There is a strong possibility Australia could be headed for a recession if the war against Iran spills into the second half of 2026, economists have warned.
Fears of a recession loom large as the battle for control over the Strait of Hormuz enters a dramatic new phase and dashes any hope of a swift end to the conflict in the Middle East.
If a peace agreement is reached by the end of June, economic growth in Australia would still be slashed by more than half to 0.7 per cent, pushing unemployment to over five per cent for the first time since 2021, according to Deloitte modelling conducted for the Australian Financial Review.
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Any longer than that, unemployment could teeter dangerously close to above six per cent, driving Australia to its first recession since the COVID-19 pandemic.
"The longer this conflict drags on, the worse it looks, including for Australia," AFR's Economic Editor John Kehoe told Today.
"If it drags onto mid-year, the Strait of Hormuz doesn't get open and the oil doesn't start flowing through, there is a real possibility of a recession in Australia."
Kehoe said this worst-case scenario is edging closer to reality as US President Donald Trump struggles to find a solution to Iran's blockade of the critical waterway.
He warned a recession in Australia becomes more likely every week that commercial vessels are locked out of the Strait.
A prolonged war would spell bad news for the global economy, as well as local job and inflation data.
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"Becoming more plausible because we're not seeing a lot of good news coming out of the Middle East," Kehoe added.
"We'd want to see something in terms of the Strait of Hormuz opening within the next few weeks.
"If it drags on much beyond that, you'd have to say the economic outcomes in Australia are not going to be good."
While Treasurer Jim Chalmers has flatly denied any suggestion of a recession, the RBA has flagged that a domestic recession could be a necessary evil to drive inflation down.
"We don't want to have a recession, but if it's hard to get inflation down, then we're going to have to deal with that, possibly," RBA governor Michele Bullock said.
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Chalmers said over the weekend that the Australian economy was weathering the Middle East fallout "from a position of relative strength".
"[We] know the effects of this crisis will be felt for a long time and as I've said, we are considering that as we prepare the budget," Chalmers said.
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