Middle East tensions rattle global economy, warns Australian treasurer

The world’s economy is getting slammed from all directions, and Australia just said it out loud. On Monday, Treasurer Jim Chalmers told ABC TV that the combination of Israel’s airstrikes on Iran and Iran’s counterattack has made things even worse in an already unstable global climate.

“The global economy is a pretty dangerous place right now,” Jim said, describing the moment as “perilous.” He pointed to rising oil prices since the Friday strikes as one major signal that trouble is coming fast.

Traders in Australia have started betting harder on rate cuts—not because inflation’s over, but because the risk to growth now looks worse.

The military fight between Israel and Iran hit its fourth day on Monday, and fears are now growing about a broader war erupting in the Middle East, especially with Iran being one of the biggest oil producers.

Oil shock pushes interest rate cut bets higher

Oil jumped right after the Israeli attacks hit Iranian nuclear sites. With Iran being the ninth-largest oil producer in 2023, any interruption in supply was enough to rattle energy markets. The global oil supply is now at risk, and that directly impacts prices of everything that depends on energy—from shipping to food.

Traders responded immediately. Betting markets are now assigning a 90% chance that the Reserve Bank of Australia (RBA) will deliver a third 0.25% rate cut this year, which would push the cash rate to 3.6%. After that, two more rate cuts are expected, eventually bringing it down to 3.1%.

Jim also said that central banks like the RBA are trying to look beyond just short-term price spikes. “Typically what Reserve Banks do, central banks, not just our own, but they try and look through temporary spikes in prices, and to consider the broader implications,” he said. But those implications are starting to pile up fast.

The Treasury is now tracking not just the Iran-Israel fight but other triggers too. Jim listed US tariff tensions, the Ukraine-Russia war, and China’s slowdown—which matters a lot since China is still Australia’s largest trade partner. “Australia is well-placed and well prepared to deal with all of this uncertainty and volatility,” Jim said. “But we won’t be immune from it.”

Most economists in the region aren’t as aggressive as markets. They expect two more cuts—likely in August and November—with a year-end cash rate at 3.35%. That still puts Australia in a rate-cutting cycle, driven by concerns that the economy could stall under external pressure.

Global markets react as fear spreads fast

The conflict didn’t just hurt oil. It dragged down financial markets globally. Stocks dropped across every major index as investors moved out of risky assets. Gold prices climbed, as expected. Whenever geopolitical fears take over, investors move into gold for safety. It’s a hedge they trust during inflation, wars, or market collapses.

The US dollar also surged. Investors ran to the greenback like they always do during a crisis. The so-called “dollar smile” effect played out once again—either when things are great, or when things are really bad, the dollar wins.

This time, it gained against currencies usually seen as safe too, like the Swiss franc and the Japanese yen, which just reinforces how strong the dollar still is, even as talk of de-dollarization continues.

Jim is set to give a full speech at the National Press Club on Wednesday, outlining the government’s second-term plans in an address titled “Our Second Term Economic Agenda.”

The ruling Labor Party, which won big on May 3, now has full control to roll out its economic strategy. But all eyes are on how they’ll handle the external shocks that are piling up faster than expected.

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