Australia is facing its longest stretch of weak economic growth since the early 1990s recession, but stubborn inflation pressures are still expected to force the Reserve Bank to raise interest rates again, according to a new report by Deloitte Access Economics.
The firm slashed its outlook for the Australian economy in its latest set of quarterly forecasts on Tuesday, predicting the economy will grow by just 1.3 per cent this financial year and 1.9 per cent in 2027-28 – marking the most prolonged stretch of sub-2 per cent growth in three decades.
Deloitte Access Economics partner Stephen Smith said the Australian economy had become more prone to inflation outbreaks at lower rates of growth due to years of lacklustre productivity performance.
“For too long, strong population growth has masked a weak underlying productivity performance and lifted aggregate growth while doing less to improve living standards,” Smith said.
“Years of insufficient investment in housing, infrastructure, energy and the economy’s productive capacity have left the supply side of the economy struggling to keep pace with demand.”
Treasurer Jim Chalmers said the report was a reminder of the lingering costs of the conflict in the Middle East, but insisted Australia had “a lot going for us here at home” despite Deloitte’s grim outlook for the economy.
“Under Labor, Australia has the lowest average unemployment of any government in half a century, smaller deficits and less debt than the Coalition left us, booming business investment, with tax cuts and higher wages that the right-wing parties oppose,” Chalmers said.
Deloitte said the strength in business investment over the past six months was narrowly focused on the rapid build out of data centres. The near-term benefits to the economy were less than the headline investment numbers implied, since much of the equipment was imported, which subtracted from growth.
The Australian Financial Review reported on Monday that Australia now had the equal-highest core inflation rate among major developed economies and the second-highest across all advanced economies, behind only Iceland, after trimmed mean inflation – the RBA’s preferred measure of underlying price pressures – rose to 3.6 per cent in May.
With underlying inflation expected to rise to 3.9 per cent this financial year – far above the 2.5 per cent mid-point of the RBA’s target band – Deloitte expects the RBA to jack up the cash rate to 4.6 per cent at its next meeting on August 10-11, before leaving rates on hold for a year.
“With oil prices retreating to levels close to those seen before the Strait of Hormuz was closed, Australia – and the rest of the world – appears to have avoided a worst-case scenario. But with the focus turning back to the domestic environment, the picture is hardly reassuring,” Smith said.
Markets are far less certain about an August rate rise, pricing just a 13 per cent chance of a hike at that meeting and a 38 per cent chance the RBA lifts the cash rate to 4.6 per cent by the end of the year.
HSBC chief economist Paul Bloxham said the slowdown under way in the housing market could translate into lower inflation and prevent the RBA from needing to raise the cash rate again.
“As there is a positive correlation between housing price cycles and consumer spending and empirical studies show some small wealth effects, the fall in housing prices should be expected to weigh on consumer spending,” Bloxham said.
“Part of this reflects that falling housing prices tend to weaken housing construction, and with fewer new dwellings, there is less demand for new furniture and appliances.”
Source: https://www.afr.com/policy/economy/australia-faces-worst-growth-slump-in-decades-as-rate-rise-looms-20260707-p60d6e