Category: Market Outlook

The earlier cautious optimism about an economic recovery is translating to confirmation about broader economic strength. While serious uncertainties dominate the global outlook amid elevated geopolitical threats to markets and economic activity, particularly in the Middle East, the domestic drivers of the economy are broadly positive.

A combination of prior interest rate cuts, moderate fiscal stimulus and an increase in commodity prices have helped to spark the more positive tone.

In our latest webinar, Zagga’s Economist-in-Residence, Stephen Koukoulas, examines the unpacks inflation, interest rates, housing divergence and the policy path ahead that are shaping Australia’s economic trajectory in 2026.

The sudden and unexpected about-face in economic conditions saw the RBA move from cutting interest rates with a bias for more cuts in August 2025, to hiking them with a bias for more hikes in February 2026.
In simple terms, the facts on the economy changed.
In data since the rate hike, there has been confirmation that household spending growth is registering moderate growth; business investment is lifting; unfortunately the recovery in the number of dwelling building approvals has stalled while consumer sentiment remains pessimistic.

Stephen Koukoulas opens his February update with an important reminder: the economic landscape has shifted quickly since late last year. At that time, “rate cuts were being priced into the market, inflation was nice and low… and there was some sort of a pickup in economic activity.” But as he notes, conditions have now changed decisively.

Signs of stronger economic activity have been tempered by softening labour market conditions, on going consumer pessimism and heightened global geo-political issues.

The recent data flow has confirmed a further pick up in economic activity, particularly household spending and dwelling construction. These are welcome outcomes after what has been more than two years of below trend growth. There are early but encouraging signs of a recovery in private sector business investment, which is vital to boost productivity. Growth in government demand is slowing as some key public sector projects are at or near completion.

Stephen Koukoulas kicks off 2026 with cautiously positive news: the economic recovery that emerged in the second half of 2025 “looks to be continuing.” While he emphasises that the pickup is “not a strong economic” surge, conditions are now clearly better than six or twelve months ago.

Over the past three months, the run of economic news has been pointing to stronger activity with the composition of that growth increasingly favourable. Business investment and dwelling construction are stronger, while household consumption continues to recover. At the same time, and at odds with this better news, the labour market has shown signs of softness. The upturn in inflation is a concern for the RBA despite the fact that the drivers of the inflation increase appear to be one-offs.
At the same time, the housing market is recovering. New dwelling building approvals have rebounded strongly although the level of activity remains below the rate needed to address the housing shortage.

At its December meeting, the RBA left rates unchanged and ruled out a cut. While not signalling an imminent hike, the Board acknowledged that if inflation proves persistent and the labour market remains strong, a rate increase could be considered in the first half of 2026. For now, rates are likely to stay on hold — provided inflation eases back into the target band as temporary factors wash out.

Mixed news on the economy and an uptick in inflation has seen the RBA move to a neutral bias for interest rates. This means that the medium turn outlook has switched from expectations for lower interest rates to one now steady interest rate settings are expected into 2026.

At the same time, the housing market is recovering. New dwelling building approvals have rebounded strongly although the level of activity remains below the rate needed to address the housing shortage.