FY27: The Australian Economy in Transition?

Slower Growth, Rising Unemployment & Falling House Prices

The Australian economy is starting to turn. Some of these changes are for the better, others are potentially worrying.

Economic growth is solid but slowing; the unemployment rate is low but rising; inflation is high but stabilising; wages growth is moderate but slowing; house prices are high but starting to fall.

These are some of the key themes that are dominating sentiment including for the RBA which, after three interest rate hikes in the first half of 2026, are moving to an extended period of stable monetary policy.

When there are such significant changes in momentum in key parts of the economy, there is often a worry that there will be an economic overshoot. This is why talk of recession, unemployment over 5 per cent and even a house price ‘crash’ are gaining traction among some economists.

At this stage, the overshooting or downside economic fears appear overblown, with a soft-landing, a steady return of inflation to target and a moderate fall in house prices the most likely outcomes.

In terms of the updated economic news, the fall in house prices and low auction clearance rates have the highest high profile.

After falling 0.2 per cent in May, house prices fell 0.4 per cent in June. After the huge run up in house prices over the previous few years, this is not a major macroeconomic issue even though further price falls are close to certain in the months ahead. If the house price falls continue, the hit to wealth will dampen household spending growth, suppress the construction of new dwellings and feed into a lower inflation pulse. They are negative for growth and help to lower inflation.

In annual terms, headline inflation dipped to 4.0 per cent in May from 4.2 per cent in April, while the trimmed mean measure rose from 3.4 per cent to 3.6 per cent. In simple terms, inflation is too high for the RBA’s liking which is why interest rates are likely to remain restrictive despite the signs of slower growth.

The number of building approvals for dwellings fell 1 per cent in May and after a strong pick-up in 2025 and through to early 2026. Dwelling approvals are now trending down.  Household spending growth is holding up with purchases of petrol offsetting a slowing in other sectors. Consumer sentiment has edged higher in recent weeks, but remains pessimistic with cost of living and interest rate concerns eroding sentiment.

The broad slowing in the labour market continues with employment rising 40,000 in May but this followed a fall of 40,000 in April. The unemployment rate continues to hover around 4.5 per cent while the number of job vacancies is pointing a cooling in demand for labour.

Business investment remains a bright spot in the economy driven by strength in Capex in data centres, warehouses, education facilities and AI related equipment. While business conditions have weakened in line with the general slowing in the economy and concerns about the oil price shock, they remain mildly positive and consistent with a soft landing.

Market pricing for interest rate settings continue to reduce the probability for an interest rate rise. Current pricing has a less than 50 per cent chance of a 25 basis point rate hike and, notably, is starting to price in interest rate cuts in 18 to 24 months. Updated news on inflation and the unemployment rate will determine the next move of the RBA.

New Zealand

After the 2025 recession, signs of a gentle recovery continue to unfold. GDP in New Zealand rose 0.8 per cent in the March quarter for an annual rise of 1.5 per cent. Business conditions are also improving to the point that has seen a turn in job creation even though consumer spending and dwelling construction are weak.

With inflation above target, the RBNZ is close to starting an interest rate tightening cycle as the recovery gains momentum. The RBNZ is looking for conformation that the labour market is improving with the unemployment rate trending down before delivering interest rate hikes. Markets are continuing to price in more than 100 basis points of interest rate hikes over the medium term.

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Stephen will be presenting his FY27 CFO Economic Outlook at the Perth CFO Symposium on Thursday 23rd July at the Perth Pan Pacific & Sydney CFO Symposium on Tuesday 18th August at the ICC Darling Harbour

To register visit: www.WACFOSymposium.com or www.NSWCFOSymposium.com