Business Weekend | 1 March

Key Concepts

• Economic Strain & Inflation: The Australian economy faces inflationary pressures (currently 3.8% annually) driven by government spending, energy prices, wage growth, rents, and housing costs.
• RBA Monetary Policy Critique: The RBA’s attempts to simultaneously lower inflation and maintain full employment are deemed unsuccessful, with calls for interest rates to rise to at least 4%.
• Company Performance Amidst Challenges: Despite higher interest rates, many Australian companies reported strong profits, with Woolworths, Harvey Norman, and Quantas demonstrating resilience.
• Property Market Dynamics: Rising interest rates and surging property prices are impacting both prospective homebuyers and existing owners, leading to affordability issues and increased mortgage stress.
• Investor Resilience: Investor lending remains strong, driven by tight rental markets and expectations of reduced competition from owner-occupiers.

Economic Overview & RBA Policy

The Australian economy is experiencing strain, with annual inflation at 3.8%. A growing consensus acknowledges that government spending contributes to inflationary pressure and higher interest rates, though recent messaging from the Treasurer signals a shift towards fiscal responsibility. Core inflationary drivers include energy prices, public servant wage growth, rising rents, and increasing home prices – areas where the government has direct influence.

Former RBA Head of Economic Research, John Simon, heavily critiques the RBA’s monetary policy, arguing their attempt to simultaneously lower inflation and maintain full employment was flawed. He believes interest rates need to rise to at least 4% to address entrenched inflation, emphasizing the RBA’s traditional role as the “bad cop” making difficult decisions. He clarifies that lowering inflation doesn’t mean prices fall, but rather that their rate of increase slows. Simon discussed the Non-Accelerating Inflation Rate of Unemployment (NAIRU), explaining it’s not fixed and requires constant updating based on economic indicators. He suggests Australia is currently below the NAIRU, potentially contributing to inflationary pressure.

Productivity gains are highlighted as crucial for addressing economic challenges, with government policy identified as the key driver. Criticism is leveled at the current government for prioritizing spending on initiatives like childcare and the NDIS over structural reforms in areas like tax, industrial relations, and energy projects.

Company Reporting Season Highlights

The recent company profit reporting season concluded with a record share market performance, indicating businesses have fared well despite higher interest rates.

• Woolworths: CEO Amanda Bardwell attributes success to “listening to customers” and providing value, with a 3.4% half-year sales growth and a focus on improving availability and fresh produce. Their on-demand delivery service is the fastest growing proposition.
• Harvey Norman: Executive Chair Jerry Harvey reported strong sales across all segments, supported by a significant property portfolio valued at approximately $5 billion. He expressed surprise at the share market’s negative reaction to the results. Harvey emphasized adapting to changing consumer preferences and the potential of AI in retail.
• Quantas: Despite a share market downturn following a solid half-year profit, CEO Vanessa Hudson outlined a strategy for long-term growth focused on fleet renewal (60% performance improvement in Jetstar attributed to new fleet), a revamp of the Frequent Flyer scheme, strategic aircraft deployment, and navigating 57 Enterprise Bargaining Agreements (EBAs). The airline’s “Project Sunrise” initiative for ultra-long-haul flights is also a key component of their strategy.

Property Market Impact & Investor Activity

Rising interest rates and surging property prices are significantly impacting the Australian property market. Prospective homebuyers, like two sisters initially planning to purchase on the Sunshine Coast, are being “priced out” and forced to adjust their plans, considering different locations and property types.

Homeowners are experiencing increased mortgage repayments, exemplified by investor Joe, who is considering restructuring her finances and potentially increasing rent on tenants. Investor lending has remained resilient, constituting 40% of all loans in the December quarter of 2025, driven by a “big ramp in investor activity” and reduced owner-occupier competition.

Despite mounting rate pressure, experts predict continued home price rises, albeit at a slower pace than the previous year. February’s rate hike has had a “modest impact” so far, but the central question remains the RBA’s ability to “successfully tame inflation.” Money markets anticipate one or two further rate increases throughout the year. National prices surged 8.4% in the past 12 months.

Conclusion

The Australian economy is navigating a complex landscape of inflationary pressures, rising interest rates, and a dynamic property market. While company performance remains relatively strong, the RBA’s monetary policy is under scrutiny, and affordability challenges are escalating for both homebuyers and renters. Investor activity remains surprisingly resilient, suggesting continued demand despite the economic headwinds. Ultimately, addressing these challenges requires a combination of responsible fiscal policy, structural reforms to boost productivity, and a careful balancing act by the RBA to tame inflation without triggering a significant economic downturn.