The signals that matter for Australia’s economic resilience

Stagnant productivity and stubborn inflation test Australia’s resilience as capacity tightens and risks multiply.

In brief:

• Australia’s productivity has stagnated, limiting living standards and making inflation harder to contain without bold reform.
• Inflation expectations have lifted to 5.5%, up from 4.7%, reinforcing pricing pressures and shaping wage and investment decisions.
• Tight capacity lifts the case for investment, with early movers better placed to manage risk, lock in efficiency and protect margins.

How much output can we produce with all the land, labour, capital and enterprise that we have in Australia? Not much more than we did five years ago, it turns out, which means across the economy, we have a productivity performance that can best be described as stagnant.

Poor productivity isn’t unique to Australia, nor is it a complete measure of our economic strength or our happiness as a nation, but without some improvement, our material living standards won’t move forward as they have in the past. Business leaders and policymakers both know that it makes inflation harder to contain as growth risks stalling in a narrow, capacity-bound-lane.

As we look into 2026, this is the indicator that we most need to move forward, but like a very large, very slow ship, it is unlikely to do so in any significant way in the short term. In this second term of Government, with a large electoral majority behind Mr. Albanese and team, we hope the political capital to make bold changes will be spent. If not now, then when?

In the meantime, some faster-moving indicators are worth watching. These are better at indicating where the economy is in the business cycle, although that too can be complicated, as the Reserve Bank has found out over summer. An unexpected inflation upswing has been an unwelcome start to 2026.

Inflation that refuses to fade

You’d be forgiven for assuming Australia’s inflation problem is the result of global geopolitics or protectionist trade policies. Outside of jewellery prices, it isn’t. While the world is grappling with wars and protectionism that push up costs, there’s little evidence that these forces are meaningfully inflating Australian prices. Some substantial imports, including gas and petrol, even became cheaper over last year.

In fact, the appreciation of the Australian dollar, which is at least partly a reflection of overseas events weakening the US dollar, is helping put downward pressure on Australian prices.

Domestic factors are at play, resulting in the Reserve Bank’s 25 basis point rate hike this month. Household income and consumption have moved forward at a decent pace, dwelling investment has picked up, exports are still looking healthy and government spending has been strong.

So, demand has run more strongly than supply (with supply being held back by poor productivity growth). And an indicator of whether this will continue is consumer expectations for inflation for the two years ahead - now 5.5 per cent, up from 4.7 per cent.

Inflation expectations influence pricing, wage setting and capital allocation. For business leaders, persistently elevated inflation requires more conservative cost planning, sharper risk management and tighter scrutiny of investment sequencing. Higher borrowing costs also reshape the economics of expansion, M&A activity and balance sheet strategy.

Capacity utilisation - how close are we getting to the ceiling?

One of the most revealing indicators of business cycle stages is the NAB business survey capacity utilisation measure, which has turned upward again after easing through 2024 and early 2025. Rising utilisation signals that the economy’s supply is being used up and risks fuelling inflation unless there is more investment or an effort to do things more cleverly. When there is not enough capital in new equipment to match growth in the workforce, Australia suffers from “capital shallowing.”

There are some signs that business is responding with a pick up in investment intentions, especially in the non-mining sectors. Data centre infrastructure and renewable energy construction are moving forward at pace. Firms that move early can lock in efficiency gains and expand capacity before bottlenecks start eroding margins. Those that delay risk encountering labour shortages, cost pressures and operational strain.

Geopolitics - even the unexpected sources

Unconventional though it may seem, as an economist trying to read the current state of play, I have been paying close attention to Truth Social posts from US President Trump. A single announcement - such as the nomination of Kevin Warsh as US Fed Chair late last month - was a prominent example of how a post can move markets, triggering shifts in equity and commodity prices as well as currency.

Geopolitical and major economic events, whether social posts or developments across one of the many conflict zones around the world are, unfortunately, business as usual in 2026. Yet, EY-Parthenon research shows, of the political risk events that impacted companies in 2025, 35 per cent were completely unexpected, with a further 42 per cent catching leaders off‑guard at least half the time.

Hedging strategies, supply chain decisions and capital planning frameworks must assume the possibility of abrupt shocks, regardless of their origin.

Domestic politics: a fracturing landscape

Australia’s political system is now contending with a voter base that is more fractured and sceptical than at any point since Federation. The steady rise of minor parties and independents – now outperforming the Coalition in primary vote share – complicates the policy environment.

With power concentrated in increasingly diverse capital-city electorates and a shrinking major party footprint in the regions, the incentives driving political decision making are diverging. This heightens the risk that long term structural reforms become hostage to short term political calculus, at a time when the economy needs clarity and decisiveness.

Businesses planning major investments in energy, infrastructure, technology or skills face a higher probability that settings may shift, and organisations must build flexibility into capital planning, workforce strategy and risk management.

Resilience through investment, ideas and technology

Australia’s long-term prosperity hinges on how business and government optimise our limited resources. Lifting Australia’s capacity requires bold reform, not incremental changes. There is no magic bullet, no one policy that takes the economy on a sure-fire path to success. There is, however, consensus that the tax system needs to be updated, including with investment incentives to accelerate the adoption of technology and the climate transition and to attract more foreign capital (and keep Australian capital at home). The policy environment also needs to encourage a more equitable distribution of housing amongst the population and especially across generations.