Australia: the lucky country

Australia remains one of the wealthiest economies in the G20, with GDP per head ranking second at current exchange rates, behind only the United States. Strong institutions, abundant natural resources and a relatively resilient labour market continue to support high living standards and stable economic performance. Compared with many other advanced economies, Australia also benefits from more favourable demographic trends and comparatively strong long-term growth prospects.

Population growth is expected to continue over the next 25 years, supported by both natural increase and immigration. Importantly, the proportion of the population in the key working-age group of 15 to 64 years is projected to remain relatively stable. This contrasts with many advanced economies that are experiencing rapid ageing and shrinking labour forces. As a result, Australia is better placed than many of its peers to sustain economic growth and manage the fiscal pressures associated with ageing populations.

Inflation, however, has become a growing challenge. Consumer price inflation accelerated sharply to 4.1% year-on-year in the first quarter of 2026, well above the 2.1% rate recorded in the second quarter of 2025.

Measures of underlying inflation have also increased, indicating that price pressures are becoming more broadly based rather than being confined to a few volatile sectors. In response, the Reserve Bank of Australia raised interest rates by 25 basis points in February, March and May, taking the policy rate to 4.35%. Rising oil prices linked to geopolitical tensions are likely to keep inflation elevated in the near term and reduce the possibility of early rate cuts. The IMF expects inflation to average around 3.2% during 2026, still above the central bank’s preferred range.

Economic growth has remained relatively solid despite these pressures. GDP growth reached 2.6% year-on-year in the fourth quarter of 2025, with momentum strengthening steadily through the year. Quarterly growth improved from 1.3% in the first quarter to 1.9% in the second quarter and 2.1% in the third quarter before accelerating further at the end of the year. Although higher oil prices will weigh on household spending and business costs, underlying domestic demand remains reasonably strong, supported by population growth and resilient investment activity.

Australia nevertheless faces significant environmental challenges. Carbon emissions per head remain relatively high by international standards, and the country is not currently on track to achieve net zero emissions by 2050. The structure of the economy, including its reliance on mining and fossil fuel exports, makes the transition more difficult than in some European economies.

From a fiscal perspective, Australia is in a comparatively favourable position. Government debt is around 50% of GDP, low relative to most advanced economies, and is forecast to remain broadly stable over the next five years. This gives policymakers greater flexibility to respond to economic shocks if necessary. The external position also appears manageable. A small current account deficit suggests that the country’s international finances are broadly sustainable, although Australia continues to have relatively high net foreign liabilities.

Monetary and credit conditions are mixed. Private sector credit as a share of GDP has declined from its earlier peak of almost 200%, reflecting a cooling in borrowing activity, while broader money growth has recently strengthened.

Australia also performs strongly in governance and competitiveness measures. It ranks first in the G20 for economic freedom and scores highly for competitiveness, institutional quality and low perceived corruption.

The Australian dollar appears broadly fairly valued according to several purchasing power parity measures, suggesting that currency misalignment is not currently a major economic concern.