Australia “less well placed” to deal with potential stagflation: HSBC

Yasmine Raso

Senior Journalist

21 April 2026

New commentary from HSBC has suggested that the Australian economy is expected to face a “tough” several months, as the question of stagflation looms amid an already challenging and inflation-driven backdrop.

Chief Economist, Australia, NZ & Global Commodities, Paul Bloxham, singled out Australia as “less well placed” than other countries to cope with a potential ‘stagflationary’ shock given that inflation is already well above its target and the economy is already at “little or no spare capacity”.

“The sharp rise in fuel prices, due to the Middle East conflict, is expected to feed through to sharply higher inflation in coming months.

“It is also expected to weaken growth, partly by weighing heavily on household disposables incomes, but also by squeezing business profit margins.

“It is still early days to see this showing up in the key economic activity indicators (which are typically lagged), but it has already clearly driven a sharp negative shock to consumer and business confidence.

“There is a higher risk than in many other countries that the sharp fuel-related rise in inflation will more quickly end up in higher inflation expectations. One mechanism for this is the already tight jobs market.

“In a tight jobs market, there is a higher likelihood that worker’s will be able to successfully demand higher wage claims in the face of the inflation surge.

“An economy with little spare capacity may also be one where businesses have more pricing power than otherwise, also risking higher inflation expectations.

“In economies that have spare capacity before the shock arrives, there may be more time for the central bank to be patient.”

Bloxham noted that the Reserve Bank of Australia (RBA) is facing a particularly “tricky” road ahead, with its focus on returning inflation to target in a reasonable timeframe set to be complicated by headline CPI inflation “spiking higher in the short run, irrespective of what actions the RBA takes”.

He confirmed HSBC’s base case was for a 25-basis-point hike to come in May.

“However, beyond that point much will depend on how quickly and by how much the economy weakens,” he said.

“If the economy does clearly show signs of contracting, employment starts to fall and the unemployment rate quickly starts to rise, the RBA will have to be careful not to overtighten.

“Although significant monetary policy tightening would clearly get core inflation to fall more quickly, if it forces the unemployment rate to rise significantly, financial stability concerns would start to come to the fore too.

“Household debt levels are high, and significant job loss would start to test the ability of some households to service this debt. This would be quite different to the inflation surge and monetary tightening that occurred in 2022 and 2023, just after the pandemic, for two reasons.

“First, household saving rates were very high through the pandemic, which supported a surge in demand in 2022 and 2023. After two years of pandemic lockdowns consumers were ready to ramp up spending on services and did so.

“Second, the re-opening of the border after the pandemic saw a massive surge in inward migration – as many migrants who could not come during the pandemic arrived in 2023.

“As we pointed out at the time, this was a key reason why housing prices rose, rather than fell, even though interest rates were lifted by 425bp in 2022 and 2023.

“The current tightening phase will be very different – as household saving rates are not unusually high and inward migration is modest.”

Bloxham also urged policymakers to implement “targeted, timely and temporary” fiscal support that saves the RBA from having to continue further down its tightening cycle.

“If fiscal policy is loosened, with blanket ‘cost of living’ support measures, this is likely to add to the high inflation challenge,” he said.

“Recent cuts to fuel excise do exactly this – they support more spending by all households and lower the price of fuel when fuel is the product in short supply, preventing the price mechanism from working properly.

“The focus also ought to remain on supply-side reform. A key reason the Australian economy is in this spot, is that productivity growth has been dismal and this has left the ‘speed limit’ for the economy lower than in the past and well below what the RBA and Treasury had been assuming.

“Supply-side reform is clearly needed to lift Australia’s economic growth ‘speed limit’. In the face of a negative supply shock, policymakers should aim to do all they can to improve supply, while taking great care not to pump-prime demand.

“Australia faces a stagflationary shock, and we expect that outright stagflation is a rising risk. The aim for policymaker’s ought to be to keep it brief and optimal policy settings could help to make it so.”