Australia Risks Sharp Recession in Prolonged Iran War

Summary

• Presents a worst-case economic scenario for Australia, contingent on the Strait of Hormuz remaining effectively closed until September.
• Under this scenario, projects back-to-back quarterly GDP contractions in Q2 and Q3, with year-on-year GDP shrinking by 0.3% by the end of 2026—the sharpest recession since the early 1990s outside the pandemic.
• Highlights extreme fuel import vulnerability: ~90% of Australia's fuel imports come from Asia (Korea, Malaysia, Singapore), which themselves rely on the Middle East for ~75% of crude imports via the Strait of Hormuz.
• Identifies highly uneven industry impact: Transport, Warehousing, and Postal services are the most exposed, followed by Mining, based on total fuel usage and fuel input dependency.
• Expects the economic pain to be worst in export-oriented, commodity-focused states/territories, specifically Western Australia and Northern Territory, while the ACT may see moderate growth.
• Argues the shock compounds existing domestic inflation problems; expects the RBA to hike in May regardless of near-term Strait developments, with fuel cost pass-through to consumer prices in coming weeks/months.
• Notes a "double whammy" for Agriculture from higher diesel and fertilizer costs (20-25% of global production offline), forcing tough decisions on input use that will affect yields and prices.
• Emphasizes the analysis is a low-probability "worst case scenario" with no assigned probability, underscoring its conditional and severe nature.