Australia’s economy will avoid recession but fresh oil price shock now looms

Australia’s economy may avoid a possible recession in the second quarter, but it is not all smooth sailing for the local economy.

Experts have previously forecast a “trio” of shocks – interest rate hikes, the US-Iran war and changes to the budget – would all combine to drag the economy down in the June quarter.

In its latest update ahead of the GDP print in September, Westpac’s Nowcast expects the Australian economy to have grown slightly and be around 0.2 per cent bigger in the three months until June 30.

But the big four bank concedes there is still about a 30 per cent chance of a negative second quarter and around a 9 per cent chance of a negative quarter for the three months until September.

Two negative quarters in a row means Australia has officially entered a recession.

The Australian Bureau of Statistics will release the official GDP figures on September 2.

Westpac senior economist Pat Bustamante told NewsWire most of the dire forecasts for the Australian economy did not come true.

“It was unclear what the fallout from the Middle East and the rate hikes earlier in the year would be and there was that real risk that quarter two would see activity go backwards,” Mr Bustamante said.

“At that point I think economists would be happy with a 0.2 per cent (growth rate). The data flow since then have shown things have stabilised and surprised on the upside, especially when it comes to consumer spending.

“It talks to the resilience of the economy.”

Mr Bustamante said while the figures point to a below average growth rate, they are similar to 2024, 2025 and would not alarm the Reserve Bank.

“The Reserve Bank won’t be concerned with a growth rate of 0.2 per cent, they’ll see it as a necessary slowdown to reduce demand and reduce the call on capacity,” he said.

“If you grow below what your (economic) potential is you can put downward pressure on inflation and that is what you need from an economy that is heating a bit too much.”

Consumer spending remains the bright spot

Mr Bustamante said Australia’s economy had received a surprise boost with consumer spending remaining above expectations.

Despite the US-Iran war’s impact on fuel prices and rising rates, Australia’s economy has not slowed, which is adding pressure on policy makers.

It is currently forecasted the Australian economy needs to grow at 2 per cent or under, in order to get rid of the country’s inflation problem.

A growth rate above this will exceed Australia’s “economic speed limit” and add to its inflation woes.

But ABS figures showed household spending rose 0.8 per cent in June, despite fears that previous interest rate hikes and fluctuating oil prices could slow consumption.

Household spending is now up 6 per cent for the 2026 financial year following a bumpy few months.

EQ Economics managing director Warren Hogan previously told NewsWire these figures were spectacular.

“We know that the biggest impact of the Iranian war was sentiment …. We got the latest number earlier this week and they were nothing short of spectacular, after a strong May,” he said.

“Overall, an overall picture being painted by the numbers shows the consumer is hanging in there.

“We have this data saying Australian consumers hardly missed a beat.”

Oil price risks remain

One of the main reasons experts feared a downturn in the Australian economy was rising fuel prices in the June quarter.

Since early August fuel prices have begun climbing, as tensions between the US and Iran have flared up.

On Thursday, US President Donald Trump announced “economic D-Day” for Iran as the war moves into its next phase.

“Oil smuggling, swap lines, cash transfers, exchange houses, ship registries, front companies – It all needs to stop NOW. You know who you are,” Mr Trump said on Truth Social.

“This will be an ECONOMIC D-DAY, and we need all of our Allies to stand with the United States of America to isolate, and defeat, the Iran threat.”

On Friday Mr Trump encouraged allies and China to join in on his economic campaign to crush Iran.

The price of fuel quickly jumped on this announcement, backtowards $US94 ($A132) before returning to $US87 on Sunday.

At the same time the government’s fuel discount is over, meaning motorists are exposed to rising petrol costs.

According to AMP, every $US10 a barrel increase in fuel costs motorists about 10 cents per barrel.

AMP chief economist Shane Oliver warned oil prices may rise, although it is in neither side of the war’s interest to let them get out of hand.

“Our base case remains that oil prices will stay in a $US70-100 range with Iran preventing it going lower and the US moving to try and calm things down whenever it gets above $US100 … but the risk is high that with no resolution the world will have to face much higher oil prices (like $US150) as reserves run down,” he said.

Mr Bustamante agrees saying there is still the risk in the background, particularly when it comes to the global backdrop in the Middle East.

“We think there’s a price of oil that will see both parties come to the bargaining table and hopefully sign a peace deal,” he said.

“But that is always the risk, any sort of global shock that reduces supply of some import as important as oil, there is a risk it could have a negative impact on activity, but it is not our central forecast at the moment.