Shallow microtidal lagoons like the Peel-Harvey Estuary system are particularly sensitive to hydrologic change due to restricted exchange with the ocean. The drying climate trend in the south-west Australian region has been widely reported, though the interaction of the trend in river flow and changes to estuarine hydrodynamics brought about by the Dawesville Cut on estuarine conditions has been complex, and it is necessary to establish implications of these changes for future management of the estuary. This study developed a 3D finite-volume hydrodynamic model to assess changes in estuary hydrodynamics, considering how attributes such as water retention time, salinity and stratification have responded to the drying climate trend the artificial channel over the period from 1970 to 2016, and how they will evolve under current climate projections. Our results show that both have significantly changed the hydrology by comparable magnitudes, and also highlight the complexity of their interacting impacts. Firstly, the artificial channel successfully improved estuary flushing by reducing average water ages by 20–110 days, whilst in contrast the reduced inflow from the catchment (more than 50% since 1970) has had the gradual opposite effect on the water ages, and during the wet season this has almost counteracted the reduction brought about by the channel. Secondly, the drying climate has caused an increase in the salinity by 10–30 psu; whilst the artificial channel increased the salinity during the wet season, it has reduced the likelihood of hypersalinity (>40 psu) during the dry season in the western areas. The impacts also varied spatially. The southern estuary, which has limited connection with ocean through the natural channel, is shown to be the most sensitive to climate change and the opening of the artificial channel. The projected future drying climate is shown to slightly increase the retention time and salinity in the lagoon, and increase the hypersalinity risk in the rivers. The significance of these changes for nutrient retention and estuary ecology are discussed, highlighting the importance of these factors when setting up monitoring programs, environmental flow strategies and nutrient load reduction targets.