A defining feature of the Australian economy heading into 2026 is the unusual starting point of its expansion. Historically, economic recoveries have begun with slack-spare capacity, under-utilised labour, and idle capital. This time, recovery commenced with capacity utilisation already at the highest levels seen in forty years.

This is a double-edged sword. On the positive side, strong utilisation reflects demand resilience, high employment, and well-anchored consumer confidence at a time when many advanced economies have struggled to re-establish growth momentum. Yet it also signals a structural limit: the economy cannot grow much faster without triggering cost acceleration or inflationary pressure.

Policy commentary reinforces this point: growth returning to around 2%-close to Australia’s revised estimate of potential output-may already represent the “speed limit” for the economy. Supply-side growth has been subdued, with productivity growth running well below its long-term average and business investment remaining flat in real terms over the past 18 months.  This is a major issue and constraint moving forward and has a bearing on the retention of skilled and experienced staff.

For business owners, this means 2026 will continue to be shaped by capacity constraints, particularly:

- Pressure on labour availability

- Rising wage and unit-labour costs (though starting to moderate – see our ‘Labour Market’ discussion below)

- Bottlenecks in key service sectors

- High utilisation of existing capital stock

- Growth opportunities will persist—but operating environments will remain tight.

The Australian labour market has displayed remarkable resilience. Even with a modest rise in the unemployment rate to around 4.3–4.5%, the economy retains one of the highest employment-to-population ratios in the developed world. Businesses are still hiring, and job losses remain historically low, though churn has slowed.

We note:

- A reversal of September’s labour softness, with employment rebounding strongly in October

- Continued elevated participation, especially among women, reaching record highs

- Persistent difficulty for new entrants to find work, reflecting a low-hiring environment despite high employment levels

- But we are seeing slowing forward-looking indicators of labour demand-job ads, vacancies, and employment intentions are off their peaks

- Yet, despite these softening signals, underemployment and unemployment both remain low by historical standards

Business owners should interpret this as a tight-but-plateauing labour market: conditions are no longer tightening aggressively, but relief will not be substantial. Wages growth is moderating from its peak yet remains above pre-pandemic norms, and unit-labour-cost growth remains elevated, reflecting the high-utilisation economy. Youth unemployment is accelerating and demand for labour is concentrated in skilled and experienced staff, highlighting the need for businesses to retain these staff.

Key 2026 implications for business owners

a. Recruitment will remain competitive, particularly for skilled and client-facing roles.

b. Retention will be critical-experienced staff remain scarce.

c. Wage pressures may ease somewhat but will stay structurally higher than the decade before COVID.

d. Businesses that invest in productivity-technology, systems, workflow automation-will outperform those relying solely on labour expansion.

While inflation has fallen significantly from its 2022 peaks, underlying inflation in late 2025 surprised on the upside. Much of this increase was temporarily driven by volatile categories and one-off factors-but there were genuine, broad-based components as well.

Policy commentary suggests that roughly two-thirds of the recent inflation pick-up is likely transitory, with one-third reflective of the “true signal” that capacity constraints remain inflationary.

For business owners, the critical insight is that inflation is not likely to re-accelerate, but nor will it fall dramatically from here. Instead, inflation is expected to stabilise just above the midpoint of the 2–3% band through 2026, gradually easing as temporary factors wash out.

Implications for business settings

- Input costs will continue rising, but at a slower pace than in 2023–2024.

- Price-setting power will remain acceptable in industries with strong demand or limited competition.

- Industries exposed to discretionary spending will need to balance price flexibility with value sensitivity.

In short: inflation will not be the central challenge of 2026-but cost management will remain an essential strategic discipline.

The housing market remains one of the most powerful economic forces heading into 2026. Indeed, analysis shows an unambiguous upswing across capital cities:

National dwelling prices are rising at 11% annualised, with several mid-sized capitals posting 15–20% annualised growth

We note:

- Investor activity has surged, with investor credit growth outpacing owner-occupiers by a significant margin

- Households are committing a record $75 billion per quarter in scheduled debt repayments, enabled by high incomes and accumulated savings

- High-income households dominate current market dynamics, pushing premium-segment prices sharply higher

- Capital cities like Brisbane, Adelaide, and Perth show the strongest momentum, with 80–100% increases in house prices since 2019

This powerful upswing reinforces household wealth and supports private consumption, an important consideration given the subdued real-income growth in recent years.

The business owner’s lens

The housing cycle in 2026 matters for several reasons:

a. Wealth effects – House prices influence discretionary spending and business revenues, particularly in services, retail, renovation, construction, and hospitality.

b. Labour market mobility – High housing costs may limit worker relocation or wage flexibility.

c. Cost of labour – Housing affordability pressures can put upward pressure on wages as workers negotiate to compensate for cost-of-living conditions.

d. Investment spillovers – Rising housing wealth tends to stimulate professional services, trades, and consumer-facing industries.

The spillovers are not uniform: the housing uplift is strongest in higher-income cohorts, meaning businesses targeting premium segments may outperform in 2026.

The central strategic question facing Australia in 2026 is whether businesses will lift investment fast enough to expand capacity, lift productivity, and sustain growth without inflation. Despite rising demand, real private investment has been largely flat for 18 months. Businesses have been cautious, particularly in the face of policy uncertainty, global tariff risks, and softening global growth expectations.

Yet the opportunity remains compelling:

- Australia is operating near full capacity

- The nation has one of the world’s largest pools of domestic savings

- Capital costs, while not low, are no longer rising

- Geopolitical realignment is driving demand for secure supply chains, safe havens for capital, and resource-rich jurisdictions

Policy analysis highlights the extraordinary investment potential of Australia - minerals (traditional and critical minerals), renewables, agri-technology, advanced manufacturing, higher education, and services exporting all sit at the nexus of global demand patterns.

Expect businesses in 2026 to begin re-engaging in capital investment, particularly:

- Technology infrastructure

- Workforce automation

- Supply-chain diversification

- Productivity-enhancing capital stock

- Expansion into Asia-Pacific markets

Australia’s structural advantages - geography, education, governance, and resource endowment—are all positive tailwinds for strategic investment.

Although the policy rate remains above pre-COVID levels, broader financial conditions have eased:

- Equity risk premia are historically low

- Credit spreads are narrow

- Banks are actively competing for high-quality lending, especially business credit

- Asset valuations are elevated, supported by domestic and foreign capital flows

For business owners, this means access to credit will remain available and competitive, provided balance sheets are sound. Businesses with strong repayment histories and well-articulated investment plans will find lenders receptive.

Despite headlines about soft consumption, several underlying factors point toward moderately stronger consumer activity in 2026:

- Household savings buffers remain elevated

- Wealth is rising through the housing channel

- Consumer confidence, though volatile, has improved meaningfully in several surveys

- Employment remains high, supporting household income

- Debt-service ratios have stabilised due to improved wage growth and earlier deleveraging

Consensus views emphasise that consumption growth is likely to run in the low 2% range, modest but stable-and not recessionary

This means businesses should expect steady, not spectacular, demand growth, and plan product and pricing strategies accordingly.

Australian businesses should continue to expect geopolitical volatility. Shifts in US–China trade policy remain a central risk. Although tariff threats appear to have had less impact on Australian trade than initially feared, global demand remains fragile. Key highlights:

- US policy actions have been narrower than expected

- Chinese stimulus has partially offset tariff effects

- Australia’s diversified export base has offered resilience

- Commodity markets have remained relatively stable

Nevertheless, risk management will be essential. Businesses reliant on global supply chains must continue diversifying inputs and establishing redundancy.

Drawing the threads together, several strategic imperatives emerge.

a. Invest in Productivity, Not Just Capacity

With labour constraints ongoing, productivity-not headcount-will differentiate winners. Investments in digitisation, systems, automation and workflow design will deliver ROI far above 2020–2023 norms.

b. Strengthen Workforce Value Propositions

Retention will be cheaper than recruitment in 2026. Flexible work models, career development pathways, and total-reward competitiveness will matter.

c. Build Pricing Resilience

Inflation is easing but not disappearing. Businesses must manage pricing with a blend of transparency, value-oriented communication, and disciplined cost control.

d. Use the Credit Window Wisely

Financial conditions are more accommodative than headline rates suggest. Businesses should consider locking in medium-term funding for strategic investments.

e. Position for the Housing-Wealth Cycle

Consumer-facing businesses, particularly those targeting higher-income households, should align product development and marketing to the ongoing housing-driven wealth effect.

f. Prepare for Global Volatility

Supply-chain robustness, currency hedging, and diversified markets will remain essential features of business stability.

g. Commit to Strategic Investment

This is Australia’s decisive economic opportunity: the ability to grow supply capacity and break free from the “rail” of constraint. Businesses that invest early will gain scale advantages.

Australian business owners enter 2026 with a unique combination of conditions: high employment, strong household wealth, stable growth, and robust demand, but constrained by capacity, workforce availability and a structurally tighter operating environment.

The task is not simply to endure these conditions, but to convert them into advantages. Those who invest in productivity, talent, and market positioning will differentiate themselves from the ‘average’. Those who rely on pre-COVID operating models will find the environment unforgiving.

Australia’s economic foundations remain solid but with challenges. For business owners willing to adapt, 2026 offers the chance to position for growth, deepen customer engagement, and strengthen competitive moats in a high-utilisation, high-opportunity economy.