Why Australia’s economy is set to grow at slowest pace since 1990 and 1991 when high rates led to recession

Australia’s economy is expected to grow at the slowest sustained pace since the early 1990s recession despite high levels of immigration, with weak productivity worsening the inflation challenge.

When Reserve Bank of Australia governor Michele Bullock and her monetary policy board raised interest rates last week to 3.85 per cent, they also released new forecasts showing the economy growing by just 1.6 per cent in the 2026-27 financial year.

That, in itself, would be the weakest pace of annual growth since the COVID pandemic.

Before that, the economy hadn’t been so weak since the Global Financial Crisis in 2008.

But unlike the aftermath of those global shocks, when growth rebounded, Australia’s economy was expected to continue suffering from weak economic activity.

An anaemic 1.6 per cent growth rate was also expected for 2027-28 — a level half the long-term average of 3 per cent.

This would be the weakest two financial years of economic activity since 1990 and 1991 when 17.5 per cent RBA interest rates caused the economy to shrink.

That was also back when Treasurer Jim Chalmers’ political hero Paul Keating was the Labor treasurer who famously said, “this is the recession that Australia had to have”.

Never has growth over two years been forecast to be so weak since the RBA began publishing forecasts and a target cash rate in 1990.

“Certainly, it would be historically quite weak growth,” Deloitte Access Economics partner Stephen Smith told The Nightly.

“Early 1990s, GFC, pandemic, there was a specific shock to the economy and then a rebound.

“We’re not going to be able to get out of this by just rebounding on the other side.

“The economy just can’t grow any faster. It’s more difficult than for most periods. That, I think, is the concern.”

High immigration is also failing to boost economic activity, despite there being more potential customers.

“That’s what Australia has really relied on for the last couple of decades — population growth to drive economic growth, throwing more people into the mix,” Mr Smith said.

“It’s helped us grow but it hasn’t helped us grow as quickly per person as we otherwise would have.”

Weak productivity is being blamed for Australia being forecast to miss out on a traditional upswing after a slow year.

When output per worker hardly improves, the costs of labour are potentially passed on to consumers, keeping prices high and producing a 3.8 per cent rate of headline inflation which is well above the RBA’s 2-3 per cent target.

“At the same time, the Reserve Bank is saying demand is already as high as it can be, we need to put the brakes on,” Mr Smith said.

Even more than most of the developed world, Australia’s supermarkets, banks and airlines are among the globe’s most concentrated, making business investment to outwit competitors and boost staff productivity less of a priority.

“There are certainly sectors in the Australian economy which aren’t competitive enough — the barriers to entry are too high so there’s not enough new entrants and there’s a small number of very large players,” Mr Smith said.

Two of Australia’s Big Four banks — NAB and ANZ — now see another rate rise in May that would take the cash rate to 4.1 per cent, which would be the highest since May 2025, prior to a pre-election rate cut. The futures market agrees.

Deloitte Access Economics sees the cash rate staying on hold, a position shared for now by ANZ and the Commonwealth Bank.