Where Is the Australian Economy Headed? Why It’s in Better Shape Than We Think

Rising interest rates, falling house prices and persistent inflation may have left many Australians feeling pessimistic about the Australian economy, but not AMP Deputy Chief Economist Diana Mousina. 

In a recent presentation at the Equity Mates Finfest, Mousina explained that the data is not as black and white as many may feel. Australia is in better shape than many realise. 

So, where is the Australian economy headed? In Mousina’s view, inflation and higher interest rates are causing short-term pain, but the longer-term outlook remains positive, supported by strong investment markets, relatively low wealth inequality, manageable household debt and government debt that is low by global standards. 

Key takeaways 

• The Australian economy is facing challenges such as lagging productivity, high household debt, falling house prices, housing unaffordability and rising government debt. 
  
  
• Mousina believes there are still positives. Investment markets are strong and more Australians are investing than in the past, while an intergenerational wealth transfer of $5.4 trillion is expected over the next 20 years. 
  
  
• Australia has lower levels of wealth inequality and government debt than its global peers and, at this stage, household debt remains affordable thanks to rises in overall household wealth and assets. 
  
  
  

Consensus Concerns: House Prices, Interest Rates & Inflation 

Mousina starts with the known – the fear that many Australians will simply be left behind. 

‘It takes 10 years to save for a 20% deposit for a home,’ says Mousina, compared with three to four years back in the 1980s. She notes that it is unlikely we’ll ever see that again, and that this is similar to the experience of our global peers. 

AMP anticipates that house prices will decline by 13% in total from peak to trough – they have already fallen by around 6.7% since March this year. 

She adds that Australia’s lagging productivity has translated into flatlining real income growth, while high household debt-to-income levels mean people are more static, rather than moving around for opportunities. 

Further to this, government debt levels have climbed steadily since the Covid pandemic and are the highest in decades (outside of wartime). This will be a drag on future generations. 

Australians are currently feeling the pressure of persistent inflation and the rising interest rates used to combat it. This week, the Reserve Bank of Australia (RBA) announced a 25 basis point (bps) increase to the cash rate, bringing it to 4.85%, the highest level in 18 years. 

Concerns about future economic growth are also present, with the 2026 Intergenerational Report suggesting slower annual growth of 2% over the next 40 years (compared with 3% over the last 40 years). 

Reasons To Be Optimistic  

The challenges are indisputable, but there’s more to be positive about than Australians may realise, according to Mousina. She points to four key reasons. 

1. Investing 

More Australians are investing, at younger ages, than ever before. The ASX Australian Investor Study found that an estimated 11.5 million Australians invest outside of their superannuation and home, compared with 1.01 million back in 1986. Further to this, the baby boomer generation is expected to transfer $5.4 trillion in wealth over the next 20 years, which younger generations are likely to use in a variety of ways, from consumption to housing and ongoing investment. 

Investors have also benefited from long-term returns in the domestic share market and US markets. 

2. Levels of wealth inequality 

Compared with our global peers, levels of inequality haven’t risen as much in Australia. Wealth inequality is measured using the Gini coefficient, which has remained largely flat since 2002. 

‘This comes down to the fact we have a very broad-based welfare system,’ Mousina says. 

3. Household assets and wealth have risen, while debt seems manageable 

Household debt is high relative to other countries but, despite interest rate rises, Mousina highlights that there has been less household stress and fewer arrears than might have been expected. 

Household assets and wealth have risen on the whole, partly due to substantial increases in housing prices – Mousina points to a 50% increase since the Covid pandemic – along with highs in the domestic and global share markets. 

4. Government debt levels 

‘A lot has been made of government debt. The budget numbers in the past few years have still been pretty elevated. We’ve been quite lucky that the economy has done so well that it helps offset a lot of the downside to the budget, but our level of government debt is actually still very low relative to our peers,’ Mousina says. 

Where is the Australian Economy Headed? 

Mousina views inflation as the biggest challenge for the Australian economy, but highlights the continued strength of the labour market and other positives. 

‘If we get through inflation, Australia will be in a much better place,’ Mousina says. 

‘We do have a lot of really good resources for the long term and strong sectors here, particularly the finance sector,’ she adds, also referencing agriculture, education and a shorter-term opportunity in data centres. 

In short, there’s temporary pain, but plenty to like about the Australian economy over the longer term. For a broader view of the forces shaping markets, read The Bigger Picture: November 2026. 

Frequently asked questions 

Where is the Australian economy headed? 

According to AMP Deputy Chief Economist Diana Mousina, the Australian economy faces short-term pain from persistent inflation and rising interest rates, but its longer-term outlook is positive. Strong investment markets, relatively low wealth inequality, rising household wealth and comparatively low government debt all support this view. 

What are the key challenges facing the Australian economy? 

Inflation has been a major challenge for the Australian economy, which the Reserve Bank of Australia seeks to manage by increasing the cash rate. Alongside this, there are high levels of household and government debt in Australia, combined with falling house prices. Lagging productivity is expected to be a longer-term problem, translating into lower growth over the next 40 years than in the past. 

Will Australian house prices keep falling? 

AMP anticipates that Australian house prices will fall by 13% in total from peak to trough. With prices already down by around 6.7% since March this year, AMP’s forecast suggests further declines are possible before the market bottoms out. 

Why is Diana Mousina optimistic about the Australian economy? 

Mousina highlights strong investment markets, flat wealth inequality, rising household assets and wealth, and government debt levels that are lower than those of global peers as reasons to be optimistic about the Australian economy. 

She also highlights the finance, agriculture, commodities and education sectors as strengths for the economy, along with a short-term opportunity in data centres. 

What does the Australian economic outlook mean for investors? 

Investors who have been concerned about the strength of the Australian economy may still find opportunities for growth in the market. Inflation and productivity challenges are not necessarily a reason to avoid domestic investments, as there are still positives about the Australian economy. Learn more in How to Invest Domestically & Thrive Despite the Tough Australian Economy. 

Higher interest rates have also lifted the income on offer from cash and term deposits, bond funds and other income funds. For more, read Income Investing’s New Rulebook: How to Earn a Real Yield as Rates Keep Rising. 

Disclaimer: This article is prepared by Sara Allan. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.