Australia is increasingly expected to avoid slipping into recession, with recent economic data pointing to modest growth in the June quarter despite earlier fears that higher interest rates, geopolitical tensions and budget changes could push activity backwards.
However, economists are warning that a renewed surge in global oil prices could still create fresh problems for households, inflation and the wider economy.
Westpac’s latest economic nowcast suggests the Australian economy may have expanded by about 0.2 per cent in the three months to June 30, a result that would keep the country out of a technical recession.
The bank still estimates there is roughly a 30 per cent chance of a negative June quarter, while the probability of contraction in the September quarter is lower, at around 9 per cent.
A technical recession generally refers to two consecutive quarters of negative economic growth.
The Australian Bureau of Statistics is due to release the official June-quarter GDP figures on September 2.
Westpac senior economist Pat Bustamante said the economy had performed better than many analysts feared earlier in the year.
At the time, economists were concerned that a combination of interest rate increases, conflict involving the United States and Iran, and changes in fiscal policy could significantly weaken economic activity.
Bustamante said many of those downside risks had not materialised as severely as anticipated.
He said economic indicators had stabilised and, in some areas, exceeded expectations, particularly in household spending.
A growth rate of around 0.2 per cent would still be considered weak by historical standards, but economists say such a result would not necessarily worry the Reserve Bank of Australia.
According to Bustamante, the central bank may view slower growth as part of the process required to reduce demand and ease inflationary pressure.
If the economy expands below its long-term potential, it can help reduce pressure on prices and capacity, which remains important as policymakers continue trying to bring inflation under control.
Consumer spending supports the economy
One of the strongest areas of the economy has been household spending.
Despite higher borrowing costs, elevated fuel prices and uncertainty generated by overseas conflicts, Australian consumers have continued to spend at a stronger pace than expected.
Official ABS figures showed household spending increased by 0.8 per cent in June, suggesting consumers remained resilient even after earlier rate increases.
Household spending was also reported to be around 6 per cent higher over the 2026 financial year, despite volatility throughout the period.
Economists have described the strength of consumer activity as a key reason the economy appears to have avoided a sharper downturn.
EQ Economics managing director Warren Hogan has previously pointed to spending figures as evidence that Australian households were coping better than expected with higher interest rates and international uncertainty.
The resilience of spending, however, presents a challenge for policymakers.
Economists estimate Australia may need economic growth to remain at around 2 per cent or below to help bring inflation sustainably under control.
Growth above the economy’s productive capacity could add to demand pressures and make inflation more difficult to contain.
Oil prices emerge as the next major threat
While recession fears have eased, economists are becoming increasingly concerned about another potential oil price shock.
Global energy markets have remained volatile as tensions involving the United States and Iran continue to affect expectations for oil supply.
Earlier concerns centred on disruption around the Strait of Hormuz, one of the world’s most important shipping routes for energy exports.
More recently, renewed geopolitical escalation has once again pushed oil prices higher.
US President Donald Trump has intensified economic pressure on Iran, calling for tighter restrictions on oil smuggling, financial transfers, shipping arrangements and other mechanisms that could help Tehran generate revenue.
The renewed pressure contributed to another jump in crude prices, with oil briefly moving towards US$94 a barrel before easing back to around US$87 by Sunday.
For Australian households, a sustained rise in global oil prices could quickly translate into higher petrol costs.
That risk is becoming more significant because temporary government fuel relief measures have ended, leaving motorists more exposed to changes in global energy prices.
AMP economists estimate that every US$10 increase in the oil price can add roughly 10 cents a litre to Australian fuel prices, depending on currency movements and other market conditions.
AMP chief economist Shane Oliver said his central expectation is for oil to trade mostly within a US$70 to US$100 per barrel range.
However, he warned that the risk of a much larger increase remains if geopolitical tensions remain unresolved and global reserves tighten.
In a more severe scenario, oil could potentially climb towards US$150 a barrel, creating substantial pressure on inflation, transport costs, household budgets and business activity.
Such a spike would be particularly damaging because Australia imports a significant proportion of its refined fuel needs.
Global risks remain in the background
Bustamante said oil remains one of the major external risks facing the Australian economy.
A sharp reduction in global supply of an essential commodity such as oil could weaken consumer spending, lift business costs and slow economic activity.
Higher fuel prices would also complicate the Reserve Bank’s inflation challenge by increasing transport and energy costs throughout the economy.
Still, economists currently view that scenario as a risk rather than their central forecast.
The baseline outlook remains that the Australian economy will continue growing slowly rather than entering recession.
For now, strong consumer spending and better-than-expected domestic data have helped Australia navigate a difficult period.
But with geopolitical tensions remaining elevated and energy markets highly sensitive to developments in the Middle East, the economy’s next major test may come not from domestic weakness, but from another global oil price shock.
