The Treasurer provides the most recent modelling for the Australian economy in response to the impact of the Middle East conflict.
- Oil prices in the short‑term scenario rise to US$100 per barrel before returning to normal by the end of 2026, whereas under the prolonged scenario they increase further to US$120 per barrel and remain elevated for around three years, delaying normalisation until 2028-
- Headline inflation (CPI) is expected to rise under both scenarios, with the short‑term shock lifting CPI by 0.75 percentage points, adding to MYEFO’s forecast of 3.75% by June 2026, while the prolonged scenario generates a larger 1.25 percentage‑point increase, intensifying already elevated price pressures.
- GDP growth is forecast to weaken under both scenarios, with the short‑term shock reducing GDP by 0.2% by mid‑2026, a modest deviation from MYEFO’s real GDP growth expectation of 2.25% in 2025-26 while the prolonged scenario results in a deeper 0.6% decline in 2027, leaving output below baseline even by 2029.
Overall, the short‑term scenario reflects a brief and contained oil‑price shock with only temporary pressure on inflation and a mild softening in growth, while the prolonged scenario involves a more persistent rise in prices that keeps inflation elevated for longer and leads to a more sustained weakening in economic activity for at least the next three years.
Treasury modelling of impact of oil shock, March 2026
| Parameter |
Baseline (MYEFO 2025) |
Short-term disruption scenario |
Long-term disruption scenario |
| Oil price scenario |
USD 66 barrel |
USD 100 barrel |
USD 120 barrel |
| Oil price normalisation |
|
By end 2026 |
After three years |
| Headline CPI (mid-2026) |
3.75 |
0.75% |
1.25% |
| GDP growth (2025-26) |
2.25% |
-0.20% |
-0.6% by 2027, below baseline until 2029 |
