OECD Economic Outlook, Volume 2025 Issue 2

Australia

Economic growth is now strengthening and becoming more private-sector-driven. GDP growth is projected to quicken to 2.3% in 2026 and 2027, up from 1.8% in 2025. This is consistent with a gradual closing of the small negative output gap, keeping unemployment low while allowing inflation to remain close to target. Risks are balanced, with downside risks from a greater-than-expected softening of labour market conditions while, on the upside, strengthening disposable income dynamics could yield a faster acceleration of private consumption.

Monetary policy has become less restrictive this year as inflation returned to target, and limited further easing appears warranted despite a recent uptick in inflation. Combined with the planned modest tightening of fiscal policy in 2026-27, this would rebalance the macroeconomic policy mix while avoiding undue stimulus or contractionary impetus. The main fiscal priority is to progressively reduce structural deficits via greater spending control and well-designed revenue increases. Tax and regulatory reforms should be directed at improving competition, removing barriers to house-building and facilitating the net zero transition.

Growth is recovering as household incomes rebound

Year-on-year GDP growth, which bottomed out at 0.8% in the third quarter of 2024, picked up to 1.8% in the second quarter of 2025, with household consumption accounting for most of the improvement. This has yielded a rebalancing of growth from public demand to private, even though business investment has remained sluggish, possibly affected by the increase in uncertainty about external demand given global trade tensions. With interest rates falling this year, household disposable incomes recovering strongly from earlier falls and business sentiment indicators improving, private demand growth is expected to have continued to strengthen in the second half of 2025. Headline inflation fell to below the mid‑point of the 2‑3% target range in the second quarter, with the central bank’s preferred measure of core inflation, the trimmed mean, falling to 2.7%, its lowest level since late 2021. Headline and core inflation both picked up in the third quarter, to 3.2% and 3.0% respectively, but the upturn partly reflects temporary factors and is not expected to represent a turning point. Labour markets have been surprisingly resilient to the growth slowdown over the past two years, but the unemployment rate, while remaining low, has moved up and vacancies continue to fall, while wage growth has slowed.

Sluggish external demand for Australia’s main export commodities kept export volumes largely stagnant over the past year and resulted in a further small deterioration in the terms of trade. Growth of imports was modest through the first half of 2025, however, keeping the current account deficit little changed at around 2% of GDP. Notwithstanding international trade disruptions, Australia’s main exports have so far remained broadly stable. The recent surge in the gold price will, if sustained, boost the terms of trade and place gold among Australia’s largest exports by value.

Australia

1. Quarter-on-quarter annualized rates.

Source: OECD Economic Outlook 118 database; and Australian Bureau of Statistics.

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Australia: Demand, output and prices

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A rebalancing of macroeconomic policies is in prospect

The Reserve Bank of Australia has cut its policy rate three times this year. With inflation expected to converge on the mid-point of the target range after the recent upturn and labour market conditions continuing to soften, two more policy rate cuts are projected over the coming year. The federal budget switched from surplus to deficit in the 2024-25 fiscal year (July-June), and the deficit is expected to widen by about 1 percentage point of GDP in FY2025-26 before narrowing in FY2026-27. The bulk of the general government deficit is currently at the sub-federal level, with some states facing marked strains, but according to state budgets for FY2025-26, aggregate state deficits will ease over the coming years. The general government deficit should peak in 2025 at around 3½ per cent of GDP before narrowing to about 2½ per cent of GDP in 2027.

Barring shocks, growth should move slightly above potential by 2027

The rebound in real disposable household incomes should be sustained as solid employment growth (largely driven by net immigration) continues, interest rates fall further and real wage growth remains positive. This is expected to underpin annual growth of private consumption of about 2¼ per cent in 2026‑27. Stronger domestic demand growth and the further reduction in interest rates should also boost private investment. External demand conditions are projected to improve somewhat, allowing annual export volume growth to pick up to about 3% over 2026-27, but this will be broadly matched by import growth, leaving no net impetus from net exports. GDP growth is projected to be 2.3% in both 2026 and 2027, above estimated potential growth of about 2%, allowing the current small output gap to close. Despite a temporary pick-up in inflation in the second half of 2025, average annual inflation in 2026-27 is projected to be near the mid-point of the target range. Risks to the growth projections are broadly balanced. Downside risks include adverse external shocks, including further trade-restricting measures and possible sharp corrections in financial asset prices, as well as domestic developments such as a greater‑than‑expected softening of labour market conditions. On the upside, strengthening disposable income dynamics could yield a faster-than-projected acceleration of private consumption, while favourable external demand/terms-of-trade shocks are also possible.

Policies should aim to maintain macroeconomic stability while easing growth constraints

The medium-term fiscal consolidation planned at both federal and state levels will be needed to stabilise public debt ratios around their current levels, and will probably have to be sustained into the 2030s given spending pressures associated with population ageing, defence priorities and the net zero transition. Policies at all government levels to boost urban housing supply – especially via an easing of restrictive land-use regulation – are urgently needed, and these should be part of a broader structural reform effort to reinvigorate productivity growth and improve dynamism, including via strengthened competition. Reducing regulatory fragmentation within Australia’s federal system would lower a significant barrier to competition.