Jim Chalmers prepares for IMF talks in Washington as Middle East conflict drives higher inflation forecast

Australia is projected to have one of the highest inflation rates in the developed world as the Middle East conflict threatens a global recession, according to a dire scenario forecast by the International Monetary Fund. In the latest update to its World Economic Outlook, released late on Tuesday AEST, the global lender of last resort said the world economy was in for more pain without a speedy resolution to the conflict. The IMF revised its economic growth projections for Australia slightly down from January. The national GDP growth rate is expected to come in at two per cent in 2026, down from 2.1 per cent, and 1.7 for 2027, from 2.2 per cent. But Australia’s inflation outlook was revised significantly higher, with consumer price growth of four per cent in 2026 exceeding most advanced economies, including the US, the UK and New Zealand. The IMF had been preparing to revise its growth forecasts upwards before the war. But the closure of the Strait of Hormuz and attacks on oil and gas facilities halted the positive momentum and raised the prospect of a major energy crisis should hostilities continue, IMF chief economist Pierre-Olivier Gourinchas said. Under a severe scenario, in which an extended conflict results in more damage to energy infrastructure, global growth would fall to two per cent in 2026 and perilously close to a global recession. “What should we avoid?” Mr Gourinchas said. First and foremost, governments should refrain from wasteful and untargeted fiscal measures such as energy caps or subsidies, designed to ease cost pressures for households and businesses. “While such measures are popular, evidence suggests they are often both poorly designed and very costly for the public purse,” he said. “Moreover, avoiding fiscal stimulus at a time of rising inflation is another critical component so as not to complicate the task of central banks.” Economists have warned the Albanese government’s cuts to the fuel excise would keep inflation higher for longer and would diminish price signals encouraging Australians to preserve fuel by driving less, catching public transport or riding a bike, for example. “Preserving price signals is important: high prices signal scarcity, encouraging demand restraint and supply expansion,” Mr Gourinchas said. He urged central banks to look through the surge in energy prices, as long as inflation expectations remained well anchored and monetary policy settings were already calibrated. On inflation expectations, RBA deputy governor Andrew Hauser noted in a speaking event in New York on Tuesday that inflation expectations were picking up in the short term, but remained anchored long term. However, he admitted he was not confident rates were at the right level. Looking beyond the conflict, the AI revolution promised hope of higher economic growth, productivity and ultimately living standards, but the scars of war would be long-lasting, the IMF said. Treasurer Jim Chalmers will head to Washington, DC, on Wednesday to discuss the economic maelstrom with international counterparts, including UK counterpart Rachel Reeves and Chinese Finance Minister Lan Foan, at the IMF-World Bank Spring Meetings. The report showed it was “a dangerous moment for the global economy”, Dr Chalmers said. “We’re weighing all of this extreme uncertainty as we prepare a budget focused on resilience and reform.”