October 14, 2025 • 11 mins
The Australian economy is at an interesting point right now. House prices are rising, consumers are more confident, and inflation seems to be largely under control.
But that decline in inflation appears to have flatlined. Jobs growth has also slowed sharply, and wages growth is easing more quickly than expected.
Commonwealth Bank’s economics team has just released its 2026 outlook. Sean Aylmer speaks with Luke Yeaman, Commonwealth Bank's Chief Economist, about the year ahead for the economy.
Find out more: https://fearandgreed.com.au/
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:05):
Welcome to Fear and Greed Q and A, where we
ask and answer questions about business, investing, economics, politics and more.
I'm Suan Alma. The Australian economy is at an interesting
point right now. House prices are rising, consumers are a
bit more confident, and infation seems to be largely under control.
We think the labor market still remains reasonably strong. And
(00:27):
then we've got big international variables like US tariffs and
trade tensions between the US and China creating more uncertainty.
So what does the next year hold for Australia. Commonwealth
Bank's economics team has just released its twenty twenty six outlook.
Luke Jaman is Commonwealth Bank Chief Economist. Look, welcome back
to Fear and Greed.
Speaker 2 (00:45):
Thanks Sean Great too back.
Speaker 1 (00:47):
So what's the state of play? Where do we sit
at the moment.
Speaker 2 (00:51):
We're in a really interesting juncture because we've got clear
signs of the economy. The Australian economy is strengthening. We're
seeing consumption pick up, we're seeing house prices rise, and
so we're seeing that cyclic glopswing come through in the
economy that we've all been waiting for. Through the first
few months of this year. It's a little behind time,
but it is coming through. On the other hand, we
(01:12):
are seeing inflation rear its head again a little bit
early days, but we're seeing inflation start to pick up
again in the September quarter, which is certainly going to
give the Reserve Bank pause for thought. And the labor
market is softening. So there are some cross currents that
are making the picture really interesting.
Speaker 1 (01:27):
Just take a step back and give me it. Give
us an economics lesson here, Luke, is there a perfect
spot for the economy? I mean, the Reserve Bank's supposed
to keep full employment and prices a lid on prices.
You could almost argue they're there now, though maybe we
don't have economic great so like, how does it all work?
Speaker 2 (01:46):
That's a great question. The Reserve Bank talks a lot
about balance, bringing supply and demand in the economy into balance.
The economists talk about a neutral rate, or reach full
employment or the NEHRU, But what it means is that
the economy is operating broadly and balance, the level of
supplies matching the level of demand, prices are stable, growth
is a solid The facts are today we're quite close
to that. Everyone accepts. We're close to around neutral. Growth
(02:09):
has picked up, we've got inflation coming back towards the
target band, and employment is sitting around full employment under
our four point three percent. So we're in a fine
tuning world now. And the question is where do we
go from here. Do we start to see the economy
pick up and drive inflation back above the target band,
or instead, do we see the economy continue to soften
(02:29):
a bit further the unemployment rate tick up a little more,
which could pave the way for further rate cuts. But
we're very close to that. The concept of balance right now.
Speaker 1 (02:37):
I'll get to your forecast in a moment, but just
before that, I want to talk about productivity because that's
a really important part of this balance being maintained without
getting issued up in inflation or poor economic growth or
that type of thing. Just explain that.
Speaker 2 (02:53):
You know, productivity is at the heart sits at the
heart of all of our economic variables, and it's the
main source over time in which we get long term
improvements and living standards. And if productivity is lifting, then
you can generate more growth, more activity without generating inflation.
So we want to see productivity lift. Unfortunately, in Australia.
Over the past couple of years, COVID has thrown the
(03:14):
productivity stats around quite a bit, but when you look
through that, productivity has not been where we want it
to be. It's been too low. The Reserve Bank recently
and their recent statement on monetary policy actually downgrade of
their technical assumption for productivity. And we're hoping to start
seeing a lift over time, but that's going to be
dependent on seeing a lift in the private side of
the economy and non market jobs, which tend to be
(03:37):
more productive. And we are seeing signs that's coming through,
but there's still some way to go.
Speaker 1 (03:42):
Is it something that I mean, Michelle Bullock the other
day talked about demands shifting from public to private. We
know that when lots of people got jobs within the
public sector around aged here and I mean they're less well,
it doesn't help the productivity numbers. And don't like to
say they're less productive, but that doesn't help the productivity numbers.
Do you think that's a natural shift or do we
(04:02):
need government policy? Do we need business being incentivized to
invest more? How do you kind of give it a kickstart?
Speaker 2 (04:11):
Yeah, I think there's two things going on here. So
if you look back at the economy over the twelve
months to say March this year, almost all of the
growth in the economy, both in terms of GDP growth
and jobs growth, was coming from the government sector. GDP
was running at about one point three percent annually and
around one percent of that in March was coming directly
from the government sector. So that's been the big driver
(04:32):
of jobs and growth in the economy. Some of that
is a structural shift. We've seen huge growth in healthcare,
in the National Disability Insurance Scheme and some of the
other services that it will consume. That is a structural
shift and I don't think that's going to go away
anytime soon. There's a larger share of the economy being
devoted to those kind of public services, and they do
(04:53):
tend to be, at least in measured terms, lower productivity,
so that's skewing the numbers overall. At the same time,
we had a cyclical decline, a temporary decline in private demand,
and that was because of higher registrates, higher inflation. That
looks like it's now turning around and we are seeing
a solid pickup in private sector jobs and that should
mean that we start to see a bit of a
(05:14):
cyclical improvement in the productivity numbers, which will help bring
down costs to business of employing workers what we call
unit aper costs, and that should help the RBA on
the inflation front.
Speaker 1 (05:25):
Okay, so what is your outlook for inflation and interest rates?
So what's come wealth banks outlook for inflation interst rates?
Speaker 2 (05:31):
So at this stage, what we expect to see is
inflation coming down a little further. Inflation was steadily on
the down, on the downslide, moving back towards the midpoint
of the inflation target at two point five percent. We
saw in the June quarter a positive set of numbers,
But in July and August we've seen the monthly inflation
figures tick up, and that has certainly given the market
(05:51):
quite a bit of pause for concern and us here
at CBA, it's a bit early to say whether that
is a permanent shift back up in inflation or whether
it's a temporary pause. Our current view is that we
still expect to see a little bit of further disinflation
in coming months. Part of the reason for that is
that we're still seeing the labor markets soften. Jobs growth
has slowed to around five to ten thousand jobs new
(06:13):
jobs a month, whereas previously it was running closer to
thirty or forty thousand new jobs a month. And our
internal CBA data is showing that wages growth is continuing
to ease in the economy as well. So with the
weakening labor market and slower wages, we think inflation will
come down a little further and that will allow the
Reserve Bank to cut rates one more time in this
cycle in February twenty twenty six. But the risks are
(06:35):
very finely balanced and they sit to the upside, so
it is possible that we've seen the last rate cut
in this cycle.
Speaker 1 (06:41):
Okay, house prices come off. Thank being the biggest mortgage
lender in the country, what do you expect from house prices?
Speaker 2 (06:48):
One of the hard and fast rules of economics in
Australia is when interest rates are coming down, house prices
start to rise. And we're certainly seeing a solid pickup
in house prices now. Our latest forecasts are that we'll
see a six percent increase in house is this year
and a four percent increase in house prices next year,
so ten percent for the cycle we took it. That's
a relatively conservative view because there are some factors working
(07:09):
against higher house prices right now. We've got population growth
starting to slow, we've still got some affordability constraints in
the market, and this is a relatively shallow interest rate
cutting cycle. We're predicting only one hundred basis points of
cuts in the whole cycle from men start to end.
So for those reasons, we went with a relatively conservative
increase of around ten percent. I think if you look
at the data so far, it's possible there's some upside
(07:31):
risk to that forecast. We're seeing house prices pick up
quite strongly, a little ahead of our expectations, and there's
certainly a sense of activity and anticipation in the market
as investors look for.
Speaker 1 (07:42):
Returns jobs the jobs market, So.
Speaker 2 (07:45):
The jobs market overall is still very strong for Australia.
The unemployment rate at four point three percent. If you
went back a few years, you would take that every day.
So fundamentally the lead market is sound. But as I mentioned,
there has been a clear slowing in the pace of
new job creation. It hasn't yet flowed through to the
unemployment rate. There is a risk that you could see
the unemployment rate tick up a little above our forecast
(08:05):
of four point three percent, which is around where we
are today. But at this stage we still expect to
see a soft landing overall in the labor market.
Speaker 1 (08:13):
What about geopolitical factors. We have US China trade tensions,
We have the Middle East. Fortunately phase one was successful,
but we've still got to get to phase two on
that one. I know that Zelensky and Trump are scheduled
to meet later this week. How does that all play
out for Australia so far?
Speaker 2 (08:32):
So far, you'd have to say Australia has been pretty
well insulated from the trade war. The direct impacts of
tariffs as relatively small. But there's some big risk out there,
and you've touched on a number of them. I think
the two that we would watch most closely, the US
China relationship, is still very fraught. President Trump and President
She planning a potential meeting in coming weeks. There is
(08:52):
talk of an impending trade deal, but that is not
going to be easy to land. And if we see
further a further breakdown in those negotiations, if we see
further countermeasures and countermeasures applied by China and the US
like we saw in the last few days, then we
could see more market volatility, and that's something we'd expect
to see. It's not easy for these two superpowers to
(09:14):
land a trade deal, and so we think that will
drag on with increased volatility affecting markets. The other key
watch point for US going into twenty twenty six is
the Federal Reserve. In the US, we expect to see
the FED cutting rates a little further three more rec
cuts in this cycle. But the Fed's independence and its
credibility is certainly under attack in the US and there
(09:35):
are risks that the FED loses some of its credibility,
and if that happens, that would have quite a big
impact on markets. It would push up long term inflation expectations.
It's too early to say that will happen. At this stage.
We think the FED will still maintain its independence, but
it's a real watch point for markets in twenty twenty six.
Speaker 1 (09:51):
Look at Tadley left field question. I think it's apocryphal story,
but Ian McFarlane used to be the Reserve Bank governant.
They used to talk about him sitting in his reserve
in Martin Place, looking at the ships coming in and
seeing how low they sat in the water, or high
and judge the economy on that, so I'm sure it's apocryphal.
Do you have a favorite or favorite the number of
favorite economic indicators?
Speaker 2 (10:13):
Huh. I like them all as an economist, but I
think one you do, but the one that i'd really highlight.
At the moment, all of the action is going to
focus around the quarterly trim mean CPI. There's been a
lot of talk about the monthly CPI versus the quarterly
CPI and what you can rely on the Reserve Bank's
being to some degree talking down the monthly statistics. I
(10:33):
think the biggest watch point I would have in the
economy is the quarterly trim mean. If that continues to
come down, then I think we're going to see continued
rate cuts, so at least one more red cut in
this cycle. If that doesn't keep coming down, then that's
what the Reserve Bank first and foremost will prioritize. They
talk about a dual mandate for the Reserve Bank, and
I'm sure they take that very seriously, but as central bankers,
inflation in my world always comes first.
Speaker 1 (10:55):
Luke, thanks for talking to fear and greed pleasure. That
was Luke Yaman, Chief at Commonwealth Bank. If you've got
something you'd like to know, then send through your question
on LinkedIn, Instagram, Facebook, or at Fearangreed dot com dot
A you I'm sure I all THATTT and this is
Fear and Greed Q and DA
Welcome to Fear and Greed Q and A, where we
ask and answer questions about business, investing, economics, politics and more.
I'm Suan Alma. The Australian economy is at an interesting
point right now. House prices are rising, consumers are a
bit more confident, and infation seems to be largely under control.
We think the labor market still remains reasonably strong. And
(00:27):
then we've got big international variables like US tariffs and
trade tensions between the US and China creating more uncertainty.
So what does the next year hold for Australia. Commonwealth
Bank's economics team has just released its twenty twenty six outlook.
Luke Jaman is Commonwealth Bank Chief Economist. Look, welcome back
to Fear and Greed.
Speaker 2 (00:45):
Thanks Sean Great too back.
Speaker 1 (00:47):
So what's the state of play? Where do we sit
at the moment.
Speaker 2 (00:51):
We're in a really interesting juncture because we've got clear
signs of the economy. The Australian economy is strengthening. We're
seeing consumption pick up, we're seeing house prices rise, and
so we're seeing that cyclic glopswing come through in the
economy that we've all been waiting for. Through the first
few months of this year. It's a little behind time,
but it is coming through. On the other hand, we
(01:12):
are seeing inflation rear its head again a little bit
early days, but we're seeing inflation start to pick up
again in the September quarter, which is certainly going to
give the Reserve Bank pause for thought. And the labor
market is softening. So there are some cross currents that
are making the picture really interesting.
Speaker 1 (01:27):
Just take a step back and give me it. Give
us an economics lesson here, Luke, is there a perfect
spot for the economy? I mean, the Reserve Bank's supposed
to keep full employment and prices a lid on prices.
You could almost argue they're there now, though maybe we
don't have economic great so like, how does it all work?
Speaker 2 (01:46):
That's a great question. The Reserve Bank talks a lot
about balance, bringing supply and demand in the economy into balance.
The economists talk about a neutral rate, or reach full
employment or the NEHRU, But what it means is that
the economy is operating broadly and balance, the level of
supplies matching the level of demand, prices are stable, growth
is a solid The facts are today we're quite close
to that. Everyone accepts. We're close to around neutral. Growth
(02:09):
has picked up, we've got inflation coming back towards the
target band, and employment is sitting around full employment under
our four point three percent. So we're in a fine
tuning world now. And the question is where do we
go from here. Do we start to see the economy
pick up and drive inflation back above the target band,
or instead, do we see the economy continue to soften
(02:29):
a bit further the unemployment rate tick up a little more,
which could pave the way for further rate cuts. But
we're very close to that. The concept of balance right now.
Speaker 1 (02:37):
I'll get to your forecast in a moment, but just
before that, I want to talk about productivity because that's
a really important part of this balance being maintained without
getting issued up in inflation or poor economic growth or
that type of thing. Just explain that.
Speaker 2 (02:53):
You know, productivity is at the heart sits at the
heart of all of our economic variables, and it's the
main source over time in which we get long term
improvements and living standards. And if productivity is lifting, then
you can generate more growth, more activity without generating inflation.
So we want to see productivity lift. Unfortunately, in Australia.
Over the past couple of years, COVID has thrown the
(03:14):
productivity stats around quite a bit, but when you look
through that, productivity has not been where we want it
to be. It's been too low. The Reserve Bank recently
and their recent statement on monetary policy actually downgrade of
their technical assumption for productivity. And we're hoping to start
seeing a lift over time, but that's going to be
dependent on seeing a lift in the private side of
the economy and non market jobs, which tend to be
(03:37):
more productive. And we are seeing signs that's coming through,
but there's still some way to go.
Speaker 1 (03:42):
Is it something that I mean, Michelle Bullock the other
day talked about demands shifting from public to private. We
know that when lots of people got jobs within the
public sector around aged here and I mean they're less well,
it doesn't help the productivity numbers. And don't like to
say they're less productive, but that doesn't help the productivity numbers.
Do you think that's a natural shift or do we
(04:02):
need government policy? Do we need business being incentivized to
invest more? How do you kind of give it a kickstart?
Speaker 2 (04:11):
Yeah, I think there's two things going on here. So
if you look back at the economy over the twelve
months to say March this year, almost all of the
growth in the economy, both in terms of GDP growth
and jobs growth, was coming from the government sector. GDP
was running at about one point three percent annually and
around one percent of that in March was coming directly
from the government sector. So that's been the big driver
(04:32):
of jobs and growth in the economy. Some of that
is a structural shift. We've seen huge growth in healthcare,
in the National Disability Insurance Scheme and some of the
other services that it will consume. That is a structural
shift and I don't think that's going to go away
anytime soon. There's a larger share of the economy being
devoted to those kind of public services, and they do
(04:53):
tend to be, at least in measured terms, lower productivity,
so that's skewing the numbers overall. At the same time,
we had a cyclical decline, a temporary decline in private demand,
and that was because of higher registrates, higher inflation. That
looks like it's now turning around and we are seeing
a solid pickup in private sector jobs and that should
mean that we start to see a bit of a
(05:14):
cyclical improvement in the productivity numbers, which will help bring
down costs to business of employing workers what we call
unit aper costs, and that should help the RBA on
the inflation front.
Speaker 1 (05:25):
Okay, so what is your outlook for inflation and interest rates?
So what's come wealth banks outlook for inflation interst rates?
Speaker 2 (05:31):
So at this stage, what we expect to see is
inflation coming down a little further. Inflation was steadily on
the down, on the downslide, moving back towards the midpoint
of the inflation target at two point five percent. We
saw in the June quarter a positive set of numbers,
But in July and August we've seen the monthly inflation
figures tick up, and that has certainly given the market
(05:51):
quite a bit of pause for concern and us here
at CBA, it's a bit early to say whether that
is a permanent shift back up in inflation or whether
it's a temporary pause. Our current view is that we
still expect to see a little bit of further disinflation
in coming months. Part of the reason for that is
that we're still seeing the labor markets soften. Jobs growth
has slowed to around five to ten thousand jobs new
(06:13):
jobs a month, whereas previously it was running closer to
thirty or forty thousand new jobs a month. And our
internal CBA data is showing that wages growth is continuing
to ease in the economy as well. So with the
weakening labor market and slower wages, we think inflation will
come down a little further and that will allow the
Reserve Bank to cut rates one more time in this
cycle in February twenty twenty six. But the risks are
(06:35):
very finely balanced and they sit to the upside, so
it is possible that we've seen the last rate cut
in this cycle.
Speaker 1 (06:41):
Okay, house prices come off. Thank being the biggest mortgage
lender in the country, what do you expect from house prices?
Speaker 2 (06:48):
One of the hard and fast rules of economics in
Australia is when interest rates are coming down, house prices
start to rise. And we're certainly seeing a solid pickup
in house prices now. Our latest forecasts are that we'll
see a six percent increase in house is this year
and a four percent increase in house prices next year,
so ten percent for the cycle we took it. That's
a relatively conservative view because there are some factors working
(07:09):
against higher house prices right now. We've got population growth
starting to slow, we've still got some affordability constraints in
the market, and this is a relatively shallow interest rate
cutting cycle. We're predicting only one hundred basis points of
cuts in the whole cycle from men start to end.
So for those reasons, we went with a relatively conservative
increase of around ten percent. I think if you look
at the data so far, it's possible there's some upside
(07:31):
risk to that forecast. We're seeing house prices pick up
quite strongly, a little ahead of our expectations, and there's
certainly a sense of activity and anticipation in the market
as investors look for.
Speaker 1 (07:42):
Returns jobs the jobs market, So.
Speaker 2 (07:45):
The jobs market overall is still very strong for Australia.
The unemployment rate at four point three percent. If you
went back a few years, you would take that every day.
So fundamentally the lead market is sound. But as I mentioned,
there has been a clear slowing in the pace of
new job creation. It hasn't yet flowed through to the
unemployment rate. There is a risk that you could see
the unemployment rate tick up a little above our forecast
(08:05):
of four point three percent, which is around where we
are today. But at this stage we still expect to
see a soft landing overall in the labor market.
Speaker 1 (08:13):
What about geopolitical factors. We have US China trade tensions,
We have the Middle East. Fortunately phase one was successful,
but we've still got to get to phase two on
that one. I know that Zelensky and Trump are scheduled
to meet later this week. How does that all play
out for Australia so far?
Speaker 2 (08:32):
So far, you'd have to say Australia has been pretty
well insulated from the trade war. The direct impacts of
tariffs as relatively small. But there's some big risk out there,
and you've touched on a number of them. I think
the two that we would watch most closely, the US
China relationship, is still very fraught. President Trump and President
She planning a potential meeting in coming weeks. There is
(08:52):
talk of an impending trade deal, but that is not
going to be easy to land. And if we see
further a further breakdown in those negotiations, if we see
further countermeasures and countermeasures applied by China and the US
like we saw in the last few days, then we
could see more market volatility, and that's something we'd expect
to see. It's not easy for these two superpowers to
(09:14):
land a trade deal, and so we think that will
drag on with increased volatility affecting markets. The other key
watch point for US going into twenty twenty six is
the Federal Reserve. In the US, we expect to see
the FED cutting rates a little further three more rec
cuts in this cycle. But the Fed's independence and its
credibility is certainly under attack in the US and there
(09:35):
are risks that the FED loses some of its credibility,
and if that happens, that would have quite a big
impact on markets. It would push up long term inflation expectations.
It's too early to say that will happen. At this stage.
We think the FED will still maintain its independence, but
it's a real watch point for markets in twenty twenty six.
Speaker 1 (09:51):
Look at Tadley left field question. I think it's apocryphal story,
but Ian McFarlane used to be the Reserve Bank governant.
They used to talk about him sitting in his reserve
in Martin Place, looking at the ships coming in and
seeing how low they sat in the water, or high
and judge the economy on that, so I'm sure it's apocryphal.
Do you have a favorite or favorite the number of
favorite economic indicators?
Speaker 2 (10:13):
Huh. I like them all as an economist, but I
think one you do, but the one that i'd really highlight.
At the moment, all of the action is going to
focus around the quarterly trim mean CPI. There's been a
lot of talk about the monthly CPI versus the quarterly
CPI and what you can rely on the Reserve Bank's
being to some degree talking down the monthly statistics. I
(10:33):
think the biggest watch point I would have in the
economy is the quarterly trim mean. If that continues to
come down, then I think we're going to see continued
rate cuts, so at least one more red cut in
this cycle. If that doesn't keep coming down, then that's
what the Reserve Bank first and foremost will prioritize. They
talk about a dual mandate for the Reserve Bank, and
I'm sure they take that very seriously, but as central bankers,
inflation in my world always comes first.
Speaker 1 (10:55):
Luke, thanks for talking to fear and greed pleasure. That
was Luke Yaman, Chief at Commonwealth Bank. If you've got
something you'd like to know, then send through your question
on LinkedIn, Instagram, Facebook, or at Fearangreed dot com dot
A you I'm sure I all THATTT and this is
Fear and Greed Q and DA
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Follow now to get the latest episodes of Dateline NBC completely free, or subscribe to Dateline Premium for ad-free listening and exclusive bonus content: DatelinePremium.com
CrimeLess: Hillbilly Heist
It’s 1996 in rural North Carolina, and an oddball crew makes history when they pull off America’s third largest cash heist. But it’s all downhill from there. Join host Johnny Knoxville as he unspools a wild and woolly tale about a group of regular ‘ol folks who risked it all for a chance at a better life. CrimeLess: Hillbilly Heist answers the question: what would you do with 17.3 million dollars? The answer includes diamond rings, mansions, velvet Elvis paintings, plus a run for the border, murder-for-hire-plots, and FBI busts.