The Forward View Australia: February 2026 

19 February 2026

Too much demand, not enough economy

• The economy looks to have maintained much of the momentum gained through mid-2025 and the unemployment rate remains low.
• A number of indicators point to the economy running up against capacity constraints and there is a risk that inflation pressures persist.
• With underlying inflation expected to track above 3% for most of 2026, we see the RBA lifting rates to 4.1% in May.

Data released since mid-December show that the economy has held onto much of the momentum gained through mid-2025. Household spending data suggest growth remained robust in January after a strong Q4. The NAB Business Survey continues to show business conditions at a level consistent with trend growth, while forward orders have picked up in recent months.

Alongside the pick-up in private sector growth, there are signs that the economy has been pushing up against capacity constraints. Though employment growth has slowed, the unemployment rate remains low. The NAB Business Survey measure of capacity utilisation remains well above average, and the share of firms reporting “labour as a significant constraint” remains elevated. 

CPI data for Q4 confirmed that inflation accelerated notably over H2 2025. While we expect some of this strength to unwind over coming quarters, the acceleration has been broad-based across the CPI basket. That said, the NAB Survey measures of costs and prices point to some easing in inflation pressure. 

Looking forward, we expect growth to slow a little through 2026, but GDP growth to still track around 2% yoy. We have also softened our forecast for growth over 2027, which is also expected to be around 2%. The unemployment rate is expected to gradually drift higher, reaching 4.5% by the end of 2026. 

On inflation, we see a gradual moderation in quarterly outcomes from here, and pencil in 0.8% qoq for the trimmed mean in Q1. Despite this easing, underlying inflation will track above 3% for most of 2026. For the RBA, this implies that a further tightening in policy remains appropriate. We expect another 25bp increase in May 2026. 

We continue to see the largest downside risk for the Australian economy in 2026 emanating from a global shock, with domestic conditions remaining relatively strong. However, there has been little evidence to date of global uncertainty weighing on consumption, hiring, or investment decisions in the private sector. Indeed, global conditions have proven more resilient than expected six months ago. 

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