How conflict in the Middle East might have mildly positive effects on Australia’s economy

Once again, Australia looks about to earn its reputation as the lucky country.

As the war in the Middle East wanders an unpredictable path, spreading destruction across the region, the news at home is alarming but far less worse than it could be.

The most immediate impact is on drivers, who are now being charged as much as $2.44 a litre for premium fuel. That is a painful hit, especially for transport contractors, farmers and working-class families who have to travel long distances for work or see relatives.

Thousands of Australians in the region who want to escape the violence are also in dire straits. Passenger air travel has been severely disrupted. Travellers expecting layovers a few hours have been stuck days.

Australian-Iranians are experiencing cycles of excitement and anxiety, hoping but unsure their first country will be liberated from religious extremism.

Oil prices

Economically, the war is likely to have little effect on Australia, experts say. There is even likely to be extra tax raised for the federal budget, making Treasurer Jim Chalmers’ job easier.

Jonathan Kearns, a former Reserve Bank economist now at Challenger, told The Nightly he expected a small hit to tourism but not much else. Australia’s Asia-focused trade doesn’t rely on the Strait of Hormuz, which passes between Iran and Oman, he said.

“If the conflict ended tomorrow it would bring down the oil price pretty quickly,” he said. “There hasn’t been a lot of attacks on oil infrastructure. At this stage Iran has not mined the straight of Hormuz.”

The relationship between the oil price and interest rates is complicated and unpredictable.

The 17 per cent rise in oil prices will have an immediate effect on inflation, which is already in the Reserve Bank of Australia’s danger zone. But unless the war persists and oil prices remain higher a long time, the Reserve Bank should ignore what is likely to be a temporary increase, according to Dr Kearns and other economists.

That’s unless there’s a shift in Australians’ minds and they believe inflation is permanent, or semi-permanent. The psychological jump is what terrifies central bankers because it is self fulfilling: sellers raise prices, and employees demand higher wages, if they expect prices to go up.

If governor Michele Bullock and her colleagues believe this is happening, they will raise interest rates, quickly. (The financial markets rate the chance of an increase in two weeks time at 27 per cent.)

Datsun economy

At the moment, inflation is being driven by a more prosaic problem: the economy is operating beyond its capacity, a bit like a Datsun tearing up Mount Panorama.

On Wednesday the economic-growth figures for 2025 were published. Although Dr Chalmers welcomed the economy’s 2.6 per cent expansion as “overwhelmingly good news”, it was far above the 2 per cent figure experts believe the economy is set up for.

“The rate of this expansion is likely to be in excess of the economy’s potential growth rate,” IFM Investors chief economist Alex Joiner wrote.

At a press conference shortly after the figure was published, Dr Chalmers put his spin on the economic figures.

The treasurer asserted government spending is being replaced by business spending, an argument designed to dodge the blame for the inflation already hurting Australians before Donald Trump decided to obliterate parts of central Tehran.

Among those challenging the treasurer’s interpretation was Westpac bank economist Pat Bustamante, who pointed out that the contribution to economic growth in the last three months of 2025 from government and private spending was almost the same.

Another was Dr Kearns, who said: “I don’t think we can deny the impact public demand is having on aggregate demand and inflation.”

He was referring to the budget deficits created by Dr Chalmers and his ministers. This government is forecast to spend $37 billion more than it raises this financial year, spending that makes a big contribution to an economy running too hot.

There is no visible plan, apart from dumb luck, to balance the budget.

No cuts for you

Which may explain why Dr Chalmers today ruled out tax breaks — otherwise known as price relief — in response to the petrol price surge.

Dr Chalmers has the power to reduce petrol prices whenever he wants, by reducing taxes, but that would make his budget even worse.

“When it comes to the fuel excise, that’s not something that we’ve been considering,” he said today. “We’ve got a lot of cost-of-living help rolling out.”

That “help” is primarily a few small cuts to income tax, which are being wiped out by government-fuelled inflation anyway.

Which takes us back to the war. Apart from the death and destruction, some experts see the timing as economically convenient. There will likely be more revenue for Canberra, which narrows the government deficit, and less income for regular Australians, which will alleviate some of the economic pressures.

“The Australian economy is running faster than it can sustain right now, so a mild growth negative isn’t much of a problem,” independent economist Chris Richardson wrote.

Talk about getting lucky.