Australia’s economy set for slowest growth since 1991 recession: Deloitte

Australia is expected to suffer from the weakest economic growth since the 1991 recession as unemployment soared to COVID-era levels during an unresolved global oil crisis that is tipped to spark another interest rate rise next month.

Deloitte Access Economics is forecasting gross domestic product will expand by less than 2 per cent for the next two years, marking the longest stretch of poor economic performance in more than three decades, despite Labor’s income tax cuts.

This would include economic growth of 2.2 per cent in 2025-26, 1.3 per cent in 2026-27 and 1.9 per cent in 2027-28, which would all be weaker than the already lacklustre 2.5 per cent pace in the year to March.

Those levels would be comparable to the years after the 1991 recession when unemployment was at double-digit levels, before the internet sparked a productivity boom.

High inflation also means there’s no room for rate cuts until late 2027, which would deprive Australia of a post-COVID style recovery.

The jobless level was predicted to climb from 4.4 per cent now to 5 per cent in 2027-28, reaching levels last seen in late 2021 when Sydney and Melbourne were in COVID-19 lockdown.

Victoria was expected to have particularly weak growth over coming years, which is concerning given it comprises 22.5 per cent of Australia’s economy.

National unemployment was expected to worsen despite the massive investment in data centres to power the artificial intelligence revolution.

“Data centres are also highly capital intensive, meaning the direct employment boost - particularly after the construction phase - is likely to be modest,” Deloitte Access Economics said.

“Despite the recent momentum, forward indicators are not altogether convincing that the recent lift in investment will be maintained.”

Deloitte Access Economics partner Stephen Smith said the Middle East oil crisis was yet to be fully resolved, predicting stubbornly high inflation would spark an August interest rate rise, taking the Reserve Bank of Australia cash rate to a 15-year high of 4.6 per cent, and leaving no room for relief until late 2027.

“To date, 2026 has revealed the vulnerabilities that have developed within the Australian economy over recent history,” he said.

“Australia is now structurally exposed in ways that have become hard to ignore.”

Deloitte Access Economics warned that interest rates could rise even higher, in its latest June quarter business outlook released on Tuesday.

“Inflation may stay even higher for even longer, prompting more than just one additional interest rate hike,” it said.

“Although oil prices have since retreated, domestic price pressures could prove stickier than expected, leaving the RBA with no choice but to hike, with implications for household spending, housing investment and business investment.”

Two more rate hikes would take the RBA cash rate to an 18-year high of 4.85 per cent.

“That outcome - weaker growth, higher unemployment and still insufficient progress on inflation - would be close to a worst-case outcome for the Reserve Bank,” it said.

Headline inflation was expected to stay above 4 per cent for the rest of 2026, with the consumer price index in May remaining above the Reserve Bank’s 2-3 per cent target for the tenth straight month.

Deloitte Access Economics didn’t see headline or underlying inflation returning to within that band until 2028, a year after the Reserve Bank began cutting interest rates again to stimulate a slow economy.

Wages were also expected to lag behind inflation until next year, meaning Australian workers would be suffering a real cut in their pay levels.

Treasurer Jim Chalmers promised that income tax cuts, that came into effect on July 1 followed by more relief in July 2027, will boost economic activity.

“We’ve got a big economic agenda to grow Australia’s economy, boost productivity and address inflation while we also help first homebuyers and roll out vital cost of living relief like tax cuts, higher wages and more paid parental leave from this month,” he said.

But Deloitte said soaring mortgage repayments, rents, insurance, grocery and insurance costs would “continue to absorb a large share of income” as consumers continued cutting back on spending.

It also downplayed Labor’s claims that its changes to negative gearing and capital gains tax concessions would address housing affordability issues, despite property values falling in Sydney and Melbourne at a faster pace since the May Budget announcements.

“That change in momentum is a short-term issue. The deeper, structural problem remains supply,” Deloitte Access Economics said.

High immigration levels have also been used to mask Australia’s two decades of weak productivity, where output for every Australian has been stagnating.

“For too long, strong population growth has masked a weak underlying productivity performance and lifted aggregate growth while doing less to improve living standards,” Mr Smith said.

“Years of inefficient investment in housing, infrastructure, energy and the economy’s productive capacity have left the supply side of the economy struggling to keep pace with demand.”

This weak productivity meant economic growth approaching the long-run, annual average of 3 per cent would stir inflationary problems, as higher production costs were passed on to consumers, especially during a global oil crisis.

“The result is an economy more prone to inflation pressures at lower rates of growth,” Mr Smith said, echoing RBA governor Michele Bullock’s previous warnings on an economic speed limit.

ANZ is also expecting household consumption growth to slow to 1.1 per cent in 2026, down from 2.5 per cent in 2025, following the Reserve Bank of Australia’s three interest rate rises this year that took the cash rate to 4.35 per cent and reversed last year’s relief.

The ANZ-Roy Morgan consumer confidence reading for the week ending July 5 stood at a particularly weak 74.7 points - well below the 100-point level where optimists outnumber pessimists and significantly under the 108.8 point average since 1990 as a result of higher interest rates.

“Consumer confidence remains well below its long-run average, pointing to softness in consumer demand over the near term,” ANZ economist Sophia Angala said.

Persistently high inflation and rising unemployment would potentially see the Reserve Bank simultaneously failing its dual mandates on keeping inflation within target and maintaining full employment.