OECD Slashes Australia's Growth Forecast as Iran War Drives Global Inflation Spike

The parallels with the oil shocks of the 1970s grow harder to dismiss by the week. The Organisation for Economic Cooperation and Development released its interim outlook on Thursday, warning that the closure of the Strait of Hormuz following the US-Israeli military campaign against Iran will test the resilience of the global economy in ways that financial markets have yet to fully price.

The Paris-based organisation now forecasts inflation across G20 economies will reach 4% through 2026, a figure 1.2 percentage points higher than its December estimate. Energy exporters including the United States and Australia would be less affected than import-dependent economies in Europe and Asia, the OECD said, though neither would escape the broader consequences of sustained supply disruption.

What the numbers show

Crude oil closed at $US104 per barrel in late Thursday trading, representing a 70% increase since the start of the year. The benchmark has moved up more than $US40 in three months. The OECD downgraded growth across the Euro area, the United Kingdom, and South Korea by between 0.4 and 0.5 percentage points compared with December forecasts.

Adelaide Timbrell, senior economist at ANZ, released revised forecasts for Australia that reflect the new reality. The bank now expects growth of just 1.3% in 2026, down 0.5 percentage points from its February estimate and representing only half of the 2.6% growth recorded in 2025. The effect will linger into 2027, with ANZ projecting 1.8% growth next year instead of the 2.2% it had forecast before the war began.

Australia's growth rate would drop to 1.3% in 2026, or 0.5 percentage points lower than anticipated in February and only half of last year's growth.

— Adelaide Timbrell, ANZ

Inflation presents the more immediate concern. ANZ now expects Australian inflation to reach 4.9% by June, up sharply from a previous forecast of 3.8%. By December, Timbrell expects inflation to settle at 4.5% rather than the 3.4% previously anticipated. These forecasts assume two things: that energy prices retrace some of their gains in the second half of the year, and that Australia's fuel supply remains sufficient to avoid mandatory rationing or widespread shortages.

The policy bind

Jo Masters, chief economist at Barrenjoey, described the situation succinctly. This is an inflation shock and a growth shock, she noted, but in the first instance it is an inflation shock. The distinction matters for policy. Central banks facing simultaneous price pressures and weakening growth have no easy options. Raising rates to combat inflation risks deepening the growth slowdown; holding rates steady allows inflation to become entrenched.

Masters offered some reassurance on household resilience. Australians have been making additional mortgage payments, and the savings rate remains about $30 billion per year higher than historical averages. People will feel their standard of living has declined, she said, but most have buffers to absorb the initial shock.

Not the 1970s, but close enough to feel it

Pradeep Philip, lead partner at Deloitte Access Economics, cautioned against drawing too direct a comparison with the stagflation of the 1970s, when both inflation and unemployment reached double digits. The current situation is not that severe, he said. But his warning carried its own weight: the trajectory of unemployment going up and inflation going up is more visible now, and people will feel the pressure of rising prices more than official numbers suggest because the things they see every day — petrol at the bowser, transport, food — are the things going up fastest.

The OECD's assessment of risk was notably cautious. The organisation warned that its forecasts assume a relatively contained disruption, with oil and gas production resuming in a reasonable timeframe. A longer-lasting closure of production facilities, damage to critical infrastructure, or persisting disruptions to exports through the strait would have more significant adverse consequences than currently priced into world markets.

What this means for mortgage holders

For the 3.3 million Australian households with mortgages, the immediate question is whether the Reserve Bank will raise rates in response to higher inflation. The central bank has maintained a cautious posture, but inflation running at 4.9% by mid-year would be difficult to ignore. A household with a $500,000 mortgage would pay an additional $150 per month for each 25-basis-point rate increase.

The energy price shock has effectively cancelled the growth dividend that analysts had expected from the artificial intelligence investment boom, the OECD noted. Capital expenditure on data centres and AI infrastructure had been expected to support global growth through 2026 and 2027. That contribution has now been overwhelmed by the drag from higher energy costs.

The question that remains unanswered is how long the supply disruption will persist. Markets initially priced in a short conflict, but oil prices have continued climbing as it becomes clear the United States lacks a clean exit strategy that would guarantee stable resumption of trade through Hormuz. Until that clarity emerges, forecasters will continue revising their numbers downward, and households will continue feeling the pinch at the petrol station and the supermarket checkout.