Economic Update - March 2026

We are now into the second month of the Iran War, and much like a tropical storm; it is unclear how long it will rage for and how much damage it will do. But the longer it goes on, the worse it will be for the global economy.    

What happened in Australia?

The RBA pulled the trigger on a second-consecutive 25 bps interest rate rise in March. However, unlike February, the decision was not unanimous: the Board was split five votes to four.

All Board members agreed that monetary policy was probably not restrictive enough. But the naysayers wanted to wait for more information, given all the uncertainty. While those in favour of the rise argued that the war would increase inflationary pressure no matter what and that it was best to act early to stay ahead of rising inflation expectations.

“... they noted that developments in the Middle East would further reduce the already constrained supply capacity of the Australian economy, increasing inflationary pressures for any given level of aggregate demand.” Minutes of the Monetary Policy Board Meeting, 16-17 March, 2026.

Given the war, the economic data released during the month feels out of date. However, it continued to suggest an economy running too hot.

December GDP showed an economy growing stronger than expected at 2.6% through the year versus an expected 2.3%.

“GDP growth in Australia had picked up strongly in the December quarter, exceeding the staff’s estimate of the potential growth rate and adding to existing capacity pressures.”Minutes of the Monetary Policy Board Meeting, 16-17 March, 2026.

Meanwhile, headline inflation fell from 3.8% in January to 3.7% in February. The RBA’s preferred measure trimmed-mean inflation was flat at 3.3%.

The RBA Board does not meet in April and so will have a much clearer view of how the war and Australian economy stand when it meets in May.

Source: ABS

Fuel supply has become daily headline news in Australia, as some service stations run out of fuel. Australia imports 94.3% of its oil products. While its fuel supplies remain at similar levels to before the Iran war, hoarding has affected supply in some areas. The government is working hard to ensure shipments of oil and fuel keep coming and has introduced a range of measures to temporarily boost supply. So far it is working, but a prolonged war would increase the pressure on Australia.  

What happened around the world?

USA

Fears of an AI bubble and SaaSpocalypse receded into the background as Wall Street watched the oil price bounce around according to the latest declaration from the White House (see chart below).

The US and Israel have killed Iran’s senior leaders and inflicted massive damage on Iranian military and civilian infrastructure, but the Stait of Hormuz remains effectively closed for now.

After a strong increase in January, non-farm payrolls decreased by 92,000 in February and unemployment increased slightly from 4.3% to 4.4% (see chart below). The Fed’s preferred inflation measure PCE decreased from 2.9% in December to 2.8% in January.

With inflation still too high and the Fed uncertain about the labour market and the impact of the war, it kept rates on hold in March. 

“But the U.S. economy is doing pretty well. It’s just, we don’t know what the effects of this [the war] will be, and really no one does.” Jerome Powell, Federal Reserve, chairperson, press conference 18 March 2026.

Source: Bloomberg

China

As expected, China lowered its annual growth target for 2026, from 5% in 2023, 2024, and 2025 to a 4.5% to 5% range for 2026. A flexible range rather than the usual fixed number suggests leadership does not want to admit how far growth could drop in 2026.

Despite the lower growth target, the Lunar New Year holiday lifted the national mood in February. Retail spending, industrial output, and urban investment all increased in January and February (see first chart below). Further, March Manufacturing PMI returned to growth (see second chart below).

Source: CNBC

Source: CNBC

However, as the Lunar New Year glow fades and the impact of the war on Chinese energy and exports takes hold, good news may be at a premium going forward. At least China is much less reliant on oil than it used to be. China may also benefit from its close relationship with Iran.

EU

The ECB kept interest rates on hold again in March.

“Inflation has been at around the 2% target, longer-term inflation expectations are well anchored, and the economy has shown resilience over recent quarters.”

The well-anchored inflation expectations are key here as it will give the ECB some wiggle room to resist any inflationary pressures from the rising price of oil and LNG from the Iran war. Early estimates of March inflation shows a quick increase in energy prices from -3.1% in February to 4.9% in March (see chart below).

The ECB’s wiggle room is critical, as the ECB may need to stimulate the euro area economy soon. Where the ECB says it sees resilience, I see concerns. GDP increased 1.2% over the year in the December quarter, down from 1.4% in the September quarter. Industrial production also continued its decrease from December and was down 1.6% in January (see chart below). This included a 6.4% decrease in non-durable good production on an annual basis.

Japan

Japan imports nearly all of its natural gas and oil products, and so their higher prices will put pressure on inflation and economic growth. However, supply should not be a problem. Japan has over 250 days’ worth of oil reserves and recently released 45 days’ worth to local refineries. 

The BoJ kept rates on hold at its meeting in March, but the minutes show a Board concerned about the impact of the Iran war on inflation and inclined to raise rates.

Inflation fell in February, from 2% in January to 1.6%, food excluded (see chart below). But this was driven by a government energy subsidy implemented in January, and its impact on inflation was largely expected. From March, the war should push inflation up.  

December-quarter GDP was revised up from 0.2% to 1.3% on an annual basis.

UK

The BoE kept rates on hold in March with a unanimous vote. Inflation looks to be back under control (albeit still too high) and the Board was inclined to cut rates, but the Iran war has complicated matters.

“Monetary policy cannot influence global energy prices but aims to ensure that the economic adjustment to them occurs in a way that achieves the 2% target sustainably.” Bank of England, Monetary Policy Summary, March 2026.

New Zealand

GDP increased from -0.6% in the September quarter to 0.2% in the December quarter on an annual basis (see chart below). The 0.2% quarterly increase was less than the expected 0.5%. The RBNZ meets in April.

Source: NZ Stat

What this means for Australian Private Debt

The Iran war has shaken up the global economy and is being felt from fuel pumps to farmers’ fields. Central banks everywhere are waiting to see how long the war will last. Higher oil and LNG prices will push up inflation and weigh on economic growth. Lower fertiliser exports from the Gulf will also push up inflation but could have a dire impact on global food supplies. The Australian government is working hard to ensure Australia’s fuel supplies while the RBA is committed to moderating the war’s inflationary impact.