Deloitte warns Australian economy facing longest period of sub-par growth since 1990s recession

Australia faces its longest stretch of sub-par economic growth since the early 1990s recession, one of the nation’s chief forecasters has predicted, warning that long-run vulnerabilities are finally catching up with the country.

Deloitte Access Economics this morning said it expects the economy to slow sharply through coming months, with GDP growth this financial year and next to slip below 2 per cent. It would be the first back-to-back years of sub-2 per cent growth since the end of the 1990-91 recession.

The slower growth will be accompanied by ongoing inflation, which Deloitte believes will hang around 4 per cent through 2026-27 before falling to 2.6 per cent in 2027-28.

Real wage growth will go backwards in 2026-27 while slower economic growth will mean unemployment, now at 4.4 per cent, is expected to average 4.9 per cent next financial year before peaking at 5 per cent the following year.

Deloitte partner Stephen Smith said the war against Iran and this year’s increase in inflation had exposed economic vulnerabilities that had developed over recent years.

“Australia is now structurally exposed in ways that have become hard to ignore. Deloitte Access Economics has rarely adopted such a downbeat assessment of the short-term outlook,” he said.

“For too long, strong population growth has masked a weak underlying productivity performance and lifted aggregate growth while doing less to improve living standards.

“Years of insufficient investment in housing, infrastructure, energy and the economy’s productive capacity have left the supply side of the economy struggling to keep pace with demand.”

Deloitte is expecting the Reserve Bank to lift official interest rates once more this year, most likely at its August meeting. That would take the cash rate to 4.6 per cent.

But financial markets believe it is much more likely the Reserve’s next move will be a cut. Pricing of a rate rise fell to its lowest level this year on Monday, with the chance of a hike now at 38 per cent by February.

A rate cut by September next year is now fully priced in with a 50 per cent chance of a second cut by Christmas.

After being the nation’s strongest economy for several years, Western Australia is expected to be the slowest this financial year. Deloitte is tipping WA growth to slow to 0.7 per cent, far behind the Northern Territory (5.9 per cent), NSW, South Australia and Victoria (all 1.3 per cent), Queensland (1.7 per cent), Tasmania (0.9 per cent) and the ACT (1.6 per cent).

Deloitte said the largest impact to the economy was the war against Iran. Financial markets are also “frothy” with a heavy dependence on expected profits out of the AI sector.

It did note there were some positives. The surge in spending on data centres and technology within Australia did offer the chance of a much-needed lift in productivity. Business investment alone is forecast to grow by 6.9 per cent this year and 5 per cent in 2027-28.

But Smith said cost-of-living pressures remained the biggest weight on the economy.

He said mortgage repayments, which had climbed by $350 a month on the average home loan due to the Reserve Bank’s three interest rate hikes this year, and higher prices for rents, insurance, groceries and electricity, were all buffeting households.

“Households remain under pressure. Tax relief, nominal wage gains and higher minimum and award wages from July will provide some support,” he said.

“Yet those offsets are being tested by renewed inflation pressure, higher borrowing costs, volatile fuel and transport costs and weak confidence.”

That lack of confidence was confirmed in today’s ANZ-Roy Morgan weekly measure of sentiment, which slipped by 1.2 points over the past 7 days.

Confidence among shoppers collapsed at the start of the war against Iran, falling to the lowest levels on record. It remains well above that level despite this most recent drop.

Treasurer Jim Chalmers said the report confirmed the lingering costs and consequences of the war against Iran, but noted the nation’s economic fundamentals remained sound.

“Under Labor, Australia has the lowest average unemployment of any government in half a century, smaller deficits and less debt than the Coalition left us, booming business investment, with tax cuts and higher wages that the right-wing parties oppose,” he said.

“We’ve got a big economic agenda to grow Australia’s economy, boost productivity and address inflation while we also help first homebuyers and roll out vital cost-of-living relief like tax cuts, higher wages and more paid parental leave from this month.”

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