IMF vs. Australian Treasury: “the Severe scenario”
Higher global inflation and lower growth will reflect the scale of impact dependent on the length and severity of the U.S./Iran war.
The near-term forecasts for global Gross Domestic Product (GDP) from the International Monetary Fund (IMF) use a Reference Scenario, Adverse Scenario and a Severe Scenario, as illustrated in Graph 1 below.
Graph 1. IMF Global GDP Growth Forecasts
Source: IMF, Macrobond, Macquarie Macro Strategy
The Adverse scenario assumes average petroleum spot prices of US$100/bbl. in 2026 and US$75/bbl. in 2027. The Severe scenario assumes price increases to US$110/bbl. in 2026 and US$125/bbl. In 2027.
In the recently released Australian Budget, Treasurer Jim Chalmers refers to the most severe scenario if the Iran War drags on, meaning the oil price could spike to US$200/bbl. during the September 2026 Quarter. Treasury’s forecasts appear to be significantly more negative than those from the IMF. That said, it is worth exploring these forecasts given the U.S. has a history of starting wars whilst having trouble finishing them.
This (severe scenario) could occur if the conflict is protracted or if an escalation further damages energy and export infrastructure across the Middle East and shuts off supply from the region, including through the Red Sea trade route.
The Red Sea trade route connects the Mediterranean Sea to the Indian Ocean via the Suez Canal and the Bab-el-Mandeb Strait. It facilities approximately 12 per cent of global trade and 30 per cent of container traffic.
Under this scenario, Treasury expects Australia to record negative real GDP growth in the September 2026 Quarter of minus 0.6 per cent and persistent weakness in the economy over the balance of the decade, whilst the rate of inflation could hit 7.25 per cent in the year to December 2026. The unemployment rate would be expected to peak at around 5 per cent in 2027/2028.
Graph 2. Scenario impact on a real GDP level
Source: ABS Australian National Accounts: National Income, Expenditure, and Product and Treasury.
Graph 3. Consumer Price Index growth in scenario
Source: ABS Consumer Price Index and Treasury
Given the size and population of Australia and the amount of goods transported by road, we are one of the biggest global consumers of diesel per head of population. With the potential for higher price for diesel, fertilizer and other petrochemical products increasing input costs, there would also likely be disruptions to the physical supply of products throughout the supply chain, and many companies would see pressure on both margins and their potential viability.
Investors should keep a close eye on the U.S./Iran war to assess whether the “Reference scenario” gets worse!
Chief Executive Officer of Montgomery Investment Management, David Buckland has over 40 years of industry experience.
David is a deeply knowledgeable and highly experienced financial services executive. Prior to joining Montgomery in 2012, David was CEO and Executive Director of Hunter Hall for 11 years, as well as a Director at JP Morgan in Sydney and London for eight years.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
