minus 29 index points, the second largest monthly fall in the survey’s history, with falls of this magnitude previously only seen in the GFC and the onset of Covid,” Mr Spence said. “Business conditions fell only one point to six index points in March, reflecting that while the global news backdrop has impacted sentiment, it is still early days in terms of the flow through to activity.”