CANBERRA, March 19 (Xinhua) -- Australian Treasurer Jim Chalmers warned on Thursday that a prolonged conflict in the Middle East could cut GDP growth by 0.6 percent and cause inflation to approach 5.0 percent.

In a major speech to an industry event for economists, Chalmers said that the Treasury is modeling the potential impacts of a shorter and prolonged conflict in the Middle East.

He said that the Treasury is currently projecting that Australia's GDP would be around 0.2 percentage points lower than the previous forecast at the mid-point of 2026 under the short-term scenario, but that the gap would quickly close.

Chalmers, who will hand down the federal budget for 2026-27 in May, warned that a prolonged conflict in the Middle East would leave a "bigger scar" on the economy.

"There would be an immediate hit to output, but it would build over time," he said.

"Treasury estimates that GDP would be 0.6 percent lower in 2027 and even by 2029 would still be below where it would have been without the conflict."

Chalmers said that around half of the impact on GDP would be due to higher oil prices.

In the short-term conflict scenario, he said the Treasury is currently projecting oil prices to remain around 100 U.S. dollars per barrel for the first half of 2026 before returning to pre-conflict prices by the end of the year.

By comparison, the Treasury expects oil to reach 120 U.S. dollars per barrel in the first half of 2026 and then take about three years to get back to pre-conflict prices under the more prolonged scenario.

Chalmers said that the Treasury is forecasting that Australia's annual rate of inflation will peak 0.75 percentage points higher in the short-term scenario and 1.25 percentage points higher in the prolonged scenario.

"It means the prospect of inflation peaking in the high 4s or even higher this year is very real," he said.

According to the latest official data from the Australian Bureau of Statistics, the consumer price index rose by 3.8 percent in the year to January. ■