The economic impact of a prolonged Iran war in Australia

The Australian economy faces surging inflation as capacity constraints that have been building domestically are exacerbated by the conflict in the Middle East, which is adding to price pressures through higher energy, shipping, and transport costs.

• Our current base case is that the conflict will last for around two months, keeping the Strait of Hormuz closed until the end of April. From there, we anticipate traffic through the Strait rises to around 50% in May and June then gradually returns to full capacity over the next six months.

• However, opportunities for de-escalation are narrowing, risking a more prolonged conflict. Our prolonged war scenario suggests world GDP growth would slow to 1.4% in 2026 – 1.2ppts below our current baseline – before recovering to just 2.1% in 2027. Oil prices would stay above $150 per barrel for four months alongside shortages of refined energy products, pushing global inflation to 7.7%, close to the 2022 peak.

• In this scenario, the Australian economy would suffer a sharp recession. Using our Global Economic Model, which now includes Australian states and territories, we estimate GDP would contract 0.3% q/q in Q2 as inflation soars and fall a further 0.8% q/q in Q3 as fuel rationing begins. Excluding the pandemic, this would be the sharpest quarterly fall since the early 1990s.

• Industries with the highest reliance on fuel would suffer the most. Transport, manufacturing and mining are particularly vulnerable. Agriculture is similarly exposed and faces medium-term tradeoffs between fertilising with more expensive, scarcer resources or lower yields.

• States and territories with export-oriented, commodity-focused economies would fare the worst, while more densely populated, economically diversified economies suffer the least negative consequences.

Download the full report to know more.