The economy has had plenty to contend with in 2026, with an oil shock having pushed up costs, and higher interest rates adding pressure at home. Yet the slowdown that might normally follow has been surprisingly difficult to find.
Reserve Bank of Australia (RBA) Assistant Governor Sarah Hunter said in July that the oil shock had hit consumer and business confidence, but there were still few signs of a marked slowdown in activity, which is an indicator that investors judging how well economies can handle another period of global uncertainty will want to take note of.
Better Growth Than Sentiment Suggests
GDP increased by 0.3% in the March quarter of 2026, according to the Australian Bureau of Statistics, taking annual growth to 2.5%. Quarterly growth of 0.3% hardly looks exceptional on its own, until you consider the backdrop against which it happened. Households have been dealing with higher costs and tighter financial conditions; businesses, meanwhile, have had to make investment decisions against an uncertain global outlook. But despite all of this, private demand has remained an important source of growth.
Business investment has also been particularly notable. Spending on machinery and equipment saw a strong increase during the quarter (with data-centre investment in New South Wales and Victoria contributing to the rise), as did household consumption, which grew at a more modest pace.
Consumers have clearly become more cautious, but they haven't stopped spending to the extent that weak sentiment might suggest. Rather, the RBA's more recent assessment points in the same direction, with household spending easing only gradually.
The Oil Shock Hasn't Become an Economic Shock
Higher oil prices had already negatively impacted confidence in the economy, yet the RBA wasn't seeing the corresponding drop in economic activity. The oil shock not translating into an economic shock made Hunter’s July comments even more significant.
A temporary increase in fuel prices can be absorbed more easily than higher energy costs that persist and begin appearing elsewhere in the economy. For now, though, the impact on activity has been relatively contained.
Higher Rates Haven't Triggered a Sharp Slowdown
The RBA raised interest rates three times during the first half of 2026, taking the cash rate to 4.35%. It then held policy steady in June, although policymakers made clear that further tightening remained possible.
Because higher borrowing costs tend to work gradually as mortgage payments rise and businesses reconsider investment, there’s a reasonable case for expecting a more pronounced loss of momentum when you add an external energy shock. But that loss of momentum hasn't materialised so far. Participants in OANDA will need to note that interest-rate expectations can quickly feed into the Australian dollar. And if the economy continues to withstand restrictive policy, there will be even less reason for markets to expect rapid rate relief. That said, evidence of weaker household spending or employment would change the calculation.
By early July, investors appeared to think the RBA was probably close to the top of the cycle, and Reuters reported that markets had only around 15 basis points of additional tightening priced by the end of the year after oil prices retreated from their earlier highs.
Inflation Makes the RBA's Job Harder
The fact that economic activity hasn't slowed down yet doesn't remove the RBA's main problem: inflation.
Supply shocks are awkward for central banks because higher prices don't necessarily mean domestic demand is excessive. In fact, an increase in oil prices can raise transport and production costs regardless of what consumers are doing. But there’s a difficulty that comes if those increases stick: businesses may eventually pass more of their costs on to customers, while prolonged price pressure can affect inflation expectations. Hunter argued that supply shocks therefore can't always simply be looked through by policymakers. Further tightening isn't automatic, though. If activity or the labour market weakens materially, the RBA would have to weigh the inflation risk against putting additional pressure on the economy.
Why Global Investors Are Paying Attention
Because the country is closely connected to the economic forces shaping the wider Asia-Pacific region, its trade relationship with China and position as a major commodity exporter mean developments at home will always have international ripple effects.
The Australian dollar also gives international markets a liquid way to express changing views on the outlook. Expectations around RBA policy can influence it quickly, as can shifts in commodity markets or sentiment towards China. Investment is also becoming another part of that picture. The economy has long been associated with resources, yet data-centre construction is now contributing meaningfully to business investment. The RBA has noted that private demand remained the main driver of annual growth through the March quarter.
Exposure to weaker conditions overseas remains, particularly through trade. But growth has continued through a difficult external environment, helping explain why global investors are taking notice.
The Next Test Is Already Underway
There’s still pressure at home, borrowing costs remain high, and inflation continues to concern policymakers. What has been notable in all of this, though, is the response underneath those headline concerns. Spending has held up better than confidence measures implied, while investment has provided support. In fact, even the earlier surge in fuel prices appears to have had a relatively contained effect on overall activity. But whether this trajectory will continue depends partly on energy prices and how inflation develops from here.