Australia's economic slowdown is just beginning, the experts warn

Australia's economic slowdown is just beginning, economists warn, as interest rate rises and cost-of-living pressures weigh on households.

The economy grew just 0.3 per cent in the first quarter of 2026, the Australian Bureau of Statistics revealed on Wednesday, but the figures only captured the first month of the Middle East war.

"Surging inflation, sky-high oil prices and shattered confidence will collide to crimp spending through the rest of the year," Oxford Economics Australia's head of economic research and global trade, Harry Murphy Cruise, wrote.

Gross domestic product (GDP) per capita went backwards in the quarter, down 0.1 per cent — the first contraction since the start of 2025.

"We expect per capita household spending to be broadly flat in 2026, while softer hiring will push unemployment close to 5 per cent through 2027," Mr Murphy Cruise said.

Recent data showed the unemployment rate rising in April, to 4.5 per cent, meaning Oxford Economics sees a significant weakening in the jobs market from here.

The slowdown in economic growth from the final quarter of last year to the first quarter of this year and the rise in the unemployment rate come as the Reserve Bank battles to get inflation under control.

The RBA expects rate rises to slow the economy. (AAP: Bianca De Marchi)

Inflation was already above the RBA's 2 to 3 per cent target band before the oil shock caused by the Iran War put further pressure on prices.

"We expect inflation to be with us for a while. Higher interest rates are expected to slow the economy and lower the risk that inflation becomes entrenched," RBA board member Ian Harper remarked earlier this week.

HSBC expects weaker demand to filter through the entire economy in the coming months.

"Our view, since March, has been that GDP is likely to contract in Q2 [three months to June]," HSBC chief economist Paul Bloxham wrote.

Two consecutive quarters of the economy contracting would constitute a so-called technical recession.

Australia's economy grew at an annual rate of 2.5 per cent in the March quarter, the same as in the previous quarter.

Mr Bloxham does not see inflation returning to the midpoint of the RBA's target band without a prolonged economic downturn.

"With inflation well above target and growth having been well above potential — given very weak productivity growth — we see the only likely pathway to getting inflation down over a reasonable timeframe is to push the economy into a downturn.

Part of the problem, economists say, is that productivity is no longer just weak; it has gone backwards.

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