When Treasurer Jim Chalmers drew a parallel between the Middle East conflict and COVID-19's economic fallout, he was reaching for a frame that most Australians instantly understand. A major shock, sudden disruptions, household hardship. The comparison stuck. But does it hold up under scrutiny?
The surface similarities are real enough. Australians are facing travel and supply chain disruptions, panic buying, and requests to work from home, echoing scenes from 2020. While the product has changed from toilet paper to petrol, panic buying has reemerged since the war started, motivated by fears that supply chain disruptions may lead to products becoming either unaffordable or unavailable. The psychological ingredients are familiar.
But economists who have examined the fine print say the analogy breaks down quickly. The disruptions may look similar; the economics are not. Supply shocks and increasing freight costs during the current crisis differ from those in COVID-19, which had different causes such as border closures, lockdowns in manufacturing countries, labour shortages and port congestion as demand for certain goods plummeted. More fundamentally, in 2020, COVID-19 mitigation measures caused a drop in demand for fuel, creating global oversupply of oil, while the Middle East war risks potential undersupply triggered by conflict.
That distinction matters for Australia's actual economic prospects. Higher oil prices will pressure fuel costs and inflation, yes. But the transmission mechanism is different. For Australia, the most direct and immediate impact is through petrol prices and headline inflation; if higher oil prices are sustained, petrol will add to headline inflation, even if the Reserve Bank looks through the initial supply side shock. Economists have warned that higher fuel prices alone could add around one percentage point to headline inflation, with petrol prices potentially pushing headline inflation above 5 per cent by the June quarter if prices remain elevated.
The employment story also diverges sharply from COVID-19. The pandemic forced lockdowns and destroyed jobs directly; businesses simply could not operate. The Middle East conflict creates price inflation and uncertainty, but it does not shut down Australian workplaces. That structural difference has profound implications for policy responses. Work-from-home suggestions, which made sense during lockdowns, are now framed as fuel-saving measures rather than public health imperatives. The logic is thinner.
Where the comparison fails most visibly is in the distribution of pain. COVID-19 was relatively indiscriminate; it hit households and businesses with similar force through lockdowns and income loss. The Middle East shock works through energy prices, which disproportionately affects transport-dependent sectors. Drivers are now being charged as much as $2.44 a litre for premium fuel, a painful hit especially for transport contractors, farmers and working-class families who have to travel long distances. Asphalt suppliers have flagged an increase of around 10 per cent immediately to cover current pricing shocks, with no timeframe for how long the cost increases will be in force.
Some economists have noted a potential offsetting benefit, though this remains tentative. Higher fuel prices and reduced demand could generate more revenue for Canberra and less income for regular Australians, which may alleviate some economic pressures, with some independent economists arguing that a mild growth negative is not much of a problem for an economy already running faster than it can sustain. That argument assumes the conflict remains limited and prices rise modestly. If sustained high prices trigger broader inflation expectations, the Reserve Bank may have no choice but to raise interest rates further, compounding mortgage stress.
The conflict adds to risks that inflation remains higher for longer, with trimmed mean inflation already expected to remain above the RBA's 2-3 per cent target range for a few quarters; an extended conflict would lengthen that period. That possibility frightens central banks more than the oil spike itself. RBA Governor Michele Bullock said it was too early to surmise what the conflict would mean for the Australian economy, noting that a supply shock could add to inflation pressures and that the potential implications for inflation expectations are something the bank is very alert to.
The Middle East war will inflict real economic damage on Australian households. The comparison to COVID-19, however, obscures more than it clarifies. This is not a systemic economic shutdown; it is an energy shock layered onto an already inflationary environment. The policy responses need to be different. So should the national conversation about what this crisis actually is.