Deloitte has forecast Australia’s economy to grow by 2.2 per cent in 2025/26, with headline inflation predicted to remain above four per cent for the remainder of the calendar year, prompting the RBA to raise interest rates one more time in August. The forecast points to the longest stretch of weak growth since the 1990s, reflecting the challenging economic environment facing the country. The combination of persistent inflation and modest growth presents a difficult policy challenge for the Reserve Bank as it seeks to balance the competing objectives of price stability and economic activity. Deloitte Access Economics partner Stephen Smith described the outlook as “a prolonged period of sub‑par growth that is testing the resilience of households and businesses alike.”
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The Deloitte analysis highlights the headwinds facing the Australian economy, including elevated inflation, geopolitical tensions and the ongoing impact of global supply chain disruptions. Despite these challenges, the economy has avoided recession, with unemployment remaining relatively low by historical standards at around 4.4 per cent. However, per capita GDP has gone backwards in two of the past five quarters and was flat in a third, underscoring the weakness in living standards growth. The outlook suggests that while the economy continues to expand, the pace of growth remains insufficient to generate meaningful improvements in per capita incomes, a trend that has significant political and social implications.
Inflation expectations have shown some signs of moderating, with Australia’s expected inflation rate falling to 4.7 per cent in July, the lowest level since January 2026, according to a survey released by the Melbourne Institute. This decline offers some encouragement that price pressures may be easing, though inflation remains well above the RBA’s target band of 2-3 per cent. The central bank’s next interest rate meeting will be held on August 10-11, with markets closely watching for any indication of the policy direction. Governor Michele Bullock has previously signalled that the board will not hesitate to tighten further if the data warrants it, but the current mixed signals make the decision finely balanced.
