Australia’s economy is set to slow sharply over the next year as inflation climbs again, unemployment rises and interest rates stay higher for longer than previously expected. For companies with exposure to the market, that points to a tougher mix of weaker demand, rising costs and more persistent financing pressure.

In its latest quarterly Business Outlook, Deloitte Access Economics says the economy is moving out of its post-2025 recovery phase and into a more difficult period shaped by domestic inflation pressures and the fallout from higher global energy prices. 

The headline numbers capture the shift. Real GDP growth is forecast to slow from 2.6% in the year to December 2025 to 1.8% by the end of 2026, with full-year growth of 1.9% expected in 2026–27. Inflation is projected to peak at 4.9% in mid-2026 before easing back into the Reserve Bank of Australia’s target range by mid-2027. 

For CFOs and treasurers, that means planning for tighter margins, more volatile input costs and a less forgiving policy backdrop.

Energy shock keeps rates higher for longer

The outlook is being reshaped by a renewed energy shock linked to geopolitical tensions in the Middle East, which is feeding quickly into inflation and forcing a shift in monetary policy.

“The conflict in the Middle East has rocked the global economy, sending inflation expectations soaring while growth forecasts plunge,” says David Rumbens, partner at Deloitte Access Economics and author of the report. 

For corporates with exposure to Australia, the impact is broad-based. Fuel is a key input across sectors, from transport and logistics to manufacturing and agriculture, meaning higher oil prices are already filtering through into operating costs. The report also points to second-order effects, particularly through fertiliser and food prices, which could extend cost pressures further into 2026 and increase the risk of more persistent inflation.

That shift is already feeding into policy. After easing rates in 2025, the Reserve Bank has moved back into tightening mode, with another increase expected in the June quarter. Rates are then forecast to remain elevated for around a year, with cuts only expected to return from mid-2027. 

This is a particularly challenging combination. Input costs are rising at the same time as borrowing costs stay higher for longer, compressing margins and increasing pressure on funding structures. Refinancing risk also becomes more relevant for companies with near-term maturities, while higher rates continue to weigh on investment decisions.

A further layer of complexity is added by the policy mix. The report highlights a growing imbalance between monetary tightening and fiscal settings, with government spending continuing to support demand even as the central bank seeks to contain inflation.

Demand weakens as household pressure builds

The energy shock may be the trigger, but Australia’s domestic economy was already under strain. Inflation had proved sticky even before oil prices jumped, and households are now facing another hit to spending power.

Real wages are not expected to grow meaningfully until 2027, limiting the ability of consumers to absorb higher prices. Savings buffers remain, but they are unevenly spread, making a sharper pullback in discretionary spending more likely among lower- and middle-income households.

For businesses, that points to softer demand and less confidence in the months ahead. Consumer-facing sectors are likely to feel the pressure first, but the effects are unlikely to stop there. As demand weakens and uncertainty builds, business investment may also start to lose momentum.

Rumbens argues that the economy may already have passed its high point for the cycle: “The 2.6% GDP growth we saw at the end of 2025 might be the most robust we see for quite a while.” 

The labour market is also expected to cool. Unemployment is forecast to rise to 4.9% by mid-2027 before stabilising. That would still amount to a meaningful loosening from the tighter conditions employers have been dealing with in recent years, even if it falls short of a sharp deterioration.

That may offer some relief for employers on hiring and wage pressures, but it comes with a trade-off. Weaker household spending, slower revenue growth and a more cautious investment backdrop would offset much of that benefit. For CFOs and treasurers, any easing in labour market pressure is therefore unlikely to outweigh the broader hit to demand and profitability.

Investment outlook turns cautious

Investment is likely to soften as the cycle turns. Higher borrowing costs, weaker demand and rising uncertainty all make it harder for companies to commit to new spending, particularly on longer-dated or capital-intensive projects.

Housing is one of the clearest pressure points. Higher interest rates and elevated construction costs are expected to weigh on activity, with knock-on effects for sectors tied to the building cycle, from materials and logistics to business services.

The report also points to the growing role of government spending in keeping the economy moving. Public expenditure has accounted for around half of Australia’s growth since the pandemic, roughly double its share in the decade before. 

While that support has helped steady activity, it also complicates the policy picture. If inflation is being restrained mainly through higher interest rates while fiscal settings continue to support demand, more of the burden falls on interest-sensitive parts of the economy, particularly mortgage holders and renters.

Implications for treasury strategy

Australia’s shifting outlook is likely to be felt most clearly in margins, liquidity and planning assumptions. Rising input costs alongside softer demand leave less room for error, putting greater pressure on pricing discipline, procurement and overall cost control. At the same time, higher interest rates and more volatile cash flows make liquidity management more important, particularly for companies with tighter funding structures or near-term refinancing needs.

The outlook also remains highly sensitive to external shocks. Much depends on how energy prices evolve and whether geopolitical tensions persist. A more prolonged disruption would increase the risk of further growth downgrades and renewed inflation pressure, reinforcing the need for scenario planning rather than relying on a single base case.

Currency and commodity exposures are another area to watch more closely. The speed at which global energy dynamics are feeding into domestic conditions highlights how quickly external factors can affect costs, demand and working capital.

A more uncertain phase

The Deloitte report points to an economy that is still growing, but with far less resilience than it appeared to have only a few months ago.

“The Australian economy is running on empty,” Rumbens says, pointing to the combined impact of domestic inflation pressures and global cost shocks. 

What is emerging is not a sharp downturn, but a more fragile expansion. Growth is slowing, inflation is proving harder to contain and policy settings are pulling in different directions. The result is an environment where even a relatively contained energy shock is enough to shift the balance.

For finance teams, the challenge is no longer just navigating weaker growth. It is managing through a cycle where costs, funding conditions and demand are all moving at the same time, and not always in predictable ways. That leaves less room for error. And with much of the outlook still tied to external factors, the margin for stability may prove as limited as the growth itself.