Australia could plunge headfirst into a recession within months with unemployment poised to surge along with inflation, according to startling modelling.
Deloitte Access Economics warned of two nightmare scenarios as the war in the Middle East continues.
The first mapped out what would happen if the conflict was protracted over a long period, sending oil prices to $US175 a barrel.
The unemployment rate could rise from 4.3 per cent to 6.8, with more than one million Australians out of work, while inflation would soar from 3.7 per cent to 7.5, as the country entered a deep recession.
The second scenario looked at what would happen if oil reached $US150 a barrel, which several analysts have warned is a likely scenario if the Strait of Hormuz remains closed over the next few weeks.
Deloitte forecasted that Australia would fall into recession, inflation would hit 6.6 per cent by the end of the year, and that more than 950,000 workers would be unemployed.
Deloitte Access Economics lead partner Pradeep Philip said if the conflict escalated or became more protracted, the economy would be shrinking by the September quarter.
'No one can predict the severity and duration of [the economic shock],' he told the Australian Financial Review.
Australia could plunge headfirst into a recession within months with unemployment poised to surge along with inflation, according to startling modelling (stock image)
Deloitte Access Economics warned of two nightmare scenarios as the war in the Middle East continues (pictured, an Israeli airstrike in southern Lebanon)
'If you look at the higher oil price scenarios where growth is hit and underlying prices go up, that is in stagflation territory.'
Those fears intensified after weekend peace talks between the Trump administration and Iran collapsed, heightening concerns oil prices could remain elevated for years as Iran weaponises the critical chokepoint.
In a dramatic escalation, Trump has ordered US Navy warships into the Strait of Hormuz to effectively blockade one of the world's most critical oil chokepoints and choking off global energy supplies.
Deloitte Access Economics Business Outlook report author David Rumbens said the Australian economy is 'running on empty' in the face of higher fuel prices and a domestic economy struggling to contain inflation.
'In Australia, the sticker shock of higher petrol prices has been jarring, but the pain doesn't stop there,' he said.
'Fuel is a notable input cost across much of the economy, so there will be a significant filtering through of price pain into other sectors as 2026 goes on.
'Home-grown inflation was already a problem when that conflict got underway, moving quickly from 'nearly under control' to 'we have another problem' in late 2025.
'Meanwhile, the RBA has opened the year with back-to-back rate hikes and is threatening to go the hat-trick.'
The first scenario mapped out what would happen if the conflict was protracted over a long period, sending oil prices to $US175 a barrel (stock image)
Most economists expect the RBA to lift rates to 4.35 per cent when it meets in May while Westpac expects the Reserve Bank of Australia to hike it in June and August as well.
Chief economist Luci Ellis said the economy 'does not care about your feelings' and the outlook for Australia is rough.
'The near-term outlook for Australia is tough: higher inflation, with consumers again squeezed by some combination of higher interest rates, lower income growth and higher unemployment,' she said.
Fears of a recession come as Treasurer Jim Chalmers is set to hand down his fifth 'full of ambition' budget on May 12.
There are reports Treasury is examining changes to the capital gains tax discount, negative gearing, trusts and tax exemptions for electric vehicles as well as more support for the economic fallout of the war.
'We know the effects of this crisis will be felt for a long time and as I've said, we are considering that as we prepare the budget,' he said.
AMP chief economist Shane Oliver said if the war resumes and the Strait remains effectively closed then the boost to inflation will be bigger and longer and there would be a high risk of recession.
He added if the Strait quickly reopens then Australia should be able to make it through without fuel rationing, but if not then rationing is likely to be necessary from late May.
Fears of a recession come as Treasurer Jim Chalmers (pictured) is set to hand down his fifth 'full of ambition' budget on May 12
'While Trump has military superiority on his side, Iran has weaponised the Strait of Hormuz to control global oil supplies and despite Trump's assertion that 'Iranians don't seem to realise they have no cards' this is a really big card to have,' Mr Oliver said.
'Trump maybe, with Israel's suggestion, thought he would be fighting another Venezuela, but it's turned out to be more like Vietnam - the US had overwhelming military might, but North Vietnam and the Vietcong still won by 1975 using so-called "asymmetric warfare".'