What does the economy hold for businesses in 2026?

The economy shows its resilience

As 2025 came to a close, the Australian economy was showing its resilience. The economy outperformed expectations and ended the year in a cyclical upswing, a marked improvement from a year earlier when it was growing below trend.

This resilience is tied to several factors and prevailed even amid new levels of geopolitical uncertainty. The economy’s growth drivers have shifted through the economic cycle, and household savings and business balance sheets have been rebuilt.

While growth has picked up, helped by stronger household spending and business investment, inflation shows signs of persistence. As a result, the Reserve Bank of Australia (RBA) is lifting interest rates to bring inflation back into its target range.

Approaching the growth speed limit

The growth we’ve seen in the economy has brought related challenges, as there is limited capacity to meet rising demand. What I mean is that every economy has a growth ceiling based on the available supply of inputs, such as labour and capital. If surpassed, it can generate inflation and our view is that the Australian economy is at, or above, that ceiling.

So, despite growth being good news for the economy, concerns around inflation have shifted our outlook on interest rates. The RBA is now forecasting inflation to remain above 3% through 2026, prompting the cash rate increase to 3.85% in February. While it’s a close call, we expect this will be followed by another hike in May to 4.10%, more as a fine-tuning exercise rather than a longer-term rate-hiking cycle.

It’s worth noting that higher productivity is one way to lift capacity and grow the economy without generating inflation. There are encouraging signs of productivity improvements that are flowing through to business investment, and the potential for new tools, including artificial intelligence (AI), to help businesses become more productive. 

Business investment a bright spot

At an economy-wide level, business investment has been a recent wildcard. Our view is that the large-scale rollout of data centres and continued energy transition could lead to a 5-year investment cycle. However, due to capacity constraints, we expect a slight easing in business investment growth this year, before it rises again in 2027.

From a lending perspective, we’re seeing upgrades in capital expenditure planning support credit growth as businesses change their funding mix. Generally speaking, it’s been growing very strongly over the past two years, and credit demand trends follow the economic trajectory as well as business funding decisions.

While overall business confidence has brightened and demand has improved, this isn’t reflected equally across businesses of different sizes. Confidence among smaller businesses has lifted, but not to the same extent as larger peers. Small businesses have many opportunities, but being at the coalface of the economy and navigating pricing and staffing pressures might help explain why relative confidence is lagging.

Wages growth a double-edged sword

Businesses are also experiencing elevated costs, particularly as wage growth of more than 3% translates to higher staffing expenses. A 4.1% unemployment rate, which is lower than we would expect at this point in the cycle, is driving more competition for talent. If wages growth rises and adds to inflation it will be closely watched by the RBA.

In contrast, wage growth also supports stronger household spending. For most of 2025, we maintained a positive view of consumer spending. Looking back, consumers’ willingness to spend outpaced our expectations, particularly in the December quarter last year. From a consumer confidence standpoint, we’ve seen some softening amid lingering inflation and the prospect of higher rates.

For businesses, there is much to be optimistic about in 2026 and beyond. More resilience has been built into the economy over 2025, and the demand profile remains positive. The questions that remain are about managing the two-sided nature of the economic forces at play.

That is, balancing stronger growth, supply capacity and inflation or tighter employment, wage growth and staffing costs. The answers will influence business decision-making this year, as well as the opportunities and funding choices considered as they seek to invest and grow.