Middle East conflict placing Australia in ‘risk zone’ for recession: CreditorWatch

CreditorWatch has warned that climbing oil prices are causing substantial flow-on effects for heavily fuel-dependent sectors and putting Australia in the “risk zone” for recession.

These sectors are facing high cost pressures that flow through supply chains, CreditorWatch said, intensifying inflation, tightening cash flow, and lifting insolvency risk across the broader economy.

CreditorWatch’s February Business Risk Index revealed the sectors at risk due to the impact of hiking fuel costs. According to the report, CreditorWatch found that 7.1 per cent of road freight businesses closed last year, up from 6.2 per cent the year prior.

Forty per cent of operating costs in road freight are accounted for by diesel, with these prices jumping in two weeks, it is one of the most at-risk sectors in the economy. It warned that this will have a flow-on effect on agriculture, construction, manufacturing, and retail.

The road freight transport sector could face additional business failures on top of its 7.1 per cent insolvency rate (particularly smaller and mid-sized businesses) if oil prices remain above US$120 per barrel for an extended period.

With payment arrears up 9.4 per cent year-on-year for manufacturers, moderate increases in insolvencies for this sector were projected for the next six to 12 months.

The highly fuel-dependent construction industry is also being affected by rising diesel prices amid high interest rates and rapid inflation in input costs. Additionally, construction business failure rates are being pushed 5.8 per cent above the national average, and the sector is now second among all industries for payment defaults, according to CreditorWatch

The agricultural sector could have a moderate uptick in insolvencies if fuel costs persist and fertiliser prices are impacted, the report found. Currently, the price of urea, the key ingredient in nitrogen fertiliser, has hiked by more than 50 per cent year-on-year, and the national average cost of diesel has risen from 180.9c/litre on 1 March to 245.6c/litre on 15 March, it noted. These costs are likely to impact cash flows and potentially increase rural loan delinquencies later in 2026.

The report also noted that the mining sector held strong with a failure rate for the last 12 months similar to that of healthcare (4.6 per cent) and a low insolvency rate (around 1.0 per cent), which tracked similarly last year due to high commodity earnings.

“We expect very few mining company failures due to the conflict. If anything, the greater risk would be indirect - for instance, if a global recession hits commodity prices broadly later in 2026,” it said.

CreditorWatch noted that the conflict would provide energy producers with a profit windfall, as Australian LNG exporters benefit from higher spot gas prices in Asia (as buyers hedge against Middle East supply risk), and the increase in thermal coal prices.

The Strait of Hormuz

The passage through which 20 per cent of global daily crude and LNG production flows, the Strait of Hormuz’s closure and continued damage to the region’s energy infrastructure would keep oil prices high.

Historically, sustained oil price increases of 50-70 per cent over six to 12 months have been associated with global recessions. If the oil price remains in the high range for several months, recession risks would rise sharply, according to the report.

It said that fuel prices should retreat once the Strait reopens or the conflict de-escalates by mid-2026; however, it noted that insolvency rates were expected to remain elevated through the first half of the calendar year.

Chief executive Patrick Coghlan called this one of the most challenging operating environments that Australian small and medium-sized businesses have faced in years, with cost pressures, interest rates, and global volatility all converging at once.

“The data is clearly showing that these pressures are feeding through to cash-flow stress, slower payments, and a rising risk of business failure, particularly for smaller operators with limited buffers. These indicators underscore just how exposed many SMEs are to sustained economic shocks,” Coghlan said.

CreditorWatch chief economist Ivan Colhoun (pictured) said the duration of the conflict and rising oil prices were the two key factors impacting Australian businesses.

“A sustained oil price of over US$125-150 per barrel (sustained equals more than three to six months), will seriously pressure consumers’ budgets and businesses’ costs, and substantially increase the probability of recession,” Colhoun said.

“The RBA’s February interest rate rise adds to that pressure, though I would expect the Bank’s Board to not raise interest rates again in May, while it seeks to understand the longevity and impacts on the economy from current oil prices.”

“The implications for businesses are quite clear. As long as oil prices remain very elevated, there will be increased pressure on many businesses, and unfortunately, the likelihood of an increase in insolvencies.

"There is also the risk that fuel supplies are significantly disrupted throughout the economy, causing a COVID-like shutdown event. The best development would be a very swift end to the conflict and quick reopening of the Strait of Hormuz.”