The Australian economy is navigating a challenging period, marked by higher interest rates, elevated energy costs and growing signs of strain across confidence, spending and housing.
In his latest Two Minutes for Zagga update, Stephen Koukoulas outlines the key developments shaping economic conditions and what they may mean for households, businesses and property markets as the year progresses.
Interest rates and inflation pressures
The Reserve Bank of Australia has delivered its third interest rate hike of the year, lifting the cash rate to 4.35%. This move fully reverses the rate cuts seen in 2025 and places monetary policy firmly in restrictive territory.
Inflation remains above target, which explains the Reserve Bank’s tightening stance. At the same time, recent commentary suggests policymakers are increasingly focused on assessing incoming data before considering further moves.
Global oil prices and confidence
Internationally, oil prices remain elevated, continuing to place pressure on inflation through higher petrol costs. These global energy dynamics are feeding into domestic conditions and weighing on household budgets.
Locally, both consumer sentiment and business confidence have weakened sharply, reaching levels typically associated with periods of heightened economic stress.
Household spending trends
Recent household spending data delivered a mixed signal. While headline spending showed strength, this was largely driven by higher petrol purchases. Excluding fuel, spending growth was only marginal, indicating that households are beginning to adjust to higher interest rates and rising living costs.
Housing: supply improving, prices softening
The housing market continues to send mixed signals. On the supply side, building approvals remain volatile but are trending higher, with an annualised construction rate of just over 200,000 dwellings, pointing to improving supply conditions.
On the pricing side, house prices in Sydney and Melbourne have edged lower in recent months, while momentum in other capital cities has slowed. Asking price data also suggests emerging softness across most markets.
What this means for the remainder of the year
With interest rates now restrictive, confidence weakening and housing conditions beginning to shift, economic momentum is slowing. While inflation remains a challenge, the combination of higher borrowing costs, softer spending and changing housing dynamics suggests growth is likely to remain subdued through the remainder of the year.
These trends will be important to monitor closely, particularly given the implications for household wealth, confidence and broader financial conditions.
Stephen Koukoulas is Managing Director of Market Economics, having had 30 years as an economist in government, banking, financial markets and policy formulation. Stephen was Senior Economic Advisor to Prime Minister, Julia Gillard, worked in the Commonwealth Treasury and was the global head of economic research and strategy for TD Securities in London.
