Key insights from the week that was.
The first detailed look at the mindset of Australian consumers and businesses amidst the Middle East conflict proved sobering. Our Westpac-MI Consumer Sentiment Index posted its largest fall since COVID-19, down 12.5% to a deeply pessimistic reading of 80.1. The impact from the surge in fuel prices was acute, leading to a more pronounced deterioration in the sub-indexes tracking current conditions – namely ‘family finances vs a year ago’ (–16.7%) and ‘time to buy a major household item’ (–15.0%). There were also significant hits to the year-ahead outlook for family finances (–13.9%) and the economy (–12.4%), suggesting households are bracing for enduring pressure.
The tone of the March NAB business survey was no better, business confidence collapsing 29pts from a neutral reading in February. This came alongside a notable lift in purchase cost pressures, up 1.7ppts to a quarterly pace of 3.0%. That final producer prices lifted +0.4ppts emphasises the rapid pass-through of surging fuel costs, but also that businesses are currently absorbing most of the increase in costs via margins, impacting profitability. Note though, the readings for current trading conditions and employment were positive, enabling business conditions to hold around its long-run average. This suggests the underlying health of the economy can be maintained if risks subside quickly.
This week we also received the March Labour Force Survey. It showed the Australian labour market was in good health prior to the Middle East conflict and the RBA’s most recent rate hike. Employment growth continued to strengthen from its trough in March, from 1.0%yr to 1.5%yr on a three-month average basis, reflecting the economy’s momentum through the second half of 2025 and into 2026. The unemployment rate has also held at 4.3% over the past two months, a similar level to the second half of last year. It now looks increasingly like the 4.1% prints at the turn of the year were due to temporary weakness in participation, not a sustained re-tightening.
However, given the hit to business confidence and the expectation of further policy tightening, the Middle East conflict looks set to cast a long shadow over the labour market. We expect a combination of lower average hours worked and slower employment growth, seeing the unemployment rate lift to 5.0% in early 2027. Tracking industries most exposed to the fuel shock will provide an initial take on the scale of the impact. Manufacturing, construction, transport/logistics and travel/tourism are the sectors to watch.
Offshore, an abrupt end to the first round of in-person talks between the US and Iran and the US’ Navy’s subsequent blockade of Iranian ports and associated vessels was the main point of conversation for markets this week. The market’s take has been sanguine, the price of Brent oil retreating below US$100 and global equities rallying back to historic highs during the week. Comments made by both sides imply negotiations are ongoing and another round of in-person talks will occur before the two-week ceasefire ends in coming days. There is also the option to extend the ceasefire, if necessary.
Effectively cut off from global shipping, Iran’s need for a deal is clear. But arguably this is also the case for the US economy, University of Michigan consumer sentiment falling to a record low this week, 43% below the average of the survey since 1978. Price pressures are currently limited to first-order effects, headline CPI inflation printing at 0.9% against a core reading of just 0.2% in March; but, should the conflict persist, it is highly likely second-round effects will permeate through the US economy, materially increasing the likelihood of inflation holding well above target and term interest rates trending higher. FOMC members who spoke this week all showed confidence in the underlying health of the US economy but also concern over the potential for an lasting imbalance between growth and inflation.
In contrast, China’s economy showed strength this week, annual GDP growth accelerated from 4.5%yr in Q4 2025 to 5.0%yr in Q1, matching the full-year outcome for 2025. From the monthly partial data, China’s Q1 momentum was principally due to the strength of exporters and associated investment, both of which are likely to receive a lasting boost from increased demand for green technology given the Middle East’s impact on energy prices and supply. There is reason for guarded optimism over the outlook for property investment as well, the year-to-date decline having moderated from -17%ytd at December to -11%ytd in February and March. Still equivalent to circa 15% of GDP, an end to the sharp construction declines of recent years would provide a material boost to aggregate growth through 2026.
External demand and investment’s support for GDP masks the still-troubled state of consumer demand, however. Having surprised to the upside in February at 2.8%ytd, in March retail sales growth slowed once again to 2.4%ytd. While not a disastrous outcome by any means, it is less than half the average pace of the past five years post pandemic, a historically weak period for household demand growth. Policy makers have been clear in their intent to provide additional support to households but are yet to action plans. And, while equities have risen through the year, house prices continue to decline, weighing on wealth and sentiment. Without broadening the growth pulse, aggregate momentum will remain susceptible to slipping towards, or through, 4.0% in coming years, even with a significant benefit from global demand for green technology.
A full update of our expectations and assessment of risks for the global economy and markets will be made available today in the April edition of Market Outlook on Westpac IQ.
 and ‘time to buy a major household item’ (–15.0%). There were also significant hits to the year-ahead outlook for family finances (–13.9%) and the economy (–12.4%), suggesting households are bracing for enduring pressure.){kind=link}