05.06.2026
Australia’s economy strengthened in 2025, but momentum is expected to slow in 2026 as higher fuel prices, tighter monetary policy and weaker household consumption weigh on activity. Growth should remain modest in 2026–2027, supported by business investment, dwelling construction, public infrastructure, services and commodity exports. Inflation is expected to rise temporarily in 2026 because of the global energy-price shock before easing back toward the Reserve Bank of Australia’s target range. The labour market remains resilient, although unemployment is expected to edge higher. Fiscal deficits are moderate by advanced-economy standards, while public debt remains manageable.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 2.0 | 1.9 | 1.3 |
| Inflation (%, yoy) | 3.6 | 4.0 | 2.4 |
| Unemployment rate (%) | 4.3 | 4.3 | 4.6 |
| Fiscal balance (% of GDP) | -2.4 | -2.0 | -1.7 |
| Gross public debt (% of GDP) | 49.8 | 50.4 | 50.7 |
| Current account balance (% of GDP) | -1.5 | -2.0 | -1.8 |
Growth slows as household consumption weakens
Australia’s real GDP growth reached about 2.0% in 2025, supported by population growth, public spending, services activity and a recovery in business investment. Growth remained positive, but household consumption was already under pressure from high living costs, mortgage payments and weak real disposable income growth.
Growth is projected to slow to 1.9% in 2026 and 1.3% in 2027. Higher fuel prices and tighter interest rates are expected to weigh on household spending, while net exports are likely to be a drag as imports rise and mining export growth moderates. Business investment, data-centre spending, renewables, defence and infrastructure projects should provide some offset.
Inflation rises temporarily in 2026
Inflation remained above the RBA’s target band in 2025 and is expected to rise further in 2026 due to higher fuel, freight and raw-material costs. The RBA expects headline inflation to peak in mid-2026 before easing as energy-price effects fade and capacity pressures soften.
Inflation is projected to fall back toward the 2%–3% target range in 2027. However, risks remain tilted upward. Higher global oil prices, second-round effects from energy costs, rent pressures and services inflation could keep inflation elevated for longer, requiring monetary policy to remain restrictive.
Labour market remains resilient but softens
Australia’s labour market remains strong by historical standards, with unemployment around 4.3% in 2025–2026. Employment growth continues to be supported by services, healthcare, education, construction and public-sector activity.
Unemployment is expected to rise gradually to around 4.6% in 2027 as slower growth reduces labour demand. Participation should remain high, supported by migration, female labour-force participation and older workers staying in employment for longer. Wage growth is expected to remain positive, but real wage gains will be limited if inflation remains elevated.
Fiscal position remains manageable
Australia’s fiscal position remains relatively strong compared with many advanced economies. The deficit is expected to narrow gradually from around 2.4% of GDP in 2025 to below 2% of GDP by 2027, supported by solid labour-market revenues and expenditure restraint.
Gross public debt is projected to remain around 50% of GDP, which is low compared with most advanced economies. However, fiscal pressures are rising from defence, health, aged care, disability support, housing, climate adaptation and interest costs. Maintaining medium-term fiscal discipline while supporting productivity-enhancing investment will remain important.
External position shifts further into deficit
Australia’s current account moved further into deficit in 2025–2026 as imports rose and export growth softened. Imports have been boosted by energy costs, capital goods, data-centre equipment, defence investment and infrastructure projects, while mining export growth is expected to moderate with slower Chinese demand for iron ore.
The current account deficit is expected to remain modest but persistent in 2026–2027. Australia’s position as a major exporter of LNG, coal, iron ore, gold and critical minerals provides resilience, but the external outlook remains exposed to commodity prices, Chinese demand, global energy markets and climate-related disruptions.
Overall outlook
Australia’s outlook remains stable, but growth is expected to slow in 2026–2027 as households face higher prices and borrowing costs. Inflation should gradually return toward target, while unemployment is likely to rise only modestly. Public debt remains manageable, but fiscal pressures are increasing. The main medium-term challenges are weak productivity growth, housing affordability, infrastructure bottlenecks, climate risks, and dependence on commodity demand from Asia.
Sources:
Reserve Bank of Australia, Statement on Monetary Policy, May 2026.
Australian Government, Budget 2026–27, Budget Paper No. 1: Statement 2, Economic Outlook.
Australian Government, Budget 2026–27, Budget Paper No. 1: Statement 3, Fiscal Strategy and Outlook.
International Monetary Fund, World Economic Outlook, April 2026.
Australian Bureau of Statistics, Australian National Accounts and Balance of Payments releases, 2025–2026.
