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Key points:
2025 predictions highlighted ongoing inflation and major megatrends affecting the economy, which are expected to persist in the years ahead.
In 2026, three major themes are likely to influence economic outcomes in Australia:
- inflation and interest rates;
- higher commodity prices benefitting the economy; and
- US policy, AI and markets.
In 2026, business owners may expect potential improvements in the Australian dollar, but this may come alongside more sustained inflationary pressures and possible interest rate hikes - making efficiency and cost control essential.
Reflecting on our 2025 Predictions
This time last year, we suggested the following major forces were likely to impact how the economy developed in 2025:
- The ongoing effects of high inflation and high interest rates on the cost of living and the cost of doing business.
- The megatrends that are shaping how business, the economy and indeed society might evolve over coming decades, including:
- AI and technology
- Climate change and the energy transition
- The ageing population
- Geopolitics
- Rising inequality
- The policies of the second Trump Administration and their flow-on effects to Australia.
- The Federal election.
Based on these factors, last year, it was concluded that 2025 would likely produce a more uncertain business environment driven by President Trump’s policy agenda, and that the RBA would be likely to reduce interest rates by around 0.75-1.0%. Those two predictions were reasonable, however, the Australian Federal election turned out to not be the close result that seemed likely in late 2024. On top of this, globally, the boom in AI spending and related strength in equity markets was a very large offsetting force to the drag on US and global growth caused from the imposition of tariffs.
Predictions for 2026
Looking ahead there are several forces likely set to shape the economic and business landscape, including: megatrends; more persistent Australian inflation; steadier US policy; rising gold and copper prices; strong population growth; and the potential for corrections in asset markets such as tech stocks, Bitcoin, and housing.
In the first half of 2026, there are three key themes that stand out:
1. Inflation and interest rates
Late 2025 inflation data came in higher than expected. This means the RBA most likely will not be able to reduce interest rates in the first half of 2026, unless the unemployment rate rises significantly. The latter is not currently signalled. The likelihood of a much earlier than expected rate rise was signalled at the December RBA Board Meeting. That could happen as early as February if core inflation for the fourth quarter was 0.9% or above. More generally, many interest rate markets outside of the US have already begun factoring in this possibility, something that Australian markets have also taken on board.
2. Higher commodity prices, population and housing benefiting the economy
On the domestic activity front, mining and mining-exposed regions are beginning to benefit from stronger commodity prices, particularly for gold and copper. At the same time, while criticism about the rate of Australia’s population growth is likely to intensify, population growth remains robust at around 400,000 people per year. This 1.5% growth rate provides a solid foundation for GDP growth and housing demand, which is already enjoying a recovery, supported by government plans to build 1.2 million houses over the next five years.
3. US policy, AI and markets
It’s hard to imagine that US policy making could be more volatile next year than it was in 2025. In fact, it’s likely that policy could be more stable for global markets, with tariff rates generally being eased slightly in recent months, a trend that might extend further in the lead up to the US mid-term elections.
Our final important consideration is perhaps more of a caution. It relates to the potential for a correction to some asset prices that might currently be trading at relatively stretched valuations. This has arguably already been in evidence in the prices of Bitcoin and selected tech companies leveraged to AI. While businesses globally will continue to invest heavily in AI efforts, investment does not guarantee returns, and from time to time, even the valuations of very good investments may become stretched. Having perspective on fundamental valuation is always important in business and investment.
Key takeaways for business owners
It’s likely that the very uncertain world for business brought about by US tariffs will be less of a factor for Australian businesses in 2026. Australian businesses – and indeed likely also the Australian dollar - are likely to benefit from improvement in the Mining and Housing sectors, underpinned for now by continuing very strong population growth.
The emergence of more persistent inflationary pressures in late 2025 mean interest rate cuts are unlikely in the near term unless a major global shock occurs. The possibility exists that the RBA might return to raising interest rates sooner than expected, as inflation is clearly not running as low as previously assessed.
As always, business owners can deal with uncertainty by remaining focused on running operations efficiently, carefully managing expenses, delivering great customer service, and looking for ways to improve productivity.
