SKILLSOOP Insights: Economic Prediction for Australia in 2026

Based on key economic indicators, SKILLSOOP predicts that the Australian economy is poised for a significant slowdown in 2026. While the labour market has so far displayed resilience, largely supported by government-driven job growth, underlying weakness in the private sector and deteriorating consumer confidence are beginning to tell a different story. Government intervention has increasingly stifled primary economic productivity, suggesting that the economy will enter a period of deceleration in real output. If adjustments to the Federal Funds Rate (FFR) or the M2 money supply continue unchecked, the risk of stagflation will rise.

The year ahead will likely be characterised by labour market tightness and a correction in corporate turnover, placing distinct pressure on both employers and employees. This forecasted slowdown and the squeeze on corporate profitability signal a turning point for Procurement and Supply Chain (P&SC) strategies, shifting focus from growth enablement to aggressive cost management and risk control.

SKILLSOOP observes a clear uptick in unemployment across private sectors, as businesses signal contractionary pressures that threaten job stability. The Manufacturing PMI (51.4) and Services PMI (52.4) remained marginally above the expansion threshold in September 2025, yet both fell sharply month-over-month (-1.6 and -3.4 points, respectively). This loss of momentum indicates that business activity is rapidly losing steam. A simultaneous drop in Capacity Utilization (-1.7 percentage points) and a steep decline in New Orders (-7 points) suggest that employers are scaling back future production plans as demand weakens. As a result, suppliers across non-critical sectors, such as professional services, marketing, and indirect goods, will face reduced utilisation.

Procurement teams should seize this softening market to initiate re-tendering and renegotiation cycles, prioritising flexible volume commitments and incorporating “right-to-audit” clauses into new contracts.

For employers, the combination of weakening demand and a Bank Lending Rate of 10.01% is creating a severe profitability and liquidity squeeze. The high cost of capital makes inventory carrying costs prohibitive, compelling P&SC functions to reduce Days Sales of Inventory (DSI) to free up cash flow. Closer alignment with Sales and Operations Planning (S&OP) will be essential to ensure inventory levels reflect reduced consumer demand and to minimise obsolescence risk. Beyond demand shocks, supply shocks pose an escalating threat. Rising tensions over rare earth minerals and European restrictions on Chinese corporate acquisitions could provoke retaliatory action from China, an event with the potential to disrupt global supply chains overnight. This creates a dilemma between cost and risk, both difficult directions for supply chains to commit to.

With employers scaling back investment, major CapEx projects, including warehouse automation, WMS upgrades, and fleet renewals, will come under heavy scrutiny or be deferred entirely. P&SC functions must pivot towards low-cost process improvements, digital optimisation, and efficiency gains using existing assets. Persistent global supply chain uncertainty, coupled with domestic deflation in specific input costs, may renew interest in near-shoring or reshoring critical supply lines. Though capital-intensive, such strategies will be justified by the imperative to secure supply continuity rather than achieve marginal cost savings.

The recent 14-unit increase in corporate bankruptcies underscores the growing financial distress within the real economy. Employers will be forced to prioritise cost containment, leading to hiring freezes, reduced investment, and redundancies, particularly across Construction and Manufacturing, where industry indexes are already deeply negative. Procurement must respond by intensifying supplier financial risk assessments, identifying mission-critical suppliers, and developing secondary sourcing options or requesting financial transparency from high-risk partners.

As of September 2025, the Unemployment Rate remained low at 4.5%, with 14.64 million employed persons. However, forward indicators paint a less optimistic picture. Job advertisements declined by 3.3% month-over-month, while job vacancies fell by 12,000, foreshadowing a significant softening in labour demand. This weakening environment will gradually erode workers’ bargaining power, reducing wage momentum just as inflation remains elevated. While current unemployment levels still provide employees some leverage, the swift decline in vacancies suggests that job security, not wage growth, will soon dominate worker priorities. In such a context, wage growth will lag, leaving inflation as the more pressing risk to household budgets. Employees should proactively “right-size” their cost of living now, adapting to more modest spending patterns in preparation for potential redundancy or reduced hours. Workers in more elastic or discretionary sectors will face heightened insecurity as employers recalibrate staffing to meet falling demand.

The greatest downward pressure stems from the consumer sector, creating a negative feedback loop that amplifies weakness across both employers and employees. Consumer Confidence fell further in September to a pessimistic 92.1 points, reflecting concern over the persistently high Bank Lending Rate. While Reserve Bank intervention may lower the short end of the yield curve, the mid-to-long end is expected to steepen, ensuring that mortgage and corporate debt costs will rise, not fall. The primary beneficiary of cheaper short-term borrowing will be the government, potentially worsening stagflation pressures if current Keynesian fiscal policies persist. As demand and manufacturing activity slow, domestic logistics bottlenecks are likely to ease.

Freight and 3PL providers will face lower volumes, creating short-term opportunities for Procurement to renegotiate transport and warehousing contracts. Strategic suppliers may offer improved payment terms in exchange for long-term cost-saving collaboration, through value engineering, process simplification, or price certainty agreements.

When consumers are pessimistic and burdened by high debt servicing costs, discretionary spending contracts sharply, leading to reduced orders, falling revenues, and further job losses, especially in services sectors.

By 2026, the Australian economy is shifting from a period of overheating to a demand-led deceleration. This new environment will redefine corporate priorities, compelling employers, employees, and procurement leaders alike to focus on stability, liquidity, and resilience above all else.