WEEKLY E-MAIL

13 April 2026

TIGHTENING INTO WEAKNESS: THE RISK OF POLICY ERROR IN 2026

By Ethan Hardeman

The beginning of 2026 has delivered an unusually difficult mix of shocks to the global and Australian economies. These include rising geopolitical risk in the Middle East, rapidly tightening financial conditions, and the accelerating impact of artificial intelligence (AI) on jobs and productivity. While most central banks have paused to assess the fallout, the Reserve Bank of Australia (RBA) has continued raising interest rates—a move that increases the risk of a policy mistake.

Historically, recessions are often triggered by oil price spikes, sharp declines in confidence, or abrupt financial tightening. Australia is now experiencing all three. Oil prices have surged amid conflict in Iran, consumer confidence has fallen to levels comparable to the COVID pandemic, and financial conditions are at their tightest in over a decade. Despite this, policy settings are becoming more restrictive, even as household cashflows weaken and economic momentum fades.

Source: RBA, ANZ, March 2026

A key concern is the RBA’s reliance on models that may underestimate the speed at which shocks affect behaviour. In particular, confidence shocks can drive abrupt spending pullbacks before they are visible in traditional data. Further, the RBA’s assessment of ‘neutral’ financial conditions is based on backward-looking indicators, which may understate the current pace of tightening.

Compounding these risks is AI. Unlike past technological shifts, AI directly competes with labour at rapidly declining costs. If deployed at scale, it could lift productivity while also increasing unemployment, suppressing wages, and adding to disinflationary pressures. A higher interest rate environment is poorly suited to managing this type of structural shock and may amplify the next downturn.

Inflation, while still elevated in headline terms, has been distorted by one-off factors such as tax increases and subsidy removals. Measures of underlying inflation show limited evidence of sustained excess demand. In this context, continued tightening appears increasingly misaligned with economic conditions.

With Australia more exposed than in past cycles and fewer policy buffers available, the risk of recession in 2026 is materially higher. The coming months will test whether policy can adjust in time—or whether tightening continues after the cycle has already turned.

Ethan Hardeman
Junior Paraplanner

If you have any questions or comments, please email me at ethan@gfmwealth.com.au

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