Australia’s economy is expected to remain resilient despite subdued consumer spending, with AI-driven investment set to underpin growth and prompt one final RBA rate hike, according to Janus Henderson Investors.
In its July Australian economic outlook, fixed interest strategist – macroeconomics Emma Lawson said the Reserve Bank’s decision to leave the cash rate unchanged at 4.35 per cent was widely anticipated, but inflation pressures remained strong enough to justify another increase.
“We continue to see one last RBA hike, to 4.60 per cent,” Lawson said. “Our high case is one where inflation remains elevated and the RBA [is] forced to raise interest rates more than expected into 2027. Our low case reflects a weaker economic outcome, particularly if supply constraints and rising costs act as a tax to subdue growth.”
Lawson said Australia’s economy had continued to expand, supported by capital investment linked to AI, even as households faced moderating house prices and declining real wages.
“Locally, GDP remained at 2.5 per cent yoy, driven by continued artificial intelligence (AI) related capital investment,” she said. “We expect this investment cycle continues, despite its import heavy nature, to propel domestic demand and maintain an overall positive growth momentum.”
Although household conditions remained subdued, Lawson said spending had proven resilient while the labour market continued to hold up, with unemployment sitting at 4.4 per cent.
She also noted trimmed mean inflation reached 3.6 per cent year-on-year in May, above expectations, leaving the Reserve Bank focused on persistent underlying price pressures.
Turning to fiscal policy, Janus Henderson said this year’s federal and state budgets would have only a modest effect on near-term economic activity despite significant policy announcements.
“The Federal Government fiscal pulse is relatively neutral, despite the changes to the health and tax policies,” Lawson said. “The significant policy changes are only anticipated to have aggregate fiscal impacts in the out years, leaving the near-term forecast fiscal pulse near zero.”
State governments, meanwhile, were continuing to wind back spending introduced during the pandemic, particularly Victoria, as they sought to improve budget positions and stabilise debt levels. New South Wales and Queensland were expected to remain in deficit during the 2026-27 financial year, while other states projected improving surpluses.
Lawson said government consumption was therefore likely to contribute less to economic growth than in previous years, leaving investment to carry more of the economy.
“This leaves the investment side of the economy doing the economic growth heavy lifting,” she said.
Government infrastructure spending was expected to remain elevated in the near term before easing in coming years, while strong private investment associated with the AI investment cycle would continue to support growth.
Despite forecasts for rising government debt over the forward estimates, Lawson argued Australia’s fiscal position remained comparatively strong internationally.
“Would we wish for debt repair? Certainly. But can Australia manage the levels we have and continue to be an attractive sovereign investment environment? Definitely,” she said. “This year’s budget season did not change that view.”
