Australian’s set for massive economic shock as consumer confidence plummets to COVID-era low

Australians are set to experience a “big real income shock” because of the nation’s heavy reliance on diesel, Reserve Bank deputy governor Andrew Hauser has warned, as households brace for more financial pain. Corporate giants Qantas and Westpac on Tuesday warned of hits to their bottom line thanks to tensions in the Middle East — the same day Mr Hauser described high inflation as a “nightmare” and likened the global oil shock to a minefield. Motorists are now paying more than $3.20 a litre for diesel, which Mr Hauser suggested would have a greater effect on Australia’s inflation than most other parts of the world. This was a stark contrast to the Federal Budget, which is set for a boost thanks to higher tax revenue and commodities royalties. “We are almost wholly reliant on imports for oil and we’re the highest user of diesel per capita in the world,” Mr Hauser said. “This is a big real income shock for Australia even if national income, fiscal coffers may benefit from that net export position.” Mr Hauser did not rule out further interest rate hikes. The RBA has already lifted rates twice this year and inflation at 3.7 per cent is well above its preferred 2 to 3 per cent target range. “More important for us now to think through what that medium-term impact might be,” he told a New York university audience, adding that if inflation was higher, “we’re going to have to respond”. His comments came as Westpac-Melbourne Institute revealed consumers were being hit by another cost-of-living shock, with its index falling to 80.1 in April from 91.6 in March. It was the worst monthly fall in the survey since the onset of the COVID-19 pandemic, leaving it close to historical lows. An index above 100 means there are more optimists than pessimists. Westpac head of Australian macro-forecasting Matthew Hassan said the spike in fuel prices following the onset of the war and the RBA’s March rate hike had again put finances under intense pressure. Average pump prices hit $2.40/litre in the first week of April, up 37¢ from the time of the March survey and 77¢ compared with early February. “Near-term expectations for the economy and family finances also deteriorated sharply, suggesting consumers see little prospect for improvement and are bracing for more difficulties,” Mr Hassan said. “The wider inflation consequences of the global energy shock have yet to fully play out locally but clearly add to concerns that the RBA will need to increase interest rates again.” Financial markets widely expect another 0.25 percentage point hike on May 5 when the RBA next meets. By then, inflation data for March would have been released, with Westpac forecasting a three-year high reading of 4.2 per cent for the first full month of the conflict. According to International Monetary Fund analysis be released on Tuesday night, Australian households will suffer some of the highest inflation in the developed world this year, to hit 4 per cent. Global inflation is expected to lift to 4.4 per cent this year and would rocket to 6 per cent in a severe scenario of a long-term energy shock. AMP economist Shane Oliver predicts Australia is on the doorstep of a recession as fuel and fertiliser becomes more expensive and scarce each day the Strait of Hormuz is closed. The RBA and Treasurer Jim Chalmers have already signalled they are bracing for inflation to soar to 5 per cent this year for the first time since 2023, during the last rate hiking cycle, as a result of the Middle East conflict pushing fuel prices higher. National carrier Qantas and Big Four bank Westpac have also started quantifying the financial impacts of the war, now in its seventh week. In WA, Qantas and Jetstar passengers have had their domestic travel plans thrown into chaos, with the national carrier trimming routes within Australia as Middle East tensions play havoc with oil prices. The Flying Kangaroo said it would reduce domestic capacity in the June quarter by about 5 percentage points. As part of the changes, budget offshoot Jetstar will temporarily suspend its Sydney to Busselton service from June to September, with flights set to resume in time for the September school holidays. Qantas, led by Vanessa Hudson, said jet fuel prices had more than doubled since the US and Israel launched attacks on Iran in late February, and acknowledged it had already hiked fares to recoups costs. It now expects fuel costs in the second half of the current financial year to soar by between $600 million and $800m to between $3.1 billion and $3.3b, up from an estimate of $2.5b issued just days before the start of the war. “Unfortunately, with fuel costs at these levels, there is not enough demand to support our Busselton-Sydney service, and we’ve had to make the difficult decision to temporarily suspend the service,” a Qantas spokeswoman said. “We know this is frustrating for customers and we look forward to restarting the service later this year.” Qantas noted fuel prices remained highly volatile amid ongoing geopolitical turmoil and flagged the potential to make more flight changes. Budget offshoot Jetstar will continue to operate three direct flights a week between Melbourne and Busselton Margaret River Airport, and Qantas’ mining sector charter operations in WA are also unaffected. Overall, capacity across the group’s domestic operations are expected to be down one per cent in the June quarter, compared to a year ago, after a 5 per cent jump in capacity in the previous three months. Qantas said it had responded to strong demand for travel to Europe — as customers bypassed the Middle East — by redeploying capacity from the US and its domestic network to increase flights to Paris and Rome. Virgin Australia has also adjusted capacity and increased fares, and says it actively manages fuel price volatility through hedging, being about 75 per cent covered across both crude oil and refining margins for the remainder of this financial year. “Our fuel suppliers continue to provide assurances regarding the near-term supply of aviation fuel,” a company spokesman said. “Our predominantly domestic network positions Virgin Australia well to manage the impacts of the Middle East conflict.” Meanwhile, the nation’s second-biggest lender Westpac reported the Middle East conflict had dented earnings contributions from one of its internal businesses. The lower income from the treasury and markets division, driven by volatility, means its net interest margin contribution — as a key measure of profitability — will fall to seven basis points in the second quarter of the 2026 financial year, from 15 basis points in the first quarter. ASX-listed Cleanaway, which collects waste, also expects to make less money in the 2026 financial year, citing higher fuel and third-party logistics costs.