Highlights

  • Australia's economic growth is projected to moderate as slower housing price growth reduces household spending and weighs on broader economic activity.
  • Investment linked to artificial intelligence is becoming a major source of global growth, particularly in the United States and East Asia, with Australia benefiting from increasing data centre development.
  • Lower oil prices are supporting the global economy, although geopolitical developments and trade conditions continue to influence risks and opportunities worldwide.

Australia's expected economic slowdown is increasingly being linked to housing market conditions rather than energy prices. Weaker growth in house prices is now likely to have a greater impact on economic activity than previously anticipated rises in oil prices.

The moderation in housing prices that began in late 2025 has spread across most major Australian cities, creating more difficult conditions for sellers. Higher interest rates and changes in housing-related policies have contributed to softer market sentiment and slower price growth.

Economists often refer to the "wealth effect" to explain how movements in property values influence consumer behaviour. When home values rise, households generally feel wealthier and more confident about spending. Conversely, when housing prices weaken, consumers often become more cautious and reduce discretionary spending.

This shift in consumer behaviour is expected to become one of the main factors slowing Australia's economy throughout 2026. Forecasts suggest economic growth could ease from around 2.5% in late 2025 to approximately 1.5% by late 2026 before gradually recovering towards 2% by late 2027.

Consumer Spending Shows Signs of Moderation

Household spending patterns are also beginning to soften. Recent retail activity, including end-of-financial-year sales, indicates that consumers may be spending less than they did during the same period a year earlier.

Although household savings levels remain relatively stable, weaker consumer confidence combined with slower growth in housing prices is expected to encourage more cautious financial decisions for the remainder of the year.

Labour market conditions are also expected to become less favourable. Forecasts point to a gradual increase in unemployment, highlighting the challenge facing policymakers as they attempt to balance economic growth with inflation control.

New Growth Opportunities Through AI Infrastructure

Despite weaker conditions in housing and consumer spending, new investment opportunities are emerging through the expansion of artificial intelligence infrastructure.

Australia is experiencing strong growth in data centre development as global technology companies invest heavily in facilities needed to support AI computing. These projects are expected to provide an important source of economic growth over the coming years.

However, several limitations may restrict the speed of expansion. Energy supply, water requirements and the lengthy process of constructing large facilities all present challenges for the sector. In addition, much of the specialised computing equipment used in these centres is imported, reducing the direct economic benefits for Australia.

As a result, while data centre investment is likely to support economic activity, it is not expected to fully offset slower growth in household consumption.

Global Growth Improves as Energy Pressures Ease

The outlook for the global economy has improved due to falling oil prices and rapidly rising investment in artificial intelligence technologies.

Oil prices declined sharply following diplomatic developments involving the United States and Iran, reducing one of the major risks to global economic growth. The speed of this decline surprised many economists, particularly as prices returned quickly to levels seen before recent geopolitical tensions.

Global economic growth is currently expected to strengthen gradually over the next two years. Nevertheless, challenges remain in certain regions. Parts of Europe continue to face pressure from higher natural gas prices following disruptions to important gas infrastructure.

The AI Investment Boom Expands Beyond Technology Companies

One of the most significant global economic developments is the scale of investment flowing into artificial intelligence infrastructure, particularly in the United States.

Large technology companies are investing hundreds of billions of dollars in AI-related facilities, computing power and supporting infrastructure. This spending is now large enough to influence overall economic growth in the United States.

The effects of this investment are expected to spread well beyond the technology sector. Countries that manufacture semiconductors, electronic components and specialised equipment are likely to benefit substantially from increased demand.

Economies such as Mexico, Vietnam, Malaysia, South Korea and Taiwan are expected to receive significant gains from supplying products and services to the AI industry. Larger economies including Japan and China are also positioned to benefit from this investment cycle.

China's economy continues to display a two-speed pattern. Export industries linked to artificial intelligence, advanced manufacturing and green technologies such as electric vehicles remain strong and are supporting economic growth. However, domestic consumer demand remains relatively weak.

A Mixed Outlook for Australia

Australia's economic outlook reflects two contrasting forces. On one hand, slower housing activity and more cautious consumers are expected to restrain growth in the short term. On the other, stronger global conditions driven by artificial intelligence investment and lower energy prices provide new opportunities for expansion.

The benefits of improving global conditions are unlikely to be evenly distributed. Europe continues to face energy challenges, while China's growth remains heavily dependent on exports rather than domestic consumption.

For Australia, the coming years are likely to be shaped by how effectively the economy balances these domestic challenges with the opportunities created by technological investment and changing global trade patterns.