Economic Update April 2026
In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.
Key points:
- US-Iran war destabilises markets but not as much as expected
- The US Fed kept its interest rate on hold in March
- RBA raised interest rates again
- Higher fuel prices likely to be inflationary in the short term at least
We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.
The Big Picture
At the end of February, Brent crude oil was $US72.48 per barrel and the Iran war had not yet begun. Fast forward to the end of March and that oil price had risen to $US112.78.
The Straits of Hormuz in the Persian Gulf between Iran, Saudi Arabia and the United Arab Emirates were essentially blocked. About 20% of oil world exports typically went through those straits. That flow translated into about 20 million barrels per day.
A short-term solution was for Trump to release a stock of 172m barrels from US reserves while the International Energy Agency (IEA) released 440m from its reserves. Trump then allowed Russia to sell any oil it already had at sea – amounting to about 124m barrels. The IEA only released 182m barrels when Russia invaded Ukraine in 2022.
But it is not only oil exports that have been disrupted. Food and fertilizer exports have been massively affected. If the war is not resolved swiftly, there will be a serious impact on global growth and inflation.
Importantly, a very senior member of the US administration resigned over the war. He argued that there was neither a proper reason, nor a plan to go ahead. He stated that the war was largely at the behest of Israel.
The US and Israel attacked Tehran and Israel also fired at Beirut and southern Lebanon. Israel has since stated it wants to control the southern 10% of Lebanon to increase the buffer between its northern region and attacks from the Iranian sponsored Hezbollah forces based in southern Lebanon.
Despite requests from President Trump, member countries of the North Atlantic Treaty Organisation (NATO) have declined the invitation from the US to help restore shipping traffic through the Straits of Hormuz on the basis that NATO forces are for the defence of Europe not as an antagonist in other wars.
It is worth noting that, when the US invaded Kuwait on the ground in February 1991, only 40% of the troops were American. Trump is in the process of mobilising a large contingent of marines and paratroopers in the Gulf. To date, Trump’s intentions or exit plan are not apparent but the obvious required outcome is a reopening of the Straits of Hormuz to ‘all’ commercial seaborne traffic.
The Yemeni Houthis – ‘friends of Iran’ – have talked of joining the conflict on a different seaway – around the Arabian Peninsula and along the Red Sea. The Houthis have reportedly already fired two missiles at Israel, but both were intercepted.
One of the major problems with following the progress of the war and its possible resolution is frequency and clarity of positional changes on the part of the combatants.
Trump is not the sort of man to back down, and neither are Iran’s Revolutionary Guard Corps who appear to be in effective control of Iran’s governing regime. While it is apparent that all are seeking an ‘off ramp’ to hostilities and a ceasefire as a prelude to a lasting peace, the position of both sides is intractable at this point.
Former US President, George Bush Snr, once said [paraphrased], any fool can invade another country – it’s getting out that’s difficult.
Closer to home, Australia’s fuel position has also been affected. Prices at the pump have gone up sharply and, reportedly, we only have just under a month of fuel stockpiled. Six large oil tankers headed to Australia from Southeast Asia were cancelled at the end of March. Albanese approached the US for supplies, and they agreed to some exports.
Given the enormity of the restriction to oil and fertilizer (which is highly dependent on natural gas to produce nitrogen-based fertilizer such as urea), the tragedy of human suffering and infrastructure destruction, it surprises us that the markets have been as calm as they have. The Dow is off only just over 10% from its peak and many were talking about overvaluation before the war began so a pullback of this magnitude was not unexpected.
To us, the spillover of the Iran war into the conduct of monetary policy here and in the US is an added problem. The US Federal Reserve (Fed) kept its interest rate on hold in March while the RBA increased its overnight cash rate by 0.25% for the second successive meeting. The two countries face the same global issues, and their growth and jobs data have a lot in common. The two central banks can’t both be right.
It is of critical importance to recall what US Fed chair Jerome Powell said about oil price shocks after the Federal Open Markets Committee (FOMC) conference. A journalist asked a question about ‘whether he would look through’ an oil price spike (meaning he would ignore it because it would be expected to go away quickly). Powell responded that he would ‘look through’ one (using the same expression) and basically not hike interest rates unless inflation expectations by households and businesses rose as a result. He backed that up at an address he gave at the end of March at Harvard.
Secondly, Powell stressed that the US is ‘nowhere near stagflation’ – as we have been writing for some time. Stagflation was a phenomenon in the 1970s and 80s when inflation was in double figures and the unemployment rate was not far behind. Today’s numbers are far too small to engender that concern.
The FOMC also released its quarterly economic update. The vote had been 11-1 for a ‘hold’ in March – Stephen Miran, Trump’s recent appointment, dissented with a vote for an interest rate cut). Of the 19 people in the FOMC, of which only 12 vote on the interest rate decision in a prescribed rotation, 7 expressed an opinion of ‘no change’ over the rest of the year. The other 12 favoured one or more interest rate cuts by the end of 2026.
The new forecasts for growth, unemployment rate and inflation were not that different from the December quarter’s forecasts. However, the day after the FOMC media conference, the market, reported through the CME Fedwatch tool, started pricing interest rate increases for this year!
The mood in the RBA press conference was noticeably different from that in the Fed’s less than 48 hours before.
The RBA raised its interest rate – as the market had priced in. RBA Governor, Michele Bullock, said ‘they wanted to get ahead of oil price inflation’ – the exact opposite of Powell! She also expressed a view that the jobs market is holding up – a view that is open to conjecture. Full-time annual jobs growth is running well behind what is generally regarded as an appropriate rate for population growth. Gross Domestic Product (GDP) did come in at a reasonable 2.6% over the year but that is being fuelled by both public and private growth. The May budget will have a lot of ‘heavy lifting’ to do.
Indeed, the budget now places the government’s views on oil stockpiles, and fossil fuels more generally, at centre stage. While it might be laudable to have the government’s long-term goals in fuel production and consumption, the transition to that long-run should be flexible enough to navigate the problems we have been facing – including electricity prices – and any others that might arise.
Bullock also fixated on a 2.5% CPI inflation target – which is not the target stated in the RBA website, now or previously. The recent headline CPI rate was 3.7% (down from 3.8% the month before). We note that this estimate is well above what the measure should have been because of the way in which the ABS concocted the income subsidy provided by the governments into a price adjustment. Electricity price inflation for the year was published by the ABS as a staggering 37.0% while the same measure without the rebate impact was only 4.9%, again according to the ABS.
Housing inflation was the highest among the largest sectors of the index at 7.2%. Housing includes rent and electricity consumption. Neither associated rates of inflation would be likely to go down because the RBA interest rate was increased. We assessed a CPI-less-Housing inflation level to be about 2.8% and well within the official target range of 2% to 3%. Our inflation ‘problem’ is centred well within the Housing component.
There is no reason we can see why the RBA should have raised rates twice (or at all) while all our peers were staying ‘on hold’ including the Banks of Canada and England, together with the Fed, the Swiss National Bank and the European Central Bank, amongst others. [The Bank of Japan has been on a different strategy from the rest of the world for decades owing to a previous deflationary problem.]
A further problem we have with the interpretation of micro-economic data in Australia and the US is the reliance on possibly out-dated views on what constitutes low unemployment. The world economies have changed massively since the pandemic. Working-from-home, growth of delivery and car services in the gig economy, and, increasing support to help people back into the workforce after prolonged absences have all, in our opinion, made it easier for people to get work and, hence, increased what we should consider to be full-employment.
It is extremely difficult to foresee what will happen to markets in the very short term. Markets can and have moved sharply on just one short statement by Trump – irrespective of its substance.
Pakistan, now with the assistance of China, has put together a peace plan for cessation of hostilities in the Iran-US war. If that were to come off, markets obviously would react very favourably. The S&P 500 rose 185 points, or 2.9%, just in the one session on the news that the President of Iran said he was open to resolving the conflict.
The underlying company earnings forecasts in Australia and the US are still very strong, and they have not been revised downwards during the war. Indeed, there have been some modest improvements. Despite the Iran war and the protentional economic disruption it could cause there is still an undercurrent of an upward trajectory in equities markets.
What is a little more worrying than equities behaviour is the US bond market. Just under a year ago, the US 10-year Treasury yield was just under 4.5% and the 30 year was at 5.0%. Trump and the Treasury acted swiftly and the yields declined quickly. The 10 and 30-year yields again got back down to be very close to being back at those interim levels of around 4% and 4.5% respectively. At the start of hostilities yields began rising as risks rose back toward the recent highs before talks of a resolution to hostilities saw yields pull back late in March.
Asset Classes
Australian Equities
Australian equities (ASX 200) wiped out the strong February gains and more. In March, the index fell 7.8% making the year-to-date performance 2.7%.
Given the oil crisis, it is not surprising that the Energy sector was the standout performer of the 11 sectors with a capital gain of +18.5%. The defensive sectors of Staples, Telco’s and Utilities each eked out gains. The other sectors were all in the red with Materials being the worst at 14.1%.
International Equities
For so long, the so-called Magnificent 7 (mag 7) stocks dominated the upward momentum in the S&P 500. In the first quarter of this year, several of those stocks posted losses of around 30% and none were positive. TV pundits are now referring to the ‘mag 7’ as the ’miserable 7’. However, a lot of that price cutting appears to be a rebalancing from the mag 7 into other stocks in the 500. That rebalancing is healthy for the long-run prospects of the market.
The S&P 500 performed strongly on the last day of the month owing to a possible Iran-US war resolution, but it has still lost 4.6% on the year-to-date.
The London FTSE and the Tokyo Nikkei each made gains on the month. The German DAX and the Shanghai Composite each lost ground in March.
Bonds and Interest Dates
The RBA has stepped out of cycle with the rest of the world on monetary policy. All its peers have been ‘on hold’ (except for Japan which is coming to equilibrium from a different direction).
The RBA has now increased its interest rate twice (totalling 50 bps) and looks set to raise them more. We believe the RBA Board is misguided in its interpretation of the economy and the appropriate responses a central bank should make in circumstances such as these.
The Fed, on the other hand, is making it quite clear that it is in a position to act if necessary. It plans to ‘look through’ oil price inflation resulting from the Iran war. It will do that for two reasons. First, oil prices will not go down if the Fed raises interest rates. Global oil prices are set by markets and not central banks. Second, the oil price spike will be short-lived if the war is short-lived. Powell stated clearly that the FOMC will act if the price shock flows through to increasing inflation expectations; so far, they haven’t.
Other Assets
Oil prices, Brent (+55.6%) and West Texas Intermediate (WTI) (+53.5%) were up very strongly in March.
The price of gold fell 12.0% over March. Some speculated that the fall might be due to some central banks selling and investors wanting to take some profits to help support other investments.
The price of iron ore rose +7.6% and copper fell 8.7% in March.
The Australian dollar depreciated by 4.9% against the US greenback over March ending the month at $US 0.6845. Our dollar traded for $US 0.6693 at the start of 2026.
Regional Review
Australia
The ABS reported that +48,900 jobs had been created in February but that 30,500 full-time positions had been lost. That is a weak jobs result.
The balance of +79,400 jobs were part-time additions. When we look past the one-month data points and focus on growth over the whole year, we note that full-time employment only rose by +1.2% which is not enough to keep pace with population growth. Total employment growth was +1.8%. The latest unemployment rate rose to 4.3% from 4.1% the month before.
GDP growth for the December quarter, 2025 was +0.8% and +2.6% for the year. While these numbers are good, the strength of the economy is being carried along by public (government) expenditures. Public and private contributions to GDP growth in the last quarter were equal at +0.3%.
The household savings ratio climbed to 6.9% from 6.1%. The new data point is above where it needs to be to keep savings creation at a ‘normal’ long-run level. That households are saving more than this might be signalling that they are expecting the economy to worsen. They might be ‘saving for a rainy day’.
The government was struggling to frame a May budget that would address the productivity problem and the cost-of-living crisis. The Iran-US war has made that task much more difficult.
The government’s fuel policy has been seen to be inadequate. Fuel prices have been climbing rapidly, and supplies are under pressure. At the end of March, it was announced that fuel exercise tax will be cut by 50% for three months from April 1st. That will feed into CPI calculations as a price cut, but that cut is quite different from the flat subsidy in electricity rebates. Any changes in inflation readings by the ABS from taxes and subsidies should not be viewed in terms of the effectiveness of monetary policy.
CPI inflation data are still contaminated by the ABS attempt to correct electricity prices used in the index for a flat rebate – which is more correctly thought of as an income effect. Even so, the headline rate of inflation fell to 3.7% from 3.8% in the latest data.
China
China published a reasonably strong set of economic data in March.
The official Manufacturing PMI (Purchasing Managers’ Index) was up to 50.4 from 49.3 and 49.0 in the two prior months (above 50 is a positive result).
Retail sales grew by +2.8% for the combined January and February months over the same period in the previous year. Industrial output grew by +6.3% over the year when +5.0% had been expected.
China’s CPI inflation also rose to 1.8% from 1.3%. China had been flirting with deflation which can have a very negative impact on economic growth. Inputs inflation (measured by the Producer Price Index (PPI) was 0.9% when 1.9% had been expected.
Exports grew by +21.8% for January and February from the year before. The comparable result for the year to December was +6.6%.
There have been comments made that China may have been ‘dumping’ exports at prices below what they would normally charge to compensate for the loss of opportunities in the US owing to the tariff war.
China stated that it is aiming to bring economic growth in for 2026 into the range of 4.5% to 5%. While it is always difficult to read the true picture of China’s macroeconomic situation, these data suggest China has navigated the first round of tariffs in the ‘Reciprocal Tariff’ policy of April 2nd, 2025. That policy has since been quashed by the US Supreme Court in February. The jury is still out on Trump’s reconfigured tariff policy.
US
The status of the tariff policy got swept aside with the war in Iran. Trump had said he was placing a 10% global tariff on imports, but little has been reported on where that policy is up to. Many actors flagged that they would challenge the new tariffs in court.
Since tariff revenue looks to be well below what Trump had initially forecast, it appears that the US deficit and debt will have to blow out or, some of the expenditures curtailed.
The revision to GDP growth for the December quarter, 2025 reduced the provisional reading of +1.4% to +0.7%. However, that translated into an annual GDP growth reading of +2.0%. While that is a reasonable number in isolation, Biden, and now Trump have been using strong fiscal stimulus to keep the economy running at this rate. If continued, this policy will continue to see US debt rise to levels well above those at which most feel comfortable.
US jobs growth came in at 92,000 for February but there are two extenuating factors. There was a short-lived strike that took 31,000 people out of the workforce just at the time the survey was conducted. And there were some particularly bad weather events that would have temporarily affected jobs. The December jobs number was revised downwards from +48,000 to 17,000 and there was a small adjustment to January’s number. The unemployment rate was 4.4% which is line with the average of the previous three months.
US Consumer Price Index (CPI) inflation was 2.4%, as expected, for the year to February. When shelter inflation is subtracted from that number, the official CPI-less-shelter inflation reading came in at 2.1%. There is good reason to think of shelter inflation differently from the rest of the ‘basket of goods and services.’ This reading also supports the notion that tariffs did not unduly affect domestic inflation.
The University of Michigan consumer sentiment index fell to 54.1 from 56.6. The comparable reading was well above 70 in the run up to the November 2024 presidential election. 54.1 is in the region observed during major crises such as the Global Financial Crisis (GFC) and the late 1970s oil crises. This index has only been below 50 for 13 months of the 579 months since inception.
With the confusion over wars, tariffs and immigration, US consumers are becoming increasingly wary. Uncertain consumers are expected to spend less now in preference to saving a little extra for the future. The US is not in recession, but things could turn quickly if the Iran-US war is not resolved.
There is an April 7h deadline for Iran to respond to US requests. This deadline has been shifted three times and may be shifted again. Iran rejected Trump’s 15-point plan, and the US rejected Iran’s 5-point plan. A key sticking point is Iran giving up all enriched uranium.
Europe
Europe is standing firm in its resolve not to be drawn into the Iran war. However, it might not be immune from any spillover from China’s purported dumping of exports.
The European Central Bank (ECB) kept interest rates ‘on hold’ in March. European Union (EU) inflation was reported to be 2.5% from 1.9% in the previous month. Energy costs were attributed to the rise above the target rate of 2%.
Rest of the World
Japan’s economy expanded by 4.2% when only 1.6% had been expected.
There are numerous ramifications to come out of the Iran war. Since the moves and counter moves are changing rapidly, it is not as relevant to focus on the actions and reactions of the various actors. Rather, we draw a tentative conclusion that Pakistan’s recent entry into a peace-making solution role could help a swift return to order in markets. However, Trump’s assembly of substantial numbers of marines and paratroopers around the Gulf has the potential to tip the balance the other way.
On the other side of the conflict, Iran’s ally, Yemen’s Houthis, have initiated minor attacks on Israel. They also have the potential to disrupt shipping in the Red Sea and the coastline between that sea and the Persian Gulf.
We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.
