David Goodman, Aware Super's Lead Economist, shares what our team is seeing across global and Australian markets at the end of the financial year — and what it means for your super.
The oil shock hit hard but AI softened the blow: The closure of the Strait of Hormuz sent oil prices from $70 to near $120. A boom in AI-driven investment has cushioned the economic impact, keeping growth positive despite the shock.
Inflation is the defining challenge of 2026: Higher energy costs have pushed Australian inflation to 4.6% and US inflation above 4%. The RBA has raised rates three times this year and further rate rises remain on the table.
Central banks are caught between two risks: Slowing growth would normally mean rate cuts, but with inflation still high, that's not an option. This tension has contributed to market volatility this year.
A peace deal would help: A US-Iran truce has emerged, including a ceasefire and reopening of the Strait of Hormuz, but it remains fragile and has already been tested. If it holds it would normalise oil supply, ease inflation, give central banks room to act, and provide a meaningful boost to markets.
Your returns remain positive: Returns from all our investment options were positive this year, keeping your super on track. We’re also proud of our track record of strong long-term returns, which are most impactful for your final balance.
Geopolitical tension escalated in the Middle East and oil prices jumped sharply. Oil supply was curtailed when the Strait of Hormuz, the narrow shipping route through which around 20% of the world's oil supply passes, was effectively closed in February. This spike in oil prices seemed likely to trigger a sharp slowdown. So far, that slowdown has been more modest than feared, and the main reason is AI.
In the United States, a structural shift toward AI-driven infrastructure investment has cushioned the economy against weakening consumer demand. Business investment grew at an annualised pace of more than 10% in the first quarter. But consumer spending has softened as higher energy prices erode household purchasing power, and first-quarter GDP growth was below trend.
Australia tells a similar story. Headline GDP growth was soft in the first quarter but if we look through the temporary factors, there is genuine underlying strength in AI-related business investment and data centre construction.
The area we are watching most closely is the labour market. Unemployment has edged up to around 4.5% in Australia and 4.3% in the US. Both remain relatively contained, but the direction is softer, and we expect unemployment to drift gradually higher in both countries as we move into 2027.
If one theme has defined the global economy in the first half of 2026, it's inflation — and the primary driver has been energy.
In Australia, headline inflation reached 4.6% in the March quarter. The most recent reading showed a modest easing to 4.2%, but much of that improvement was driven by a temporary halving of the fuel excise. The RBA's preferred underlying measure actually ticked higher, and there are early signs that elevated energy costs are flowing through to freight-exposed categories like postal services and construction materials.
As a result, the RBA delivered three rate rises this year — in February, March and May — and further tightening remains on the table.
Globally, similar pressures are playing out. In the US, headline inflation has risen above 4%, the highest in three years. The Federal Reserve has shifted to a more hawkish stance, with nine members signalling a potential rate hike by end-2026.
The European Central Bank has already raised rates in response to the energy shock, and the Bank of Japan raised rates to 1.0% — the highest since 1995.
The important point at the moment, is that this inflation is largely supply-driven — caused by disrupted oil supply, not by strong demand. Supply-driven shocks, while painful, tend to pass. We expect Australian inflation to ease to around 2.5% by mid-2027, and US inflation to converge back toward 2% by 2028.
Central banks are caught between a rock and a hard place. When growth slows, central banks would normally cut interest rates. But when that slowdown is accompanied by rising inflation, as it is now, cutting rates isn't an option.
Central banks are caught between two competing risks: inflation that is still too high, and an economy that is losing momentum. That tension has contributed to the market volatility we've seen this year.
The risk we're watching most closely is a prolonged conflict keeping oil prices elevated while growth slows and unemployment rises — the definition of stagflation, and extremely difficult for central banks to address.
That said, there are real reasons for optimism. A US-Iran truce has emerged in recent weeks, and while the agreement remains fragile, if it holds and energy supply normalises, it would be a powerful positive catalyst — easing inflation, giving central banks room to move, and boosting market confidence.
Longer term, the structural tailwinds from AI investment remain meaningful, and we expect AI to support productivity growth over time.
Our central expectation is for growth to be soft but positive, inflation to ease through the second half of 2026 and into 2027, and interest rates to stay higher for longer before gradually coming down from 2027. In Australia, we expect one more rate rise — likely in August — before cuts begin in 2027 as inflation normalises.
It’s been a more challenging year globally. Geopolitical tensions, including ongoing conflict in the Middle East, combined with slowing economic growth and higher inflation, created periods of uncertainty and volatility during the year. We’ve also seen continued evolution and growth in AI technologies, and unemployment rates have generally remained low.
Against this backdrop, we’re pleased to have delivered positive returns across all our investment options for the year. More importantly, our long-term track record remains strong. Our High Growth option, where most members are invested, is among the top performers over 10 years.
While we can't predict what will happen in the future, we know that diversification, active management and a long-term focus are key to growing your super savings over time.
A well-diversified portfolio — spanning both public and private markets — helps manage risk through changing conditions and reduces the impact of any single market falling.
We are carefully monitoring developments in the Middle East, central bank policy and inflation. At the same time, we remain focused on the long-term structural themes — the energy transition, digitalisation and demographic change — that we expect to drive returns over time, regardless of near-term volatility.
