Business Outlook: Risks are becoming reality

Australia’s economic good fortune is running out, prompting Deloitte Access Economics to downgrade its growth forecasts for a second consecutive quarter. The economy may avoid a near-term recession, but for many households caught between high inflation, rising interest rates and weak growth, it will feel like one.

Elevated inflation and waning central bank patience have already prompted 100 basis points of interest rate increases this calendar year, with another rate hike still expected this side of Christmas.

As a result, growth prospects have been downgraded in this edition of Business Outlook. The September 2026 edition of Business Outlook now puts Australian economic growth at 1.7% in 2027-28 and 2.1% in 2028-29.

While Australia is expected to avoid a recession in the aggregate, many households will continue to experience recession-like conditions. That divergence will weigh on discretionary consumer spending, widen differences across sectors and intensify political pressure.

At the same time, risks continue to rise. While not the most likely outcome, a worsening Middle East conflict and higher fuel prices could push inflation higher and prompt the Reserve Bank to raise interest rates further.

While the Australian economy’s near-three-decade stretch of uninterrupted growth from the early 1990s until the onset of the COVID-19 pandemic was record breaking, its quality deteriorated over time, relying increasingly on a larger population rather than a more productive workforce.

Between the 1990s recession and the 2008 financial crisis, economic growth per hour worked – a measure of labour productivity – increased at an average annual rate of 2.0%. That compares to average annual growth per hour worked of 1.2% between 2008 and the pandemic.

If the quality of growth had been deteriorating prior to the onset of the pandemic, it has since all but vanished. Indeed, measured on a ‘per hour worked’ basis, the Australian economy today is smaller than it was at the end of 2019.

Increasingly, Australian economic growth has been achieved by adding more people to the economy rather than making each worker more productive. In short, Australia has mistaken a larger economy for one which is more prosperous.

That is not an argument against population growth. Migration has been one of Australia’s great economic strengths. Skilled migrants expand capability, ease labour shortages, improve the population’s age structure, and deepen the tax base. A smaller, older and less open Australia would face serious economic costs.

But population growth is not an alternative to productivity growth. It sustainably strengthens an economy more when paired with adequate housing supply, faster planning approvals, deeper capital investment, timely infrastructure delivery, stronger competition, better skills formation and greater business dynamism. Without that pairing, population growth means the harder disciplines of allocating capital well or forcing firms to compete harder for customers and workers are not imposed.

The policy priority is therefore the supply side. Australia needs reforms that lift productivity, accelerate housing and infrastructure delivery, broaden business investment and translate AI adoption into higher output per worker. Such reforms are no longer optional.

This newsletter was distributed on 14 October 2026. For any questions or comments on this week’s newsletter, please contact our authors.