Our economic outlook for Australia
January 15, 2026
A modest easing path amid prolonged disinflation
“Labor market tightness and subdued productivity growth will keep upward pressure on unit labor costs, prolonging the disinflation process.”
Grant Feng,
Vanguard Senior Economist
We expect Australia’s economic growth to hover around trend in 2026, supported by relatively solid incomes, a gradual recovery in private demand, and robust public spending. An improving global growth backdrop will also be supportive. However, an extended disinflation process is likely to result in only a modest Reserve Bank of Australia (RBA) rate-cut trajectory, limiting economic momentum after monetary policy easing last year.
Labor market conditions remain tight, although there are signs of softening. Australia’s challenge lies in its constrained supply side and weak productivity growth, which have lowered the economy’s potential growth rate. We expect labor market tightness and subdued productivity growth to keep upward pressure on unit labor costs.
With the economy operating near its full capacity and amid evidence that disinflation is stalling, we expect the RBA to emphasize its price stability mandate. We anticipate only one quarter-point cut in 2026, to 3.35%, with that occurring only late in the year. The RBA made three quarter-point cuts in 2025.
Australia economic forecasts
Notes: GDP growth is defined as the annual change in real (inflation-adjusted) GDP in the forecast year compared with the previous year. Unemployment rate is as of December 2026. Trimmed mean inflation is the year-over-year change in the Consumer Price Index, excluding items at the extremes, as of the fourth-quarter 2026 reading. Monetary policy is the Reserve Bank of Australia’s year-end cash rate target.
Source: Vanguard.
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