Australia Year Ahead 2026: Resilient but Tested

The world economy is slowing but not stalling.

Advanced economies are growing at a modest pace, averaging 1.5 per cent, while global growth is expected to ease to 3.1 per cent in 2026 (IMF). 

Trade tensions that dominated headlines earlier in the year have started to calm, with countries moving toward more managed bilateral arrangements rather than outright tariff wars.

In the United States, fears of a full-blown trade conflict have eased. Tariffs that were briefly imposed on Chinese goods have mostly been rolled back or frozen, and exemptions have been extended into 2026. This has helped restore confidence after a volatile start to the year, when markets dropped sharply on tariff news. Growth in the US has slowed to about 1.5–2%, down from last year’s stronger pace, but inflation is settling near 3%, and investment in technology, especially AI, remains a bright spot.

China, on the other hand, continues to wrestle with a deep property market slump. Real estate investment fell nearly 15% this year, and home sales are down about 8%. Big developers have defaulted, and November sales dropped by more than a third compared to last year. Policymakers have responded with mortgage rate cuts and looser purchase restrictions in major cities, but recovery looks fragile. Interestingly, while property struggles, capital is flowing into technology and AI sectors, signalling a shift in growth drivers.

For Australia, the picture is relatively upbeat - at least for now. The ASX has delivered strong returns this year, with valuations running high. Price-to-earnings ratios are well above historical averages, reflecting optimism around technology and AI themes. Credit spreads remain stable, and the Reserve Bank of Australia’s (RBA) rate cuts earlier in the year have supported sentiment. However, these rich valuations come with risk: if global trade tensions flare up again or China’s slowdown deepens, the current optimism could fade quickly.

In short, the global economy is walking a fine line. The US looks steady, China remains a source of concern, and Australia is riding a wave of confidence fuelled by tech enthusiasm. But beneath the surface, vulnerabilities remain, making 2026 a year to watch closely.
 

Read RSM’s global outlook here.

Australia’s productivity performance has essentially flat lined over the past decade, with recent gains only just clawing back the sharp fall seen in 2022–23, and labour productivity now back around pre pandemic levels rather than clearly above them. 

This is occurring in an economy where growth is increasingly driven by services, which tend to have lower measurable productivity growth than capital intensive sectors unless there is strong adoption of technology, innovation and new business models.

 Where productivity stands now 

ABS data show that in 2023‑24 market‑sector labour productivity rose about 1.1% after a record 3.5% fall in 2022‑23, leaving the cycle as a whole weak by historical standards. Multifactor productivity (MFP) for the market sector increased only 0.1% in 2023‑24, implying that most output growth came from adding more labour and capital rather than using them more efficiently. ​

The Productivity Commission’s latest bulletin notes that labour productivity was growing at only about 0.2–0.3% over the year to mid‑2025, well below long‑run averages and consistent with a “low‑productivity” expansion. The ABS primer on labour productivity highlights that the level of labour productivity in mid‑2025 was roughly back to its pre‑COVID level, underscoring a lost half‑decade in per‑worker output.

 A services-heavy growth model 

In Australia, services industries such as health care, financial and insurance services, public administration, and transport have been the main drivers of GDP growth in 2024‑25. This reinforces Australia’s position as a services‑dominated economy, with much of value added and employment concentrated in sectors where productivity gains are incremental rather than transformative without major technology or organisational change.

Many of these activities are labour‑intensive and involve complex, face‑to‑face or customised tasks, which are harder to standardise and automate than large‑scale manufacturing or resource extraction. As a result, measured productivity growth can be modest even when service quality improves, unless firms systematically embed digital tools, data analytics and process redesign into day‑to‑day operations.

 Why this creates a structural challenge 

Australia historically relied on mining and capital‑deepening in goods sectors to drive productivity, but the contribution from these sources has become more volatile and, in some years, weaker. With services now leading growth, low investment in advanced manufacturing, technology creation and intangible capital risks locking in a model where GDP rises mainly by adding more people and hours rather than lifting output per hour. ​

This matters for living standards because sustained real wage growth ultimately depends on productivity gains; with productivity barely rising, there is less scope for broad‑based income growth without eroding competitiveness or profitability. It also constrains fiscal capacity, as a slower‑growing tax base must fund rising demands for health, aged care and other public services in an ageing society.

 Where manufacturing and technology fit in 

Key sectors achieving stronger MFP growth include parts of agriculture and some tradable industries where innovation, capital‑intensity and scale are higher. Expanding advanced manufacturing and technology‑rich activities such as medical devices, clean‑energy equipment, specialised machinery, and software and digital services exports, offers a way to lift the economy’s overall productivity frontier rather than only eking out marginal efficiency in existing service models. ​

For a services‑based economy, the key is not to reverse tertiarisation but to embed more creation, engineering and digital capability inside both goods‑producing and service industries. That means higher investment in R&D, data infrastructure, automation and skills, along with policy settings that encourage firm growth and diffusion of best practice so that productivity improvements in leading firms spread across the wider business population. 

Sources: NAB business surveys, RBA business liaison, RSM client surveys

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 in Australia’s major trading partners, especially China continues to be a key risk but these effects should diminish from late 2026 in part due to strong policy support.

Broadly, 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, Australian GDP growth 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 future income gains, but this is not likely to alter the inflation outlook significantly, as both demand and the supply side of the economy are adjusting downward at a similar pace. We expect annual growth to average 2.0 per cent in 2026 and 2027.

Within the labour market, conditions are forecast to remain tight, with the unemployment rate anchored in the 4.3 - 4.5 per cent range, participation remaining high, and a modest easing in jobs growth. Wages growth is anticipated to remain consistent within inflation targets averaging 3.1 per cent, helping to support household spending.

Inflation is expected to remain near the Reserve Bank of Australia (RBA)’s 2–3 per cent target, averaging about 2.9 per cent through 2025 and 2026. This outlook is supported by easing goods price pressures and government subsidies, though risks persist from tradable inflation and currency volatility. Meanwhile, the housing market is projected to gain momentum as investment and demand strengthen, although affordability constraints and supply shortages continue to pose challenges.

Nevertheless, some key risks remain. The downside risks are that 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 that has been the centre of policy deliberations in the tail end of 2025.  In addition, if labour market tightness persists more than expected, inflation could remain above the midpoint of the target range for longer.

The Reserve Bank of Australia (RBA) kept the cash rate unchanged at 3.60% at the December 2025 meeting for the foreseeable future, maintaining a cautious, data-dependent stance as inflation risks persist. We anticipate that the next meaningful policy rate discussion will occur no earlier than the February 2026 meeting. While markets currently lean toward a prolonged hold or even speculate on a potential hike next year, we prefer to avoid premature predictions.

Given the RBA’s data-dependent stance, future decisions will be guided by incoming economic indicators, and greater clarity should emerge as fresh data becomes available in the new year. Our base case remains for a possible 25bps cut at the Feb-26 meeting with risks firmly in place for a prolonged pause rather than an earlier cut. For the entirety of 2026, we expect no more than two 25 bps cuts as at the time of writing this, should data throw no surprises.

A rate increase after commencing an easing cycle would represent a significant departure from convention and imply shortcomings in earlier forecasts, so policymakers must acknowledge that the balance of risks has shifted. Governor Michele Bullock’s recent Senate testimony reinforces that the threshold for further cuts is high and the bias remains towards a hold and if we are to go by market pricing, tightening. We will reassess our outlook once fourth-quarter inflation data are available, but for now, we continue to expect policy rates to hold at least until February 2026.