Australia Faces Deeper Economic Slowdown

Published: 02 November 2026. The English Chronicle Desk. The English Chronicle Online.

Australia is facing the prospect of a sharper and more prolonged economic slowdown as the Reserve Bank of Australia prepares to consider another interest rate increase, with economists warning that persistent inflation, the continuing conflict in the Middle East and a steep decline in property prices are creating a difficult combination for households and businesses.

The Reserve Bank is widely expected to raise its cash rate for the fifth time this year on Tuesday. Such a move would push borrowing costs to their highest level since 2008 and intensify pressure on mortgage holders at a time when economic growth is already weakening.

The prospect of another rate increase has raised concerns that the central bank could inadvertently push the economy towards recession as it attempts to bring inflation under control. Economists at major Australian banks have significantly downgraded their forecasts, suggesting that the recovery expected to emerge around the end of this year may now take considerably longer.

Belinda Allen, head of Australian economics at Commonwealth Bank of Australia, said the economic outlook had deteriorated substantially. She forecast real gross domestic product growth could slow to only 1% by the middle of next year, down from her previous estimate of 1.8%.

The economy is expected to perform only slightly better through 2027, with CBA forecasting growth of around 1.1%. The figures point to a period of below-trend economic activity that could place additional pressure on employment and household finances.

Allen had previously expected the economy to show signs of recovery around the beginning of the new year. She now believes the economy will reach its weakest point later and at a deeper level than previously anticipated.

A major factor behind the downgrade is the sharp rise in global oil prices. Economists had expected the conflict in the Middle East to ease and energy prices to move closer to normal levels. Instead, the conflict has continued and broadened, leaving global energy markets under sustained pressure.

Brent crude, the international benchmark for oil prices, has risen from roughly US$72 a barrel in early July to more than US$110 in recent days. The prolonged conflict and diminishing expectations of a near-term peace agreement have contributed to the surge.

Higher oil prices create difficulties for economies such as Australia because they can increase transportation, energy and production costs. Businesses may pass some of those costs on to consumers, making it harder for inflation to return to the central bank’s desired range.

That creates a particularly challenging situation for the Reserve Bank. Raising interest rates can reduce domestic demand and help bring inflation down, but higher borrowing costs can simultaneously weaken household consumption, business investment and employment.

The central bank is therefore facing the difficult task of determining how much economic weakness is necessary to contain inflation without causing a much more damaging downturn.

The outlook has also deteriorated because of Australia’s property market. New data indicate that the housing downturn remains on course to become one of the country’s deepest corrections on record.

Shane Oliver, chief economist at AMP, has warned that Australian home prices could decline by as much as 15% before stabilising towards the end of next year. Sydney has already experienced a decline of around 10% from its recent peak, according to the analysis.

A prolonged fall in property values could have consequences well beyond the housing sector. Homeowners who see the value of their properties declining may become more cautious about spending, particularly when they are simultaneously dealing with higher mortgage repayments and other rising costs.

Economists refer to this as the “wealth effect”. When households feel poorer because the value of their assets is falling, they may reduce discretionary spending. That can affect retailers, hospitality businesses and other consumer-facing industries, creating a broader slowdown.

The property downturn can also affect construction. Falling prices and weaker demand can discourage developers from starting new projects, while households may delay purchases or renovations. A reduction in construction activity can then affect employment and economic growth.

Oliver said the scale of the property correction could therefore deliver a substantial blow to the broader economy. Although he did not regard an economic contraction as the most likely outcome, he warned that the risk of recession was significant and increasing.

He estimated that the probability of recession could rise to as high as 45% if the Reserve Bank delivers the expected rate increase on Tuesday.

The latest forecasts from National Australia Bank also point towards a more difficult period ahead. Gareth Spence, NAB’s head of Australian economics, said unemployment could need to rise more than previously expected before inflation is brought under control.

Spence expects the economy to grow below trend through 2027 and 2028, reinforcing forecasts of only about 1% growth next year. He also believes the unemployment rate could increase from its current level of 4.7% to as high as 5.4% by the end of next year.

CBA’s forecast is somewhat less severe, with unemployment expected to peak at around 5.1% over the same period. Despite the difference, both forecasts indicate that the labour market is likely to weaken as monetary policy remains restrictive.

The potential increase in unemployment represents one of the most significant challenges for the Reserve Bank. Australia’s post-pandemic recovery was supported by strong employment growth, and policymakers had hoped to reduce inflation without sacrificing the gains made in the labour market.

That strategy now appears increasingly difficult to achieve.

The central bank’s challenge is complicated by the fact that inflation is being influenced by factors that are not easily controlled through interest rates. Global energy prices, geopolitical instability and international supply pressures can push prices higher even as domestic demand weakens.

Nevertheless, policymakers must respond to inflation because allowing price growth to remain elevated for too long could create further economic problems. Persistent inflation reduces household purchasing power and can make it more difficult for businesses and consumers to plan.

The expected rate increase has already attracted opposition from union leaders, who gathered outside the Reserve Bank’s Sydney offices on Monday to protest against another rise.

Workers and unions are concerned that higher mortgage costs and weaker economic growth could place additional pressure on households. A rise in unemployment would further intensify those concerns, particularly for families already facing higher living expenses.

The economic debate also comes as Treasurer Jim Chalmers has warned that the government’s upcoming mid-year budget update will contain a more pessimistic economic outlook. The combination of weaker growth, higher energy prices and falling property values is making the government’s task more difficult.

For mortgage holders, another rate increase could mean higher monthly repayments at a time when household budgets are already under pressure. For businesses, higher financing costs and weaker consumer demand could reduce investment and hiring.

The effects could also spread through the broader economy if households cut spending in response to financial uncertainty. Retailers and service businesses would be particularly exposed to a decline in discretionary consumption.

The housing market could become another source of pressure. If property prices continue falling, homeowners may become more cautious while construction activity weakens. A substantial decline in housing wealth could reinforce the slowdown created by tighter monetary policy.

Economists are therefore increasingly focused on the possibility that several negative forces could reinforce one another. Higher interest rates can weaken demand, falling property prices can reduce household spending, weaker consumption can hurt businesses, and rising unemployment can further reduce demand.

At the same time, elevated oil prices could continue to keep inflation higher than policymakers would prefer, limiting the Reserve Bank’s ability to quickly reduce interest rates.

The central bank’s Tuesday decision will consequently be closely watched by households, businesses, financial markets and policymakers. A fifth rate increase could demonstrate the Reserve Bank’s determination to bring inflation under control, but it could also deepen fears about the health of the economy.

Australia is entering a period in which the traditional policy trade-off between inflation and growth is becoming increasingly difficult. The economy needs sufficient demand to support jobs and businesses, while policymakers need weaker demand to prevent inflation from becoming entrenched.

The latest forecasts suggest that the costs of this balancing act could become more visible over the coming year. Slower growth, weaker property prices and potentially higher unemployment could create a difficult environment for households even if inflation eventually moves lower.

For now, economists remain divided over whether Australia will ultimately fall into recession. But the growing consensus is that the slowdown could be deeper and last longer than previously expected. The Reserve Bank’s next decision may therefore become a crucial moment in determining how severe that slowdown becomes.