Bracing for impact: Can Australia navigate 2026’s economic minefield?

On the headline numbers, you could be mistaken for thinking that the Australian economy is navigating calm waters.

Annual GDP growth is a strong 2.6%, employment is growing steadily by around 20,000 per month, unemployment is holding at a low 4.3%, and official wage measures are running at a little over 3% (0.8% in the March Quarter 2026).

Our CBA data confirms that the labour market and consumer demand is, so far, holding up relatively well. However, this dramatically undersells the threats to the outlook.

Hopes hinge on Iran resolution

Our central case forecasts assume a relatively quick resolution to the Iran conflict, a slowdown in growth but not a collapse, and inflation steadily returning to target without the need for further interest rate hikes.

Nevertheless, the economy is navigating a dangerous minefield in 2026, with major risks around every corner that could easily derail this outlook.

The Iran War presents the biggest threat to the Australian (and global) outlook. The world is holding its breath and waiting to see whether a peace deal can be negotiated. In the meantime, the rhetoric continues to ramp up and down. On balance, we remain hopeful that a peace deal can be struck by the middle of the year, followed by a gradual reopening of the Strait of Hormuz.

This would see global energy markets and broader supply chains slowly normalise. It would also deliver a much-needed boost to business and consumer confidence – both of which have plummeted.

This is our central case scenario, but our conviction is low and nothing can be taken for granted. US-Iran negotiations continue to drag on, and there remains a high risk of a prolonged stalemate or a return to open hostilities. The US is clearly looking for a way out of the war, but not at any price.

Finding workable compromises on key ‘red line’ issues like Iran’s nuclear program and long-term control of the Strait of Hormuz will remain difficult and may ultimately prove to be a bridge too far.

Global resilience is being tested

Global markets have been volatile - swinging on the daily news cycle - but they have still proven quite resilient overall. US equity markets continue to hit new highs, and despite around 14mb/day of Middle Eastern oil production remaining shut-in, Brent crude oil futures have hovered at manageable levels of around $100 to $110 per barrel. However, some cracks are beginning to appear, illustrated by rising long-term bond yields. These cracks will grow larger, the longer the strait remains closed.

Oil markets remain the key watch point. Rapid inventory drawdowns of oil and other refined products have acted as a shock-absorber, shielding businesses and consumers from higher prices and preventing wide-spread demand destruction across advanced economies. However, these emergency inventories are being quickly depleted. If the Strait of Hormuz remains shut, we expect to see the oil price spike to $US150/bbl, or higher, by mid-June to mid-July. This will drive inflation sharply higher, growth sharply lower, and again raise the prospect of fuel shortages and restrictions in Australia. If the ceasefire does collapse entirely, we expect Iran to widen its retaliation to a greater range of economic targets, driving a severe market reaction.

Inflation expectations rising

Another key threat to the Australian economy is inflation, or more accurately, rising inflation expectations. Rolling global supply shocks, low productivity, strong domestic demand and a tight labour market have seen core measures of inflation sit above the Reserve Bank’s target band since 2021 (with a brief exception in H1 2025). On current forecasts, trimmed mean inflation won’t sustainably return to target until mid-2027. Not surprisingly, inflation expectations have begun to drift higher and union wage demands have started to become more ambitious, as workers seek compensation for the rising cost of living.

The RBA has responded strongly, demonstrating its resolve with three interest rate hikes in quick succession. Post-COVID, the central bank adopted a patient approach, allowing inflation to come down steadily to ‘preserve the gains’ in the labour market.

This has given way to a far more assertive and traditional central bank focus on fighting inflation and maintaining market credibility. We expect these decisive interest rate hikes, together with slowing private sector activity, will be sufficient to keep inflation expectations contained and drive trimmed mean inflation back to target.

However, there is no room for complacency. If the US-Iran War comes to a quick conclusion from here, we may see confidence rebound and private demand remain more resilient than we currently expect. This could force the RBA to do more of the ‘dirty work’ of bringing demand back into balance with supply, through additional rate hikes in H2 2026. On the other hand, a more drawn-out conflict, or re-escalation in fighting, would see oil and other prices spike higher in mid-2026. While this should also deliver a bigger hit to demand, higher headline inflation may still force the RBA to hike rates again in the near-term.

A Federal Budget wildcard

The Federal Budget has thrown another wildcard onto the table, adding further complexity to an already messy landscape. The abolition of negative gearing, changes to the capital gains tax regime, and a crackdown on trusts, has shaken some investors and will impact the housing market over coming months.

Our analysis of the fundamental shift in after-tax cash flow for investors and its impact on prices suggests relatively modest headline impacts. We find that national house prices could be around 3% lower over the next three years as a direct result of the changes, with larger impacts in investor-heavy segments of the market (e.g. apartments/townhouses).

However, housing is a sentiment-driven market and the changes could see investors withdraw and financing become more difficult, driving house prices down more than expected. This would add another headwind into the economy, potentially keeping consumer and business sentiment depressed and the RBA focussed more on the growth side of the economy.

AI booming in the background

These high-profile downside risks around oil markets, inflation and housing are drawing much investor attention.

However, in the background, the AI boom continues to act as a huge, positive tailwind for global asset markets, productivity and growth. The US will continue to draw the largest dividend from this boom, but Australia is not missing out.

We remain bullish on AI overall and expect its economic impact to accelerate and broaden over the next 12-18 months. This should continue to provide an important offset to some of the negative consequences of this more volatile and fragmented economic era.

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This is an edited version of the CommBank View. You can read the full analysis here.