Australia’s most populous and economically active state, New South Wales (NSW), has issued a sharp downward revision to its upcoming financial year economic growth projections, citing cascading risks from the escalating conflict in the Middle East as a key destabilizing factor, NSW Treasurer Daniel Mookhey confirmed Wednesday during an address to the Sydney-based McKell Institute.
Previously projected to expand by 2.5% in the 2026-2027 financial year in forecasts published last December, the state’s economy is now expected to grow by just 1%, Mookhey revealed. The unexpected downgrade, released four weeks ahead of the official June state budget as an extraordinary pre-budget transparency measure, marks one of the clearest indicators of how Middle East tensions between the US, Israel and Iran are rippling through to the Australian economy.
Mookhey emphasized that the impact of the conflict on global energy markets will be persistent, even if hostilities de-escalate immediately. “Even if the war in the Middle East ended today, petrol prices are not falling tomorrow. Oil markets will take time to normalise – if they ever do,” he told the audience.
The slowdown is projected to hit NSW harder than any other Australian state, Mookhey explained, a gap driven largely by the state’s higher average mortgage sizes that leave households more exposed to elevated Reserve Bank of Australia interest rates. Higher inflation has forced central bank rate hikes to cool demand, which in turn has dragged down household consumption across the country. But in NSW, the burden is far heavier: the average working family taking out a new mortgage in the state borrows roughly $873,000, compared to just $677,000 for comparable households in Victoria, Australia’s second-largest state – a 28% difference. “That is why NSW fares better when interest rates fall. And fares worse when they rise,” Mookhey said.
Beyond economic headwinds, the treasurer waded into growing state political tensions around climate policy, as the incumbent Labor government prepares for upcoming state elections early next year, where right-wing populist party One Nation is gaining traction. One Nation, led by Pauline Hanson, recently claimed the federal NSW seat of Farrer earlier this month and turned in strong results in the South Australian state election, signaling growing electoral support for the party in the region.
Mookhey attacked the opposition for shifting alignment on net-zero policy, arguing that the federal Liberal Party has aligned with One Nation to oppose NSW’s legally binding net-zero emissions targets. The state Liberal-National coalition already faced a bitter internal split on the issue late last year, when then-opposition leader Mark Speakman reaffirmed the party’s commitment to net-zero, prompting a rupture with the rural NSW Nationals. Current opposition leader Kellie Sloane, who took over the role late last year, has faced mounting pressure from the increasingly right-leaning federal branch of the party to reverse the net-zero commitment.
“I have no idea if the NSW Liberal Party agrees with the Federal Liberal Party, which agrees with the One Nation Party,” Mookhey said. “The Member for Vaucluse (Ms Sloane) could end this uncertainty by declaring whether she is for or against the state’s legislated net zero targets. To campaign against NSW’s net-zero targets is to campaign for a NSW recession.”
Despite the sharp growth downgrade, Mookhey stressed that the state is well-positioned to avoid a full recession, pointing to the ongoing renewable energy investment boom driven by NSW’s early adoption of net-zero as an economic development strategy. The state is currently host to a large pipeline of renewable energy construction projects, paired with extensive upgrades to transmission infrastructure and grid connections that will drive sustained activity and investment through the slowdown. “NSW is home to this investment boom because NSW is (and was) the first state to truly have grasped that reaching net zero is a sound economic strategy,” he added.