With 2025 drawing to a close, there is a range of unexpectedly favourable news on the economy.
It is setting things up for an even stronger economy in 2026, which will be welcome to the Government as it works to further repair the fiscal settings and lock in these better economic times for the general population and the business sector. A sustained lift in business confidence, investment and hiring is vital to offset some of the slack from slower growth in public sector demand.
That said, the saying that “beauty is in the eye of the beholder” holds for views on economic conditions as well.
Some folk “love” rising house prices and low wage growth, others the opposite. Their preferences are often based on pre-determined biases about their access to housing or the availability of affordable labour for businesses to engage in their pursuit of business growth and higher profits.
The details of the economy outlined below offer a clear-eyed view without fear or favour.
While we are still a little way from former Prime Minister Paul Keating’s assessment some 30 years ago that “they are a beautiful set of numbers” when describing a set of strong economic indicators, we are getting some attractive news on economic conditions.
Importantly, the economy is growing at a decent pace, with GDP rising 2.1% in the year to the September quarter, the strongest growth in two years and materially stronger than the cyclically low growth rate of 0.8% in the year to the June quarter 2024.
Within that growth performance, the composition of economic conditions is more favourable. Business investment is now strong. New dwelling construction activity is moving solidly higher, which is the essential issue in dealing with the housing shortage.
Productivity growth is also lifting — up 0.8% in the past year, with especially strong growth in non-mining productivity.
The unemployment rate is holding below 4.5%, a rate that has only been lower for a couple of years since the mid-1970s. Low unemployment, in other words, remains a key feature of the current strength in the economy.
The level of household wealth is hitting record highs. Abstracting for just a moment from issues of fairness and equity in housing affordability (that is for another article), the boom in house prices plus the unrelenting accumulation of retirement savings in personal superannuation accounts has seen household wealth reach record levels.
In net terms, which is calculated by subtracting household debt from total household assets, is currently more than nine times annual household disposable incomes (chart on page 10), which is materially higher than the six times income just a decade ago and five times two decades ago.
At the same time, wage growth remains solid, with the wage price index up 3.4% over the past year and compensation of all employees up almost 7%. Rising wages are critical for the household sector, keeping up or even exceeding the broader inflation rate. There is rising purchasing power for wages and salary earners, which is a welcome change from the recent past.
There is one potentially looming problem in the economy as the year ends.
Inflation.
While the trimmed inflation rate edged up to 3.3% in the year to October, which is above the top end of the Reserve Bank’s target band of 2-3%, there remains considerable doubt about the skittishness of the recent results.
Most of the pick-up in inflation in the past few months has been driven by what are called “administered” prices — the price to consumers of items heavily or totally influenced by government charges. These include items such as the ending of electricity subsidies, excise increases on tobacco and alcohol, public transport fares and local council rates and charges. Changes in the price of these items, particularly over the last few quarters, are not influenced to any extent by changes in official interest rates.
This is why some of the more alert economists are largely excluding or downplaying much of the recent news on inflation. In other words, some of these price spikes will wash out of the inflation data in the months ahead.
While the economy is still a little way from being strong and in good shape, 2026 will kick off with a scorecard of economic indicators that are more favourable than a year ago.
Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.
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