The International Monetary Fund (IMF) has warned the country is heading into a far tougher mix of sluggish growth, renewed inflation pressure and rising external vulnerability as the fallout from war in the Middle East flows through energy markets, trade routes and global financial conditions.
The IMF’s April 2026 World Economic Outlook forecasts Australia’s real GDP growth at 2.0 per cent in 2026, unchanged from 2025, before slowing to 1.7 per cent in 2027.
Inflation is projected to rise from 2.9 per cent in 2025 to 4.0 per cent next year before easing to 3.2 per cent in 2027, while unemployment is expected to hold at 4.2 per cent in 2026 before edging up to 4.3 per cent the following year.
Australia’s current account is also forecast to remain in deficit, at 2.3 per cent of GDP in 2026, underscoring how exposed the economy remains to imported price shocks and a more volatile external backdrop.
While the organisation stopped short of forecasting an outright recession, its latest projections point to a significantly narrower margin for error.
Economic growth is still expected to remain positive and the labour market is still holding up, but a return to 4.0 per cent inflation would leave policymakers confronting a much more uncomfortable backdrop than the headline growth numbers imply, particularly if global supply disruptions persist for longer than assumed.
The IMF said the global economy has once again been “threatened with being thrown off course” by the outbreak of war in the Middle East at the end of February 2026.
Under its central “reference forecast”, which assumes the conflict is limited in duration and that disruptions begin to fade by mid-2026, global growth is now expected to slow to 3.1 per cent in 2026 from about 3.4 per cent in 2024–25, while global headline inflation is forecast to rise to 4.4 per cent.
It made clear that the downgrade was driven by the conflict rather than an underlying collapse in demand.
It said forecasts based on pre-conflict assumptions would have shown “a slight upward revision” to 2026 global growth to 3.4 per cent, meaning the weaker outlook now “largely reflects the disruptions from the conflict in the Middle East”, partly offset by stronger recent data and lower tariff rates.
In its broader assessment, the IMF said the conflict had already inflicted humanitarian costs, damaged critical infrastructure and “severely disrupted maritime and air traffic” in the region, with the economic fallout spreading through higher commodity prices, second-order effects on inflation expectations and risk-off sentiment in financial markets.
It also warned that the scale of the hit will depend on the conflict’s duration, intensity and scope, all of which remain “inherently unpredictable”.
Those risks are reflected directly in the assumptions underpinning the forecast.
The IMF expects energy commodity prices to rise 19 per cent in 2026, reversing what had previously been a projected decline, while oil prices are forecast to increase 21.4 per cent as disruptions to production and transportation in the Middle East push the average petroleum spot price index to about US$82 a barrel.
Food prices are also expected to rise more than previously forecast because of higher energy and fertiliser costs, disrupted shipping routes and increased transport costs. The Fund’s formal assumptions put oil at an average of US$82.22 a barrel in 2026 before easing to US$75.97 in 2027.
The most immediate implication is that inflation now looks more problematic than growth.
A 4.0 per cent inflation forecast for 2026 would place renewed pressure on households and complicate the next stage of the Reserve Bank’s policy response, particularly if headline price gains begin to feed into expectations rather than remaining a temporary supply shock.
The IMF said central banks “should remain vigilant and be prepared to act clearly and decisively in line with their mandates”, warning they “must guard against prolonged supply shocks destabilizing inflation expectations”.
The Fund also highlighted another risk that could become increasingly relevant if geopolitical tensions remain elevated and defence budgets continue to rise.
Its analysis found peacetime defence spending booms can lift real GDP by more than 3 per cent relative to non-boom periods, but they are also associated with a temporary inflation increase of almost 3.6 per cent on average and a deterioration in external balances as imports accelerate and current accounts weaken.
That trade-off is especially relevant for Australia as strategic spending rises into an environment already defined by higher import costs and fragile shipping conditions.
The IMF’s downside scenarios show how quickly the current outlook could worsen if the conflict drags on or energy infrastructure suffers deeper damage.
Under an adverse scenario with larger and more persistent energy price rises, global growth would slow to 2.5 per cent in 2026 and inflation would rise to 5.4 per cent.
A more severe scenario would see global growth fall to about 2 per cent in 2026 while headline inflation would move above 6 per cent by 2027, a reminder that Australia may still be growing, but it is doing so with much less protection from the next external shock.
