After the RBA hiked its policy rate by +425bps in 2022-2023, inflation subsided to 3.2% in 2024 and 2.8% in 2025. After staying put in 2024, the RBA conducted an easing cycle in 2025, delivering three policy rate cuts of -25bps each, to reach a level of 3.6%. Following a +25bps hike in February 2026, the RBA is likely to retain some flexibility for a little further tightening in the short term. While we expect inflation to remain within the central bank target range, at 2.6% in both 2026 and 2027, risks are clearly on the upside.

After a significant worsening during the pandemic, the fiscal deficit recovered to -1.3% in 2023 following, among other factors, increased tax revenues and high commodity prices. However, falling global commodity prices, an aging population, climate change and lower tax revenues widened the fiscal deficit again to -2.3% in 2024. As the government continues tax cuts and spending programs to help alleviate the cost-of-living and housing-sector crises, the fiscal deficit is estimated to have reached -2.7% in 2025 and should just mildly improve to -2.3% in 2026. Australia is likely to continue maintaining a moderate fiscal deficit, given rising defense costs, healthcare and welfare spending.

Australia’s short-term financing risk is considered low, though some monitoring is required regarding domestic debt. Overall, private sector credit needs monitoring, as lending activity has been picking up throughout 2025. Australia’s household debt remains among the highest in OECD countries. On the positive, recent developments have been mainly positive: debt growth slowed in 2025 compared to the previous year and the RBA’s recent monetary easing cycle pushed down mortgage rates, helping to contain debt-servicing pressures. Indeed, after reaching a high of 6.15% at the start of 2025 (+351bps compared to mid-2022), the average mortgage rate declined by -65bps over the year. 

Looking at potential external fragilities, while Australia has historically run deficits; the current account balance has been in surplus between 2019 and 2022, supported in part by high commodity export prices. However, as global prices for commodities declined and Chinese demand for those goods softened, Australia’s current account has been back in deficit since 2023. After an estimated -1.8% in 2025, we expect the deficit to remain at similar levels in 2026 and 2027. In the medium term, Australia’s reliance on China for commodity exports, combined with current global geopolitical tensions, could pose increasing headwinds. 

Australia’s business environment is well-positioned in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. Likewise, the Heritage Foundation’s 2025 annual Index of Economic Freedom surveys have put Australia 6th out of 184 economies in recent years and 3rd in the Asia-Pacific region, reflecting very strong scores with regards to property rights, judicial effectiveness, government integrity, business freedom, trade freedom, investment freedom and financial freedom. However, Australia scores less favorably regarding the tax burden, attributed to a 45% income tax rate and a 28.7% of GDP tax burden, and government spending. In our proprietary Environment Sustainability Index 2025, Australia ranks 51st out of 210 economies, down from 42nd in 2024. Underperformance is mainly visible in renewable electricity output, recycling rate and CO2 emissions per GDP.

The Labor party, led by prime minister Anthony Albanese, was renewed in government following the general election in May 2025. The party enjoys a comfortable majority, with the highest seat count ever achieved in the House of Representatives. We expect the government to continue advancing its policy agenda on the housing crisis, including its pledge to commit AUD10bn to housing construction, as well as its cost-of-living measures, notably planned adjustments to the tax system. The government is also progressing with the legislative process for its proposed campaign-finance reform, aimed at limiting the influence of large donations in Australian politics. The reform package includes caps on donations and campaign spending, along with a reduction of the disclosure threshold to AUD1,000 from the current AUD16,900. Externally, the government will continue to strengthen its relations outside of the US and China, notably with India and Japan. The next election will be held by September 2028.