We expect Australia’s economy to be resilient in 2026, with steady but modest growth, even as global uncertainties and local productivity challenges persist.
Growth among Australia’s major trading partners, especially China, continues to be a key risk, but these effects should diminish starting in late 2026, in part because of strong policy support.
Changes in global trade patterns are likely to have only a mild disinflationary impact on Australia by slightly lowering import and export prices, with the overall effect on non-tradable inflation expected to be small.
Domestically, growth in Australian gross domestic product is projected to gradually strengthen, helped by a rebound in household incomes, improved dwelling investment, and continued public sector demand, although the lift in growth will be more gradual than previously anticipated.
Weaker productivity growth is expected to act as a constraint on the economy’s potential output and income gains, but this is not likely to alter the inflation outlook significantly.
Both the demand and the supply sides of the economy are adjusting downward at a similar pace. We expect annual growth to average 2% in 2026 and 2027.
Within the labor market, conditions are forecast to remain tight, with the unemployment rate anchored in the 4.3% to 4.5% range, participation high, and a modest easing in jobs growth.
Wage growth is anticipated to remain consistent at 3.2% with the current inflation target, helping to support household spending.
Inflation is expected to remain near the Reserve Bank of Australia’s target of 2% to 3%, averaging about 2.5% through 2026.
This outlook is supported by easing pressures on the price of goods and increased government subsidies, though risks persist from tradable inflation and currency volatility.
At the same time, the housing market is projected to gain momentum as investment and demand strengthen, although affordability constraints and supply shortages continue to pose challenges.
Still, some key risks remain. On the downside, if global trade tensions endure or intensify, Australia’s export demand could weaken further, or if households remain cautious, domestic recovery may be more subdued.
On the upside, the recovery in household spending could be stronger than forecast, or business sentiment might improve faster, lifting growth beyond expectations.
A sharp rebound in consumer spending could reignite price pressures, a concern at the center of policy deliberations at the tail end of 2025. In addition, if the labor market tightness persists longer than expected, inflation could remain above the midpoint of the target range for longer.
Monetary policy is likely to remain supportive if inflation is contained. Any further upside surprises in inflation or evidence of sustained demand mean policymakers at the Reserve Bank of Australia will be reluctant to cut rates until they see clear signs that inflation is tracking back toward its target range.
Our base case remains that the RBA will stay on hold until February 2026, but the risk profile has shifted toward a longer plateau rather than an early easing cycle.
The RBA has made it clear: It prefers a data-dependent approach over giving forward guidance. We pencil in just two more 25-basis-point cuts for 2026.
Meanwhile, fiscal policy will need to focus on lifting productivity, tackling housing challenges, and adapting to demographic and environmental pressures to ensure sustainable growth.
All told, Australia is poised for steady, moderate growth with a firm labor market and contained inflation, although ongoing uncertainty and weaker productivity highlight the importance of policy reforms to lift long-term potential.