Australia’s economic slowdown is just commencing, warn economists. This is as interest rates surge while cost-of-living pressures weigh on households.
The economy grew a mere 0.3% during the 1st quarter ‘26. The Australian Bureau of Statistics disclosed this information on Wednesday, 3 June ’26. However, these figures only reflect the economic impact of the first month of the ongoing Middle East war.
Harry Murphy, the head of economic research and global trade at Oxford Economics Australia, wrote that surging inflation and sky-high oil prices, besides shattered confidence, may collide to crimp expenditure through the rest of this year.
Gross domestic product (GDP) per capita reversed during that quarter, declining by 0.1%. This figure marked the 1st contraction since the beginning of ’25.
Meanwhile, Murphy Cruise said that they were expecting per capita household expenditure to be broadly flat during ’26. This was while softer hiring may push unemployment close to 5% through ’27.
According to recent data, the unemployment rate increased to 4.5% on April 26. This meant that Oxford Economics witnessed a significant weakening in the jobs market from now on.
The slowdown in economic growth from the final quarter of ’25 to the first quarter of ’26, together with a rise in the unemployment rate, comes as the Reserve Bank battles to keep inflation under control.
Inflation was already above the RBA’s 2-3% target band. This was before the crude oil shock caused by the Iran War that put further pressure on prices.
Meanwhile, RBA board member Ian Harper remarked earlier last week that they expect inflation to be with them for a while. Economists anticipate that higher interest rates will slow the economy. Additionally, the goal is to lower the risk of inflation becoming entrenched.
Recession risk surges
HSBC expects weaker demand to filter through the entire economy during the coming months.
HSBC Chief Economist Paul Bloxham wrote that since March ’26, they believed that GDP was likely to contract in Q2 ’26 (the 3 months up to June).
The risk is rising, and it is predicted that there may be two consecutive quarters of falling GDP.
If so, two consecutive quarters of the economy’s contraction may constitute a so-called technical recession.
Bloxham added that he doesn’t see inflation returning to the midpoint of the RBA’s target band. Such a scenario won’t be without a prolonged economic downturn.
Bloxham further explained that, with inflation exceeding the target and growth significantly surpassing potential due to fragile productivity growth, they believe the only feasible way to reduce inflation within a reasonable timeframe is to push the economy into a downturn.
HSBC believed that the downturn was already underway.
Productivity is ‘a giant drag’: AMP
Economists say that part of the problem was that productivity’s no longer just weak; it has gone in reverse.
A measure of productivity, GDP per hour worked, fell 0.6% in the quarter. It was up by a mere 0.3% over the year.
AMP deputy chief economist Diana Mousina said that the decline is a massive drag on the economy as it reduces Australia’s potential to grow, adding that it impacts the ‘speed limit’ and therefore dampens living standards.
AMP puts the odds of an Australian recession in the next 12 months at 30%.
Mousina added that lower consumer spending and lower exports, besides business investment, are down. However, a lot may need to go wrong. That’s enough to tip the economy into a technical recession.
Mousina opined that there could also be low growth across all sectors. Then something weird occurs in inventories, so one ends up with negative growth.
RBA rate rise sustained despite slowdown
AMP has announced that inflation is sufficiently high whilst productivity is sufficiently low to witness the RBA hike rates twice more by the end of this year.
