21 May 2026
Global uncertainty remains elevated as disruptions to the supply of oil and other key commodities from the Middle East become more prolonged, global inflation pressures grow and the rates backdrop has shifted higher. While the Australian consumer has been relatively insulated from higher fuel prices owing to the reduction in the fuel excise and a fall back in refined product prices, we expect the broad-based cost pressure (as reflected in the NAB Business Survey) to be largely passed through to consumers.
Both business and consumer confidence remain weak, though there is little evidence to date of a significant pull-back in economic activity. That said, the unemployment rate jumped to 4.5% in April and may suggest hesitancy hiring amid elevated uncertainty. Our NAB transactions data point to resilience in consumer spending and while business conditions have eased, they remain in positive territory.
Our forecasts for growth and the labour market are largely unchanged this month, though we have nudged up our Q1 forecast for household consumption to 0.4% qoq (prev. 0.2%). Sensitivity to lower retail fuel prices means our headline inflation profile is now expected to peak slightly lower, though underlying inflation is still expected to peak at 3.9%.
The Federal Budget released last week is expected to have a broadly neutral impact on the economy over 2026-27 and become slightly contractionary over the forward estimates. That is, however, depending on forecasts of expenditure being realised, with 2025-26 having been more stimulatory than initially expected.
Additional cost pressures on the back of higher oil prices comes against a backdrop of already elevated inflation. We see the RBA lifting rates to 4.6% in August and then remaining on hold as incoming data are assessed for the impact of the 100bps of tightening this year and how the impact of the conflict in the Middle East flows through.
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