Economy to take a breather after recent surge in Australia

Australia’s economy has strengthened in recent months. Alongside a rise in consumer confidence, household spending momentum has continued in July and August after a strong Q2.

• At the same time, potential buyers are flocking back to the property market, pushing prices higher as interest rates come down. But weaker employment growth and still-struggling business investment highlight the tensions in the economy. These competing dynamics essentially net out, leaving our 2025 and 2026 growth forecasts largely unchanged from September. We forecast growth of 2.1% in 2026 following this year’s expected 1.7% expansion.

• Some – although certainly not all – of the recent spending splurge has come from one-off factors such as back-to-back public holidays and extra-generous sales. As those temporary boosts fade, unemployment edges higher and real wage gains moderate, we expect consumers to tighten their belts again. Business investment is also likely to remain in hiding. Cost pressures, falling commodity prices and tariff-related uncertainty are forcing firms to pause or scale back expansion plans. Outside utilities and data-centre projects, the investment pipeline has thinned markedly. Meanwhile, the dwelling construction pipeline also remains modest, despite some recent improvement.

• Inflation will keep the RBA on its toes. An uptick was always expected as state energy subsidies unwound. But the magnitude of the jump caught most (including us) off guard. At the same time, stronger household spending (owing to temporary factors or not) is making the RBA nervous. In turn, we’ve lifted our near-term inflation outlook a smidge. Still, the trajectory will be downward, giving the RBA the space it needs to cut in November and Q1 2026.