Fragile Economic Outlook
Australia is bracing for its most prolonged period of sluggish economic growth since the recession of the early 1990s, according to a sobering new report from Deloitte Access Economics. The firm has formally downgraded its growth outlook, citing a confluence of persistent inflation, elevated interest rates, and the lingering economic aftershocks of conflict in the Middle East.
Deloitte now projects the economy will expand by 2.2 per cent in the 2026 financial year, before slowing to 1.3 per cent in FY27 and 1.9 per cent in FY28. These figures represent a significant downward revision from previous estimates of 2.4 per cent, 1.9 per cent, and two per cent, respectively.
Structural Vulnerabilities
Stephen Smith, a partner at Deloitte Access Economics, described the current economic state as one forced to “limp along.” Mr. Smith noted that while the economy continues to expand, the outlook has become increasingly fragile. “Inflation has reaccelerated, interest rates have moved higher, and the oil price shock triggered by conflict in the Middle East is not yet fully resolved,” he said.
The report highlights that structural issues, including stagnant productivity and insufficient long-term investment in housing, energy, and infrastructure, have left the economy ill-equipped to handle current pressures. Productivity growth, measured against GDP, sat at just 0.3 per cent in the March quarter—a stark contrast to the 1.7 per cent average recorded between 2004 and 2016.
Inflation and Monetary Policy
The Reserve Bank of Australia (RBA) remains under intense scrutiny as it attempts to steer trimmed mean inflation—which reached 3.6 per cent in the year to May—back toward its two to three per cent target range. With Australia currently holding one of the highest inflation rates among advanced economies, experts are questioning the efficacy of the RBA’s recent policy decisions.
Warren Hogan, managing director of EQ Economics, stated that inflation has become “embedded” in the economy. He criticized the RBA’s decision to lower the cash rate during 2025 as a major policy error, suggesting that the central bank failed to act decisively enough compared to its international counterparts. As households continue to face significant cost-of-living challenges, the combination of sticky inflation and low productivity growth presents a complex hurdle for national policymakers in the coming years.