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Australia’s economic outlook is expected to deteriorate over the coming months, with weaker economic growth and higher unemployment forecast in the government’s upcoming mid-year budget update, Treasurer Jim Chalmers has revealed. The warning comes as households face persistent inflation, elevated interest rates and growing uncertainty over the cost of living.

Chalmers said Treasury is revising its economic forecasts ahead of the December mid-year budget update, with higher borrowing costs and continued price pressures expected to weigh on domestic economic activity. Economists have also warned that the effects of previous interest rate increases have yet to fully pass through the economy, raising concerns about employment, housing prices and consumer confidence.

Treasury Revises Economic Growth and Unemployment Forecasts

In remarks prepared for a speech on Friday, Chalmers said higher inflation was continuing to place pressure on households, while tighter monetary policy was slowing economic activity. The government is now preparing for a weaker economic outlook than previously anticipated.

“Treasury is in the process of revising all the numbers for the mid-year update,” Chalmers said in the speech extracts.

He added that higher interest rates and inflation were likely to result in softer economic growth and a modest increase in unemployment.

The revised forecasts will provide a clearer picture of the economic challenges facing the Albanese government as it prepares its next budget update. The deterioration could also intensify political pressure on Labor, particularly as households continue to struggle with everyday expenses and uncertainty about future financial conditions.

Unemployment Reaches Highest Level in Nearly Five Years

Australia’s labour market is already showing signs of weakening. Official jobs data released last week showed the unemployment rate reached 4.7% in September, its highest level in nearly five years.

Despite the increase in unemployment, financial markets have continued to consider the possibility of another interest rate rise by the Reserve Bank of Australia (RBA). On Thursday, markets raised the implied probability of a rate increase on Melbourne Cup day to almost 60%, according to ANZ.

The prospect of further monetary tightening has added to concerns about household spending and business activity. Higher interest rates increase borrowing costs for households and companies, potentially reducing discretionary spending, discouraging investment and slowing hiring.

Jonathan Kearns, chief economist at Challenger, said the economic situation could worsen before conditions improve. He warned that the effects of the four interest rate increases introduced this year had not yet been fully felt across the economy.

Kearns said unemployment could rise further, while housing prices could experience additional declines. Both developments could weigh heavily on consumer confidence, particularly among households managing mortgages and other financial commitments.

He suggested that unemployment could reach 5%, a level that would present a significant challenge for the government.

Housing Market Faces the Risk of a Deeper Decline

Australia’s housing market is another area of concern as households face high borrowing costs and pressure on disposable incomes. Economists at ANZ said they now expected capital city home prices to fall by 13.5% from peak to trough before recovering some ground in 2028.

If realised, the projected decline would represent a record peak-to-trough fall, according to the bank’s assessment. A substantial housing downturn could affect household wealth, consumer confidence and spending, adding to the broader economic slowdown.

Higher interest rates can make mortgages more expensive and reduce the amount buyers can borrow. At the same time, uncertainty about employment and future economic conditions may cause potential buyers to delay purchasing property.

For homeowners, a sustained decline in prices could create additional financial anxiety, even when mortgage payments remain manageable. Economists are therefore watching housing conditions closely as they assess how monetary policy is affecting the wider economy.

Middle East Conflict Adds to Fuel Price Pressures

Uncertainty surrounding the Middle East conflict is creating another risk for Australian households. Elevated fuel prices could increase transport costs and place further pressure on motorists during the festive season and summer holiday period.

Higher fuel costs can also affect businesses by increasing expenses associated with freight, deliveries and other transport-dependent operations. Companies may pass some of those additional costs on to consumers, potentially making it harder to bring inflation under control.

The combination of international energy price pressures and domestic interest rate increases presents a difficult challenge for policymakers. While higher rates are intended to restrain inflation, they can also weaken economic activity and increase pressure on households and businesses.

Sally Auld, chief economist at National Australia Bank (NAB), said the next six to nine months were likely to be challenging for the Australian economy.

Auld said economic growth needed to slow and that the RBA was facing a more difficult inflation situation than it had anticipated as recently as August.

Economists See the Possibility of Improvement Next Year

Although the near-term outlook remains difficult, economists expect economic conditions could begin to improve if inflation gradually declines over the following year.

Auld said that by the same time next year, Australia could be experiencing lower inflation than it is today. A sustained reduction in price pressures would represent progress, potentially giving households and policymakers greater room to manage the economic adjustment.

However, the timing and strength of any recovery will depend on several factors, including the path of inflation, the RBA’s interest rate decisions, developments in the housing market and the performance of the labour market.

If inflation remains elevated for longer than expected, the central bank could face continued pressure to maintain restrictive monetary policy or consider further increases in interest rates. That could prolong the period of weak growth and delay improvements in household finances.

Cost-of-Living Relief Presents a Policy Dilemma

The deteriorating outlook leaves the Albanese government facing difficult choices over economic policy. Additional cost-of-living support could help households cope with higher expenses, but economists warn that measures which boost overall demand could make inflation harder to control.

Kearns said the government’s options were limited because it had faced criticism over public spending and its potential contribution to inflation. Reducing government expenditure could help ease demand pressures, but it could also create political difficulties if weaker spending contributed to slower growth and rising unemployment.

The challenge is to balance support for households against the need to bring inflation under control. Policymakers must also consider how changes in public spending could affect employment, investment and confidence across the economy.

For the government, the consequences extend beyond the immediate budget outlook. Household financial pressure, job insecurity and declining property values could influence public sentiment as Labor looks ahead to the next federal election in 2028.

Australia Faces a Difficult Six Months Ahead

The warnings from Treasury and leading economists point to a challenging period for Australia as the effects of higher interest rates, persistent inflation and global uncertainty continue to unfold.

Rising unemployment and weaker growth could put further pressure on households, while the housing market and fuel prices remain important sources of uncertainty. The possibility of another interest rate increase adds to the risks facing borrowers and businesses.

Nevertheless, economists believe lower inflation could eventually help the economy move towards more stable conditions. For now, the key indicators to watch include monthly employment figures, consumer prices, housing market trends and the RBA’s assessment of inflation risks.

The government’s December mid-year budget update will provide a more detailed assessment of these pressures and their implications for Australia’s economic outlook. Until then, households and businesses are likely to remain cautious as they navigate the prospect of slower growth and a potentially weaker labour market.