Economic Outlook 2026
By Anton Crabbe 1st Feb 2026
Executive Summary:
Australia is set for a stronger economic performance in 2026, with nominal GDP growth forecast at 2.1% by the International Monetary Fund, driven by a robust labour market, high demand for commodities and minerals, and a strong Australian dollar; while public sector job growth has been a key support, private sector demand—especially in technology and infrastructure—is rising, though persistent labour shortages in trades, agriculture, and logistics may constrain growth and add to inflationary pressures, and the AI boom is fuelling demand for rare earths and base metals, with continued strong export demand for food and fibre supporting the currency, which is expected to help lower import costs but may reduce export competitiveness as mining and agriculture expand and labour market pressures intensify. Housing supply remains a critical challenge, with complex regulations, high costs, and labour shortages limiting new construction and pushing prices higher, especially for established homes, I am expecting the Reserve Bank of Australia (RBA) to keep interest rates on hold in early 2026, balancing the risks of a strong currency and persistent inflation—driven by energy prices, housing and rent costs, food, and recreation—and the RBA has signalled a willingness to tolerate higher inflation to protect employment gains, as such I am only expecting one or two rate hikes at most; despite ongoing geopolitical risks, Australia’s economy has shown resilience, and if current conditions persist, 2026 should deliver solid growth, ongoing inflation in select sectors, and an overall improvement in national prosperity.
Economic Outlook:
All things are pointing to a better year economically in 2026 than 2025. According to the IMF nominal GDP grew by 1.8% in CY25 and is forecast to grow by 2.1% in CY26.
There a few things supporting economic growth. The main drivers as I see it are low unemployment, increasing demand for our bulk commodities, base metals, rare earth minerals, and the high AU$.
The robust labour market for a number of years has been supported largely by the growth in public sector jobs. But there is increasing demand for labour coming from the private sector now, as the need to build data centres is increasing to accommodate the growth of AI. I see this a double-edged sword, as there are still labour shortages in many areas of the economy, such as the trades, agriculture, and transport and logistics to name a few. This will constrain economic growth and do little to help inflation as the demand for labour from competing sectors heats up further.
We are benefiting further from the AI boom via the demand for our rear earths, base and precious metals. With some at all time highs and elements like lithium seeing a resurgence in their spot price. Also, the demand for our food and fibre continues to be in high demand by our trade partners. All this has put a floor under the AU$ and coupled with a softening US$ is continuing to push the AU$ higher, and if these conditions remain the AU$ will remain at elevated levels round the 70c US cent mark. Once again, there is two sides to the coin here, as the mining and agricultural sectors continue to increase production their demands for labour will increase putting further pressures on our labour market. The high AU$ should help lower the cost of our imports and ease some of the cost pressure for businesses that use and/or sell imported goods in their businesses but will make our exports less competitive.
None of this will really help the housing supply imbalance except for hopefully lowering the cost of materials for construction companies. The complex regulations, long approval process, high costs, and labour shortages are all issues constraining the supply of new housing and as is the case housing prices will continue to go up in 2026, and more so for established housing.
Based on the above, I believe the RBA will tread vary lightly with interest rates in CY26. If I was on the board, my main concern would be the high AU$ and the weaking US$. As any rate hike will push the AU$ higher and reducing our competitiveness on the world stage and could slow our exports. My thinking is they will leave rates on hold when they next meet on the 3rd of February. The last inflation read showed the main drivers of inflation where energy prices, housing and rent costs, food and non-alcoholic beverages, and Recreation & Culture. Furthermore, the RBA has shown in the past they are prepared to have higher inflation to protect job gains that occurred during COVID.
The increase in energy prices is due to state and federal government rebates ending and will not occur next quarter. House and rent increases are due to lack of supply and out of the control of the RBA and past interest rate increases have done very little to impact either house prices or rents. The other areas of increased inflation are a result of low unemployment and is discretionary spending by people and is arguably a sign of a healthy economy. With all this in mind and considering the RBA’s previous actions, they will keep the powder dry this meeting and will wait for further data as the year progresses, before increasing interest rates. If they do increase interest rates, I think this will show a change in their thinking and there will be more rate increases in CY26 but as is stands currently I am not expecting more than one or two rate hikes at best in CY26.
Geopolitical risk is ever present and can disrupt or change our economic fortunes overnight in some cases. But as time has shown, in the long run our economy is very resilient to many economic shocks and majority of us continue to benefit from this via the growth in asset prices and low unemployment.
Finally, anyone that has read my scribbles over the last few years will have heard me bang on about the need for tax and IR reforms. My position has not changed on this as I believe that both our tax and IR legislation are a huge handbrakes on our economic prosperity and the need for the Federal Government to reduces its reliance on corporate and PAYG income tax is needed. As it stands currently, more than 70% of Federal Government income comes from income tax. To have such a large part of total income come from income tax is not healthy and if there is an increase in unemployment there will naturally be a decline in Government revenue most likely leading to deficits and increased borrowings.
In closing, if the status quo remains (which is a big if!) we are in for a solid year of economic growth, but inflation will remain, more so in some areas than others, and we will be better off at the end of the year that the start.
Disclaimer: Rational Share Investing With Ratios does not hold an AFSL and information on this site should not be considered financial advice, personal or general, and represents the views of the author.
Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell the same. All securities mentioned herein may or may not form part of my holdings at a certain point in time, and the holdings may change over time.
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