Fears of a recession have fallen away as the de-escalation of the Middle East conflict brings global oil prices back to prewar levels, but economists caution that Australia's economy faces a period of substandard growth. The retreat in oil prices, which spiked at $US120 a barrel before steadying at about $US72, has removed the worst-case scenarios that had been anticipated earlier this year.
Belinda Allen, head of Australian economics at Commonwealth Bank, said she had never thought a recession was likely, but "the impact of the war on energy markets and the economy were less severe than we had anticipated." She noted that oil prices did not rise as much as feared, and a cut to the excise tax blunted the impact on households. Allen expects no further interest rate hikes but sees lingering risks.
Despite dodging a recession, Tim Robinson, an associate professor at the Melbourne Institute, warned that GDP per person is set to contract for two straight quarters. "Growth is likely to be quite weak for the rest of the year, and because of that, a per capita recession is likely," he said, adding that while such recessions are less severe than conventional ones, they still constitute a decline in living standards. Deloitte Access Economics partner Stephen Smith said his firm had rarely been so pessimistic about the near-term trajectory.
Consumer confidence is at around a 50-year low as households struggle with higher prices. The three interest rate increases so far in 2026 mean that households with an average-sized mortgage have needed an extra $350 per month, Smith said, warning the Reserve Bank could hike again next month. Falling house prices, particularly in Sydney and Melbourne, are also weighing on sentiment.
However, Allen sees hope for 2027, with an expected two interest rate cuts and an ongoing boom in datacentre construction adding to the economy. "Clearly that is being constrained by capacity and energy demand, but it will still add to the economy next year and the year after," she said. Beyond that, artificial intelligence looms as a gamechanger from late 2028, potentially boosting Australia's weak productivity.
