Oil price shock to hamper Australia’s capacity-constrained economy: Deloitte

War in West Asia has triggered a fresh business cycle in Australia characterised by slower growth, higher inflation and rising unemployment, Deloitte Access Economics’ March 2026 Business Outlook has warned.

The global oil shock sparked by the closure of the Strait of Hormuz will contribute to higher prices across Australia’s economy as fuel shortages raise input costs for businesses, Deloitte Access Economics partner and report author, David Rumbens, said.

“The conflict in the Middle East has rocked the global economy, sending inflation expectations soaring while growth forecasts plunge,” he said.

“In Australia, the sticker shock of higher petrol prices has been jarring, but the pain doesn’t stop there. Fuel is a notable input cost across much of the economy, so there will be a significant filtering through of price pain into other sectors as 2026 goes on.”

Australia’s economy was already grappling with a resurgence of inflation before the conflict started, Rumbens said. Economists have also been concerned about capacity constraints, warning that without additional productivity growth, economic expansion would spur inflation.

In this context, Rumbens said that the oil price shock had tipped Australia into a new business cycle.

“The Australian economy is running on empty,” he said.

“Higher fuel prices and a domestic economy that struggles to contain inflation at modest rates of economic growth are different dimensions of a supply crisis story. Together, domestic and international pricing pressures have kicked off another business cycle.”

Deloitte has predicted that CPI would peak at 4.9 per cent in June 2026, well above the RBA’s 2-3 per cent target range. It is expected that another interest rate hike will occur in the June quarter, with rates holding steady before another possible rate-cutting cycle from mid-2027.

It added that the 2.6 per cent real GDP growth observed over the year to December 2025 was likely the peak in this economic cycle, with growth set to moderate to 1.8 per cent by December 2026.

Unemployment was expected to climb to 4.9 per cent in June 2027, up from 4.3 per cent in February 2026.

Rumbens noted that the near-term economic outlook for Australia would depend heavily on the duration and intensity of conflict in West Asia, primarily due to its implications for oil prices. The war would also impact other commodities, including fertiliser, which would affect food prices later down the line.

On fiscal policy, Rumbens added that he welcomed the Australian government’s rhetoric on cutting spending and backing productivity-enhancing reforms. He warned that current fiscal settings were actively working against the government’s stated goal of boosting intergenerational equity.

“If you are relying on the RBA to stem inflationary pressures rather than getting support from fiscal policy, you are putting more of the burden on mortgage holders and renters, who are more likely to be young, and less on those who receive interest income, who are typically older,” he said.

“There would need to be a lot in the Budget favouring young people just to break even.”

Due to inflation and global uncertainty, Rumbens also said he expected to see a deterioration in non-essential consumer spending and business confidence.

“Deteriorating confidence may see firms delay business investment while higher interest rates and construction costs may suppress housing investment. The 2.6 per cent GDP growth we saw at the end of 2025 might be the most robust we see for quite a while.”