Economies expand and contract in a fluctuating pattern known as the business cycle. When we see growth in a country’s goods and services outputs (its gross domestic product – or GDP), we view it as a good sign of flourishing economic activity.

But endless growth is unsustainable.

A healthy economy is cyclical. In some months, the GDP growth rate will be lower. And sometimes, growth will stop altogether, reversing course into negative.

A prolonged decline in GDP raises fears of recession — i.e., a widespread economic downturn that lasts many months.

Because the impacts of a recession are broad, it’s important to understand what happens – and how a recession could affect you.

(Related: How To Buy CBA Shares).

What Is A Recession?

An economy is often described in the media as having entered a ‘technical recession’ when negative GDP growth continues for a period of six months, or two quarters.

Slowdowns and recessions are usually caused by external or financial shocks, or the monetary or fiscal policies a country applies. For instance:

Above: Australia has experienced a number of economic declines throughout its history.

If There’s No Official Definition, When Do We Worry?

Two quarters of negative growth is not the definition used by all governments and economists to evaluate economic health.

A ‘technical recession’ can be triggered without rising jobless rates or serious risk of a persistent slowdown.

Above: Australia’s GDP per capita has been hovering near zero since 2024.

For instance, Australia was widely considered to be in a ‘per capita recession’ since the start of 2026:

Essentially, growth is returning – slowly – after the slowest few years on record since ’91.

Above: GDP is not exactly staging a strong rebound. In typical Australian style, it’s recovering at a modest pace.

What Happens To The Economy During A Recession?

It’s understandable to worry about recessions because sluggish growth and more people out of work can lead to:

Mass layoffs, bankruptcies and business failures are especially damaging — people’s livelihoods are deeply affected and it hurts the economy’s capacity to regain momentum.

AMP’s chief economist Shane Oliver points out that Australia has avoided recessions since the 1990s by adopting smart measures.

These include:

Australian economist Michael Blythe said that because public spending can moderate the impact of a downturn, his preferred measure of the state of the business cycle is private spending.

He said a typical recession involves peak-to-trough falls in private spending of 1-4%.

“Outright falls in private spending clearly mark the five major recessions of the early 1960s, the mid 1970s, early 1980s, the early 1990s and 2020.” — Michael Blythe, economist

What Happened During The GFC?

The so-called ‘Great Recession’ that followed the GFC saw:

Australia fared much better. Our GDP growth didn’t decline for two quarters, but the unemployment rate rose from around 4% to 5.75% between early 2008 to mid 2009.

Analysis from the RBA shows there was a longer-than-usual lag between when the GFC downturn started and when unemployment started rising, reflecting tightness in the labour market.

Many employers looked to hold on to talent as they knew they’d be hard to replace.

(Related: 7 Best Crypto Exchanges In Australia).

What Happened During The COVID Pandemic?

The COVID pandemic that swept the globe starting in late 2019 resulted in a series of lockdowns that forced a pause in business activity in many countries.

Here’s what happened that year:

By October 2020, there were some signs of recovery and Q3 GDP results for 2020 revealed the Australian economy had grown by 3.3%.

The United States, the United Kingdom, Japan, Germany, France, Canada and Italy all saw negative growth in the first two quarters of 2020.

The need to restart economies after the initial waves of the pandemic resulted in low interest rates and significant government stimulus being delivered.

Which led to more consumer spending, and saw recessions lift.

Above: The US economy expanded by 33.1% in the third quarter of 2020, the largest quarterly growth rate recorded in the US.

COVID was a uniquely disruptive event, rather than a part of the usual business cycle — and its effects are still being felt through persistent inflationary pressure.

The US economy saw two quarters of negative GDP growth when the pandemic emerged, but the US Bureau of Economic Research (NBER) found that America’s economy experienced a recession of just two months in 2020.

Capital Group U.S. economist Darrell Spence said the US’ 2020 downturn was described as a recession for lack of a better word.

Are There Upsides To A Recession?

There may be silver linings.

Contractions in the business cycle can be deflationary — businesses might lower prices or offer more special deals to try to bolster demand.

The Reserve Bank of Australia (RBA) is also more likely to cut the official cash rate to stimulate economic activity.

As banks lower their rates, it becomes cheaper to borrow, which encourages investment and spending.

While you’d expect asset prices to fall in a recession, history tells us that property prices don’t necessarily crash.

House prices actually rose in many parts of Australia during the worst months of the early 90s recession, but they did fall during the GFC.

How Good Are We At Predicting Recessions?

It’s incredibly difficult to predict how the economy will behave.

Recession concerns increased in both the US and Australia in 2023-24, but both economies avoided a technical recession.

In December 2023 — when fears of a US recession were still very much alive — head of global aggregate bonds at J.P Morgan Asset Management, Myles Bradshaw said it was hard to foresee the timing of an economic cycle’s contraction.

Naturally, this doesn’t stop economists and others from speculating.

Most predictions are based on mathematical modelling and patterns from historical data.

They’ll look at things like: data about the labour market, retail sales, consumer spending and household income; consumer and business sentiment surveys; and the performance of housing and financial markets.

In addition, indicators commonly used to help predict recessions include:

Some less conventional ways that people take stock of the economy include:

Indicators aren’t perfect, simply a guide to how the business cycle is unfolding and whether a recession is more or less likely.

How Long Do Recessions Last And What Happens Afterwards?

Recessions vary in length and impact depending on their breadth and depth. If the recession is mild and short-lived, the economy may rebound quickly.

Looking at 122 recessions in 21 advanced economies in the period between 1960-2007, the International Monetary Fund found that they typically last about one year and result in a 2% decline in GDP.

While a recession ends when growth picks up again, that doesn’t mean an economy’s troubles disappear.

The World Economic Forum gives the example of the global Great Recession of 2008, where quantitative easing was initiated to pump trillions into world economies:

Can You Recession-Proof Yourself?

Avoiding financial risk and panicked decisions is wise during a recession.

You may seek to rebalance your portfolio to lower-risk assets like government bonds and gold, but speak with a financial adviser before you do so.

Markets are likely to rebound eventually, so inaction may be the right approach.

What poses a risk to you will depend on your current financial situation and how much risk you can handle without losing sleep.

Your vulnerability during a recession is largely tied to your income-generating potential. Consider how you’ll fare if you lose your job or your business revenue declines?

Another way to think about recession-proofing yourself is to invest in skills and innovation capacity — so that you’re positioned to pivot or capitalise on the most in-demand areas of the economy or job market, regardless of how it’s travelling.

Jody

On the surface, the euro looks unstoppable. Against the Australian dollar, the trend has been clear – and uncomfortable for AUD holders.

As of August 2026, €100 costs roughly $164 AUD, putting the exchange rate near €0.61, up from around €0.58 earlier in the year.

To the casual observer, that looks like a simple, familiar story.

The Aussie dollar is weakening against another major currency – again.

Tip: Zoom out for better historical context of AUD/EUR performance.

And with talk of a European economic recovery circulating for end of 2026, many forecasts predict the slide is far from over.

But exchange rates don’t tell the full story.

Slower, deeper forces beneath the surface are shaping AUD/EUR’s future.

(Related: 7 Lies FIRE Movement Tells About Freedom).

First, growth is compounding faster in Australia, creating a tailwind for AUD relative to EUR:

Second, the public debt risk picture looks more ominous in Europe:

When you examine those forces, the euro’s future looks far less safe than the numbers suggest.

Here’s what almost nobody is talking about in the AUD vs EUR outlook for 2026.

2025 Was Brutal For AUD vs EUR – Here’s Why.

The reversal of the so-called ‘Trump trade’ played havoc, causing the AUD’s value to slip substantially.

Soft economic data out of the US – combined with President Trump’s announcement in March of 2025 of tariffs to be imposed on Canada, China and Mexico – saw investor sentiment switch.

US stock markets dipped, and the euro suddenly became a lot more attractive to forex traders.

Trade tensions and market volatility escalated further in April, with new, large tariffs threats, including against the European Union.

But amidst stock market tumbles and trade negotiations, the EUR continued its strength against the greenback.

(Largely due to a lack of confidence in the American currency).

In July, the Governor of the Bank of Finland, Olli Rehn, described the rebalancing of exchange rates as a “historic opportunity to elevate the euro into a trusted global anchor.”

On the other hand, traders dumped the Aussie.

‘Liberation Day’ tariff turmoil saw the AUD drop to below US$0.60, and plummet to just €0.54. A five-year low.

While the Aussie has rebounded somewhat since then, it’s still down against the euro.

What Experts Are Warning About AUD vs EUR.

The AUD to euro forecast from Westpac sees the currency pair softening a bit by 2027.

Above: By start of 2027, Westpac thinks AUD/EUR will soften to €0.59.

An outlook from OFX published on 8th July predicted the AUD/EUR pair would trade within a range of €0.6036 – 0.6082 for the next few months.

Its analysts said markets could favour the euro in the coming months if signs of improvement in the German manufacturing sector continue into 2026.

A continuation of the US Federal Reserve’s wait-and-see approach in 2026 is also expected to weaken the US dollar.

Whereas the European Central Bank (ECB) looks set to hold or potentially start lifting its policy rates in 2026.

In addition to a more dovish Fed, the US economy doesn’t stack up as well against Europe’s fiscal agenda in coming years, according to Mahjabeen Zaman, ANZ’s head of FX research.

Of course, the rate differential with the US should also help boost the Aussie against the greenback – but it’s less likely to benefit the AUD against the EUR.

ING FX analysts are bullish on the EUR/USD rising to €1.20 by end-2026 , but it depends heavily on the Fed’s next moves:

The strength of the euro area economy will also be a deciding factor.

What Is The Impact Of Monetary Policy On The AUD/EUR?

Although inflation in the eurozone isn’t quite within target – at 2.1% compared to its 2% goal – 93% of economists polled by Reuters in November 2025 think the ECB will keep rates on hold throughout 2026.

But more policy easing is likely in the US.

Even with the differential in the US’ favour, its easing agenda and shaky economic conditions, compared to a stabilising euro area, could lend weight to appreciation of the euro.

But demand for the AUD against the euro could improve given the Reserve Bank of Australia (RBA) looks to be shifting back into hawkish territory.

A widening of the interest rate differential between Australia and the eurozone could bolster the AUD/EUR cross pair. 

Will The AUD Get Stronger In Late 2026?

The AUD/EUR pair’s exchange rate is heavily influenced by how both currencies perform relative to the US dollar – a safe haven currency for investors.

But a major headwind for the Australian dollar in 2026 is slowing demand for our commodities, in large part due to China’s property sector downturn and slump in consumer demand.

Another risk comes from US-China trade relations.

Tensions ratcheted up again as President Trump met with President Xi in October, with Xi determined to push back on tariffs against China.

However, a deal was reached.

And Westpac’s Elliot Clarke said the Chinese economy was “well insulated from the US threats”.

He argues the key downside risk is household demand, which China’s latest 5-Year plan does aim to boost.

Historical Performance Of The AUD/EUR.

The euro took a beating in 2022, depreciating against the US dollar in one of its worst-performing years. At one point, it lost 16% of its value against the greenback.

In July 2022, the euro lost parity with the US dollar for the first time in 20 years — it’s historically been worth more than the dollar.

(Related: AUD to GBP: Expert Forecast).

Russia’s invasion of Ukraine naturally affected economies across the Eurozone due to supply chain disruptions, increased energy costs and increased fear and doubt among consumers.

Not coincidentally, it was the euro area’s worst year of inflation – reaching 10.6% in October 2022.

But the AUD to euro pairing declined again, then moved into a period of stability.

Final Verdict On AUD To Euro Outlook.

Forecasts are for the AUD/EUR to lift slightly to sit in the range of €0.59- €0.61 in 2026 – meaning one euro is worth around $1.64 Australian dollars.

A widening interest rate differential between Australian and European central banks could increase demand for the Aussie relative to the euro, but the impact may be minimal.

The AUD/EUR exchange rate also rests largely on the policies, growth prospects and political tensions that emerge out of the US, Europe and China.

Jody

On the surface, the GBP looks bulletproof. Against its major peers, sterling hasn’t exactly been limping. As of December 2025, one pound buys roughly:

To many investors, those numbers scream strength. Stability. A currency that has survived wars, financial crises, Brexit and political division.

So what’s the problem?

Tip: Zoom out for a better historical context of AUD/GBP performance.

Because scratch just beneath the surface – and the GBP’s resilience begins to look less like strength.

And more like complacency.

While AUD/GBP forecasts fixate on today’s exchange rates, the real story is unfolding where few analysts venture:

Debt dynamics also matter – because FX markets hate government balance-sheet stress:

This nuance suggests the forecast for GBP in 2026 looks far less comfortable than the spot price suggests.

Meanwhile, the AUD – usually dismissed as the “risk-on”, commodity-soaked underdog – may not be as weak as the narrative implies.

Yes, the AUD is notoriously sensitive to China’s growth cycles and commodity prices.

But 2026 could break that familiar script.

Why Experts Are Nervous About GBP In 2026.

Are you an Australian looking to exchange your AUD for GBP?

I have great news. Forecasts predict the Aussie dollar will appreciate slightly throughout 2026.

One Australian dollar is currently being exchanged for £0.49, but forecasts from Westpac and NAB show it staying within the £0.50-£0.52 range over the next 12 months.

Above: By December 2026, NAB believes AUD/GBP will be £0.52.

The GBP/AUD currency pair is currently 2.02 (as of 1 December 2025), down -3.4% over the previous 6 months.

Data-dependent fluctuations have characterised the cross-pair of late.

(Related: 7 Lies FIRE Movement Tells About Financial Freedom).

In early November, the AUD briefly gained some ground against both the sterling and the US dollar – thanks to a more hawkish Reserve Bank of Australia (RBA), which held rates at 3.60%.

The sterling broadly declined after GDP data released on 13 November 2025, showed the UK economy had grown just 0.1% in the third quarter (compared to an expected 0.2%, and following 0.3% growth in Q2) .

ABS unemployment data, also released on 13 November, revealed Australia’s jobless rate had fallen to 4.3% from 4.5% the previous month.

But the sterling has been showing some signs of strength since then.

Markets didn’t go too crazy in reaction to the UK’s budget – handed down on 26 November.

But the pound did see an initial spike in value, giving the GBP/AUD exchange rate a lift. 

Currency analyst Lee Hardman, from MUGF’s Global Currency Research, said on 27 November that the lack of “negative policy surprises” in the budget wouldn’t be enough to sustain upwards momentum for the pound.

However, Scotiabank’s FX forecast anticipates less easing from the Bank of England compared to the US Federal Reserve, justifying a bullish outlook for GBP moving forward.

At least relative to the greenback.

Of course, Australia’s currency should also do well against the US dollar, given the emerging rate differential. 

But the AUD’s relative strength to the pound will likely hinge on factors such as:

ING’s FX outlook for 2026 posits that with Fed cuts on the agenda and a less dominant USD, G10 countries’ activity data will play a greater role in shaping exchange rates.

(Related: What Happens In A Recession?)

Its analysts think the pound sterling will remain vulnerable moving forward, while the Australian dollar could be a ‘positive standout’.

Why Is The GBP In Decline?

As one of the strongest currencies in the world, the British pound (GBP) is a free-floating currency that is among the top four most-traded currencies on the forex market.

Key reasons for the pound’s strength include:

While the pound has been generally stronger than the US dollar and the AUD in recent decades, a few major events have knocked the GBP’s value against leading currencies, including:

In recent years, the pound has also lost some ground to a US dollar.

The Greenback has been remarkably resilient in the face of subdued global growth, widespread monetary policy tightening and geopolitical upheaval.

In March 2024, Bloomberg reported that the UK economy seemed to be holding up better than expected with its high interest rate, which meant the British pound was beating more than 90% of the world’s currencies.

The pound was one of the best performers – of G10 currencies – against the US dollar throughout 2024.

US ‘exceptionalism’ has been tested in 2025, with President Trump’s policies, trade wars, geopolitical tensions, soft economic data, and attacks on US institutions all reflected in the USD’s weaker performance of late.

The euro saw greater gains arising from a weaker USD than the pound. But the GBP/USD was up over 5.5% for the year (as of 1 December).

At the end of December 2024 a pound was worth US$1.25. The GBP/USD exchange rate fell to $1.21 in early January 2025 and was $1.32 at the time of writing in December 2025.

(Related: Best Cryptocurrency Exchanges In Australia).

Why Interest Rates Could Flip AUD vs GBP.

How a stronger pound against the greenback affects cross rates like the GBP/AUD in 2026 is yet to be seen.

But on the AUD side, we could see impacts from:

On the flip side, challenges facing the UK in coming months that could weaken the pound include:

The UK’s most recent CPI data (released 19 November) shows inflation rose more slowly in the 12 months to October 2025.

But at 3.6%, it’s still well above the BoE 2% target.

The US Federal Reserve is also a shoo-in to continue easing in December 2025, bringing its interest rate range to 3.50%-3.75%.

Meanwhile, in Australia, the chances of additional interest rate cuts by the RBA have diminished. Rate hikes could become a reality, which tends to lift the AUD.

Prices are rising again, as demonstrated by 3.8% headline inflation and a 3.3% trimmed mean in the October CPI, issued on 26 November by the ABS. 

ANZ senior economist Adelaide Timbrell said in November that the October CPI print showed a pattern of accelerating core inflation in recent months.

If current data is sustained, it adds to the risk the RBA won’t cut further, according to Timbrell.

The Final Verdict on AUD vs GBP in 2026.

Expected deeper monetary easing in the US, compared to the UK – and a return to hawkish sentiment in Australia – could see the Aussie and the sterling strengthen.

The pound’s strength may outweigh any investor interest in Australia’s on-risk currency if global conditions deteriorate any further.

Jody

Australia has a problem we don’t like talking about. In just a few years, Australia’s living standards have fallen faster than in any other developed economy.

We’re paying more.

Producing less.

This combination is dangerous.

It’s how economies drift into trouble without ever technically “crashing.”

Moreover, real incomes are still 2% below their pre-pandemic peak – while the average OECD country is 7% ahead.

Above: Australia’s productivity has stalled. Living standards followed.

Net result? Australians are no better off than they were a decade ago.

The RBA is calling these “temporary challenges”

Let’s uncover the hidden signs – and predict how Australia’s economy will perform in 2026.

What Does A ‘Technical’ Recession Mean?

If a country’s economy experiences weak or negative growth for six consecutive months, some economists call it a technical recession.

Above: Economic growth has cooled sharply after the RBA hit the brakes.

The sustained drop in economic growth is measured by the change in gross domestic product (GDP) produced by a country, adjusted for inflation (also known as real GDP).

Reduced production is an important indicator — but many global economists also take into account factors including:

In Australia, a prolonged decline in GDP combined with a substantial increase in unemployment is generally a recession signal.

Above: The economy contracts and recovers as part of a normal business cycle. The central bank will adopt a loose monetary policy to prevent a significant decline in economic growth.

This occurs when the business cycle contracts from a peak of economic activity and high prices, leading to less consumer demand and businesses trimming their staff levels.

(Related: What Happens In A Recession?)

Will High Interest Rates Lead To A Recession?

A number of countries experienced recession or were on the brink due to the slow economic recovery from the COVID-19 pandemic.

Many central banks committed to raising interest rates to stifle inflation - and policy easing only commenced in mid-2024.

(Related: Interest Rate Forecast: When Will RBA Slash Rates?)

Or in Australia’s case, in February 2025, when the Reserve Bank of Australia (RBA) reduced the cash rate to 4.10% after it sat at 4.35% for more than 12 months.

The RBA provided further relief in May 2025, cutting rates by 0.25% for a second time, bringing the policy rate to 3.85%.

But August brought another rate cut, with the RBA slashing the rate to 3.6%, the lowest since mid-2023.

Markets were convinced the central bank would bring the cash rate down to 3.35 per cent by December 2025.

But a surprising uplift in price growth put an end to those ideas.

Markets now doubt we’ll see any further rate cuts.  In fact, they’re pricing in cash rate increases — the implied yield of ASX cash rate futures is 3.85% by June 2026.

Although, AMP’s deputy chief economist Dina Mousina said in December 2025 that talk of hikes was premature, especially given that forward-looking labour market indicators were “basically flat-lining”.

A debate continues in many countries about whether central banks left rates too high for too long, and whether they’ve cut deep enough, or perhaps too much.

For instance:

Most central banks remain cautious as they strive to keep a lid on inflation without loosening labour markets.

Especially given the increased geopolitical unrest and policy uncertainty.

The IMF also highlighted how strained financial market valuations (e.g., AI stocks) and strained public finances were both risky situations that could boil over.

It pointed out that “increased pressure” on central banks was also creating a credibility issue that could exacerbate economic woes.

Trust in policy-setters’ ability to deliver price stability helps keep inflation expectations well-anchored in the face of large economic shocks, the IMF noted. 

(Related: Best Cryptocurrency Exchanges In Australia.)

The IMF’s comments point to a growing issue with the credibility of the US Federal Reserve — with the FOMC being hounded by President Donald Trump throughout 2025 to slash rates more substantially.

In November, Trump said of Fed Chair, Jerome Powell: “I’d love to fire his ass.”

The Fed did cut rates when they met on 10th December, citing rising unemployment in the US as a key concern. And inflation is lingering too.

Job cuts have surged in the US.

A bit over 1.1 million lay-offs were made in 2025 (as of 4th December, 2025), according to US firm Challenger, Gray & Christmas.

If you don’t count the madness during the pandemic, it’s the highest level of job cuts since 2001 — which was a recession year.

It follows on the heels of disappointing monthly GDP data, with estimated growth of just 0.1% in Q3 2025 and 0.2% the previous quarter.

Enough that the consensus view is for a 25 basis point cut to interest rates by the Bank of England when it meets on 18th December.  

Here in Australia, a prolonged downturn in the US, or other shocks in major economies, will play into the RBA’s decision-making. It adds further uncertainty to our growth prospects domestically.

The RBA’s outlook from May looked at multiple scenarios, one of which points to recession in Australia’s future if permanently large tariffs had been implemented.

But the central bank’s latest forecasts from November highlight that global economic activity has been more resilient to trade developments than expected. 

But RBA’s forecast does warn: “GDP growth in Australia’s major trading partners is expected to slow into 2026 as higher tariffs weigh on global demand.”

How Does Global Instability Impact Australia's Economy?

A contraction in economic activity domestically is heavily contingent on how our major trading partners fare — particularly the US and China.

Recession fears have re-ignited in the world’s largest economy.

Following its latest meeting on 10th December 2025, the Fed Chair Jerome Powell said that without tariffs, American inflation would be in the low 2% range.

Powell said that if the labour market wasn’t softening, the Fed would have left the policy rate at a higher setting.

Zandi said a further pick-up in layoffs would indicate a “jobs recession” at the very least.

He argues there’s a direct line between labour market turmoil and Trump’s tariffs.

Price growth has been picking up steam again, but it’s really the unemployment story that’s a concern.

When it comes to our biggest export partner, China, an expert recently said the country was “investing way too much”.

Peking University finance professor, Michael Pettis, said in November that China keeps throwing money at different sectors any time there’s a problem in the economy.

When that pattern eventually stops, investment will drop — particularly in property and infrastructure — which “should be terrible for iron ore prices,” Pettis said.

Chinese Purchasing Managers' Indexes (PMI) - surveys of purchasing managers at businesses - have been subdued.

Its manufacturing PMI remained in contraction for the eighth consecutive month in November 2025.

ING commodities strategist Ewa Manthey thinks China’s industrial cycle will struggle to regain momentum — meaning steel consumption will slow, and iron ore prices will suffer in 2026.

Above: Chinese PMIs show factory activity is deteriorating due to weaker exports and flagging domestic demand.

The performance of the US and Chinese economies also acts as a lever for the value of the Australian dollar.

When the AUD’s purchasing power is reduced, it can further weaken economic conditions.

What Is Australia's Current Rate Of Economic Growth?

Australian National Accounts figures released on 3rd December by the Australian Bureau of Statistics (ABS) for the September quarter of 2025 show that real GDP rose 0.4% for the quarter and 2.1% over the year.

Quarterly changes in the GDP between September 2024 and September 2025 have been in the positive territory.

It signals a recovery in economic activity, led by the private sector.

When we look at the GDP per capita, which better reflects economic output in relation to our nation’s population — growth is still weak.

But it’s an improvement over GDP per capita seen throughout 2023-24, which saw negative values for a record seven quarters straight.

Many commentators had considered Australia to be in a ‘per capita’ recession.

Above: Analysis from MacroBusiness highlights that it wasn't the most severe decline in per capita GDP in Australia's history, but it did last the longest.

The latest forecast from the RBA has our economy growing at a rate of 2.0% by December 2025.

Its outlook is for 1.9% GDP growth through 2026, which was revised down slightly from earlier predictions.

While financial conditions look to be easing, rising inflation may well put a lid on demand, and tariffs are still expected to slow global growth.

Deputy governor of the RBA board, Andrew Hauser, warned in late July that although tariff impacts on the global economy and Australia hadn’t been as bad as feared - “It’s coming, it just hasn’t come yet.”

He compared the situation to Brexit, where the negative impacts on UK’s economy - including significantly curtailed growth - emerged long-term.

What Is A ‘Per Capita’ Recession?

The average GDP per Australian resident was on the decline between mid-2023 and the end of 2024.

Real GDP per capita remains low — 0% growth was recorded in two quarters of 2025.

That means each individual's living standards aren’t improving.

GDP per capita is a useful measure because overall GDP doesn’t tell the full story.

It doesn’t account for how population growth - like Australia’s recent immigration surge - affects the distribution of national income across households and communities.

So, while economic growth at the national level isn’t going backwards (yet), times are tough for many families.

How Migration Can Fuel Negative Growth.

ABS data on overseas migration into Australia for the 2022-23 financial year shows a net gain of 518,000 people.

There was a 73% increase in migrant arrivals from the year prior.

ABS figures released in September 2024 show the net overseas migration in the 12 months to March 2024 was 509,800 people.

More recent figures show migration has eased. For the 2023-24 financial year, net overseas migration was 446,000, with a 10% decrease in migrant arrivals from a year earlier.

Population growth is a double-edged sword.

It can be critical for filling skill shortages that boost economic activity, but it also increases demand, which puts pressure on the price of housing and other goods and services.  

Evidence Of Australia’s ‘Per Capita’ Recession.

There are clear signs of this ‘hidden’ recession, most notably in the way many Aussies have tightened household spending. 

Confidence was still in pessimistic territory until very recently.

The Westpac-Melbourne Institute Index of Consumer Sentiment recorded its first positive read since early 2022 in November 2025.

It represented a seven-year high for optimism, driven by a large jump in the number of people who feel positively about Australia’s economic outlook over the next 12 months.

In particular, young people, tradies, and the unemployed were worried about a softer jobs market.

And family finances are clearly still tight for some — 35% of people said they plan to spend less on Christmas gifts than last year.

The wage price index saw increases throughout 2025, but it didn’t compensate for inflation’s dampening of Aussies’ purchasing power.

You’ll have noticed that more of your pay-cheque is needed to cover essential items like rent, mortgage repayments, groceries, utilities, bills, insurance, healthcare, and fuel.

Prices have moved to a high level with no hope of them being wound back.

Above: Australians are finding it easier to save as disposable incomes increase.

Is Australia’s Quality Of Life In Decline?

Research from market research firm Roy Morgan shows that 25.3% of Australians with home loans were at risk of ‘mortgage stress’ in the three months to October 2025.

But the recent rate cuts in February, May and August 2025 have provided some breathing room for many households.

It's the lowest level of mortgage stress in almost three years.

While the costs of servicing loans has decreased, Roy Morgan notes that unemployment has a larger impact on mortgage stress.

It’s becoming a major health issue, too.

People are struggling to pay for healthy food and healthcare, and many people are highly stressed and yet forced to work more to earn more.

Australians’ wellbeing saw a small increase in 2025. The AUWI report shows higher levels of satisfaction around Australia’s economic situation in particular.

As in 2024, people in low income households or who were unemployed or renting were more likely to be experiencing lower wellbeing or facing mental distress.

Everyone at the margins is being squeezed.

Australian businesses, especially consumer-facing ones, have felt the brunt of inflation and global uncertainty. However, recovering consumption has helped the retail sector.

NAB’s quarterly business survey for Q3 2025 showed business conditions and confidence have been buoyed somewhat.  

Above: Business confidence is still being buffeted by wage costs and pressure on margins.

The top factor affecting confidence was wage costs, followed by margins. The survey found:

Is Australia Going Into A Recession?

Pessimism about a recession was high among Australians in 2024.

The Dye & Durham Australian Market Pulse survey, released in October 2024, which involved more than 1,600 people, found 57% thought Australia was in recession, or would enter a recession within a year.

The prediction for 2026 is for growth to stabilise around Australia’s potential growth rate, which is around 2%.

Commbank’s Head of Australian Economics, Belinda Allen, said the GDP growth rate revealed in the latest data issued in December was below expectations but better than the “anaemic” growth levels seen a year prior.

But this may be as good as it gets, with future rate cuts off the table.

Allen said Commbank expected Australia’s economy to “walk the thin line in 2026”. The bank thinks moderate growth will be tempered by the restrictive effects of the cash rate at 3.60% and slower income growth.

From an investor perspective, AMP’s Chief Economist Dr Shane Oliver said there were grounds for optimism in 2026, despite worsening inflation of late "which could see the RBA hike prematurely and snuff out the consumer recovery.”

A strong rise in unemployment — typically associated with a recession — is not foreseen.

Key forecasts from the RBA out to December 2026 include:

Domestic demand is picking up: household spending rose 5.6% year-over-year from October 2024 to October 2025.

Of course, if disruptions to trade significantly affect global growth or the US does slide into recession — the ripple effects on stock markets and demand for our exports would impact growth in Australia too.

How Did Australia Fare In Past Recessions?

Recessions vary in severity and duration. How sharply growth slides and for how long depends on the impetus for the decline and how policy-makers respond.

Since then, Australia has seen one of the longest stretches of economic growth in modern history.

Australia’s strong population growth, supported through migration, has been an important reason for the nation’s continued growth throughout various ups and downs in global conditions.

Global Financial Crisis Put A Handbrake On Economic Growth.

Many economies worldwide went into recession during the Global Financial Crisis (GFC).

Growth slowed in Australia, unemployment reached 5.75%, the Aussie dollar lost value, and equity prices declined sharply to reduce the wealth of Australian households by nearly 10% by March 2009.

Covid Pandemic Strained The Australian Economy.

More recently, the COVID-19 pandemic triggered one of the worst ever global recessions, as lockdowns and travel bans stymied growth and led to significant job losses in most advanced economies.

However, the economy rebounded in the third quarter of 2020, with GDP increasing by 3.3% as restrictions eased and government stimulus funding had an impact on people’s spending.

The rebound effect post-COVID is one of the reasons cited for rising inflation, which has gripped the Australian economy (and numerous other economies globally) ever since.

(Related: AUD To Euro Forecast: More Surprises Ahead?)

What Happens If Australia Goes Into A Recession?

The word recession seems synonymous with ‘bad times,’ but at best, it’s an approximation of economic health.

When the economy stalls and starts to move backwards, we expect business profits to shrink and lots of people start losing their jobs.

However, while our GDP growth and unemployment numbers may not indicate a significant and lasting reduction in economic activity — it’s clear that for many Aussies, living standards are in decline and there’s no immediate sign of relief. 

Jody

Australia has felt expensive for a while now. Groceries cost more (rising 3% over the year to October 2025). Power bills sting (jumping by more than 30% year-on-year at their peak). Big purchases get postponed “until next year.”

And for many households, money stress spills over into marriage strain and mental health issues.

According to the latest ABS spending data, Australians spent 5.6% more than a year ago (over the 12 months to October 2025).

And that extra money isn’t just going on essentials.

We’re spending more on clothes, furniture, travel, and eating out – early signs that consumer confidence, while fragile, is returning.

Spending rose across the board during 2025, on both non-essentials and everyday necessities.

However, Aussies still coughed up more for essentials:

In other words: Australians are spending more on fun – but they’re being forced to spend even more on the basics.

Above: Government payment recipient households saw the largest annual surge in living costs of all household types in the September 2025 quarter – 0.7pp more than CPI.

Everyday costs are still doing the damage.

According to the ABS National Accounts Data, the winding back of electricity rebates pushed power bills higher again.

At the same time, Australians were forced to spend more on the unavoidable stuff: insurance, rent, healthcare, and food.

That shows up clearly in the numbers.

Spending on non-essentials?

Flat.

In other words: Australians aren’t splurging – they’re just paying more to stand still.

Above: Australian household debt-to-income ratios hit 182% – among the highest in the developed world.

Yes, Australia offers a high standard of living. That’s why people want to live here. But the day-to-day costs make it harder to get ahead, even when you’re doing everything “right.”

With a run of 13 consecutive cash rate hikes in two years – offset by just three cuts in 2025 – the cost of living in Australia is still on the rise.

So the obvious question is – any real relief in sight?

(Related: How A Recession Hits Ordinary Australians).

Why Your Bills Are Rising Faster Than Inflation.

Our current annual rate of inflation (October 2025) is 3.8%, with the largest increases being seen in housing and rents, food and non-alcoholic drinks, and recreation.

After falling to within target in the March and June quarters, inflation has now jumped well above the Reserve Bank of Australia’s (RBA) desired range of 2-3%.

The trimmed mean, aka underlying inflation, is also back above 3% – and that’s what the RBA really cares about.

Higher-than-expected price growth has eroded progress that saw interest rate cuts delivered in 2025, bringing the cash rate down from 4.35% to 3.60%.

Many Aussies say they plan to cut back on spending this Christmas.

But the true extent of demand will be revealed when the CPI result for December is released on 28th January 2026.

And if you have a mortgage, 2023–24 was brutal.

A rapid run of interest rate hikes - combined with borrowers rolling off ultra-low fixed rates onto much higher variable rates - sent repayments soaring.

Above: Many Australians were forced to divert 30% or more of their disposable income to servicing their loan.  

ABS Living Cost Index data released in September 2024 found that household costs saw the highest annual rise for working families due to paying more interest on their mortgages.

The latest figures for September 2025 show smaller rises in living costs for most Aussies. Falling health, insurance and interest costs made a difference.

Households now being hit the hardest by increased living costs include:

While cash rate easing has reduced the pressure, paying to keep a roof over your head is still incredibly tough.

Rents have been a major contributor to living costs, rising 4.2% annually from October 2024 to October 2025, based on the ABS’ latest complete monthly CPI figures.

Rent inflation was 7.8% in the March 2024 quarter, which at the time was the largest rise since March 2009.

With fewer properties available, asking rents in capital cities rose 5.3% in the year to November 2025, according to property data group SQM Research.

Asking rents for units increased 5.6% for the year to November 2025 - perhaps reflecting a shift away from expensive houses.

The average weekly rent in a city now stands at:

However, SQM forecasts rental growth could be more in line with inflation in 2026 (2-4%), due to a better balance between new housing supply and expanding demand.

AMP chief economist, Dr Shane Oliver, highlighted in November 2025 that the ratio of average dwelling prices to average wages and household income has both more than doubled since 2000.

Oliver said low housing affordability was deepening wealth inequality and likely contributing to rising homelessness.

(Related: Will Australia Go Into A Recession In 2026?)

Until the supply-vs-demand imbalance is fixed, home ownership will remain out of reach for many.

With supply in shortfall, any uptick in demand simply drives up house prices further.

For instance, an unusual surge in home values in October 2025 coincided with the expansion of the Australian Government’s 5% Deposit Scheme, according to property insights firm Cotality.

Why Your Money Doesn’t Go As Far Anymore.

When it comes to CPI inflation, other major costs include:

(Related: Australian Inflation Rate: Will It Drop In 2026?)

Food prices have been lowering, but stocking up on groceries was still more expensive compared to 12 months ago.

The main contributors to increases in food prices were:

Above: Overseas demand for Australian meat lifted lamb and beef prices domestically.

But Wait, We’re Getting Wealthier?

While our collective household net worth has increased, around 70% of that wealth is tied to property ownership, and therefore home price values.

Above: 70% of Australian household wealth is tied to household values.

Supply shortages that are driving up home values saw household ‘non-financial asset’ wealth grow by 1.9% in the June quarter of 2025, based on ABS data. 

It seems to be a case of the rich getting richer while others are left behind.

Recent data from the US Federal Reserve reveals American households have become wealthier since the pandemic, but the top 0.1% saw the biggest increase.

What’s The Government Doing To Bring Down Living Costs?

In its 2025-26 budget released just months before the May election, the Albanese Government announced a series of measures to help reduce living costs.

Cost of living was a major political talking point during the 2025 campaign.

The Coalition tried to make the case that Labor’s leader was “weak, woke and sending you broke.”

But Labor prevailed.

Promised tax cuts from Labor that will now come to pass include:

Other initiatives already underway include efforts to reduce childcare costs, reduce student debt, lower the cost of PBS-listed medicines, and expand Medicare.

(Related: Will The RBA Finally Drop Rates In 2026?)

In December 2025, Treasurer Jim Chalmers signalled government spending would be reined in - to the tune of $20 billion in cuts — ahead of the mid-year budget update.

The savings will come from a mix of reprioritisation of previously committed funds and less use of consultants, contractors and labour hire.

The popular, yet pricey, power bill subsidy scheme won’t be repeated, to help balance the national books.

How Do We Measure The Cost Of Living In Australia?

Consumer Price Index (CPI) is the Australian government's go-to tool for estimating living expenses.

Measuring long-term, high-level inflation (known as "headline inflation"), it monitors price movements in a "basket" of everyday goods and services from 11 categories.

Here they are, ranked from highest to lowest.

Source: Australian Bureau Of Statistics, Annual weight update of the CPI and Living Cost Indexes.

Eagle-eyed readers will notice that housing is over-represented in the above CPI index, and will wonder whether Australia's skyrocketing housing costs are artificially driving up the official reported CPI level.

The correct answer is - yes and no:

The change to a monthly CPI includes a change in the frequency of data collected to determine price growth:

When Will Australians’ Living Wage Increase?

Of course, whether you feel life is affordable also comes back to how much you’re earning.

ABS data ABS data (as of August 2025) shows the median Australian employee earnings are:

That roughly equates to a median annual income of around $74K.

Professionals and managers tend to earn more, the industries with the highest weekly earnings were mining, utilities and financial services.

The most recent WPI rise (September 2025) was 0.8% for the quarter and 3.4% for the year - beating headline inflation for the same period (3.2%) and core inflation at 3.0%.

Australian employers believe wages will increase 2.7% in the year to October 2026 - it’s unclear if that will outpace inflation.

Analysis by Janine Dixon, Director of Policy Studies at Victoria University in November 2025 found that consumer purchasing power has been in decline from mid-2020 until very recently.

Above: Australia’s post-COVID decline in ‘real wages’ (wages accounting for inflation) is the largest in recent history.

Wages that aren’t keeping pace with living costs limits people’s ability to save, making the transition from renting to home ownership increasingly hard.

The Cotality Housing Affordability Report found servicing home loans was eating up more people’s income - at 45% in 2025, compared to 29% in 2020.

Exacerbating this issue is that:

(Related: Best Cryptocurrency Exchanges In Australia).

How Many Aussies Are Struggling With Living Expenses?

In a 2025 report, the Australian Council of Social Service (ACOSS) found that 3.7 million Australians (14.2%) live below the poverty line of 50% of median income.

The ACOSS report revealed poverty was worsening:

Obviously, people on the lower end of the salary range are doing it toughest.

Australia’s minimum wage increased by 3.50% on 1 July to $948 per week (~$49,300 annually).

The Australian Council of Social Service (ACOSS) expressed concern that if the Government doesn’t increase support payments and boost social housing, more Australians would be at risk of experiencing homelessness.

How Can Australians Ease Cost-of-Living Pressures?

Avoiding spiralling debts and making your money work harder starts with having your fundamentals in order. That includes:

But you also need to think about ways to increase income and reduce expenses. One oft-overlooked strategy that is a clear winner — asking!

You should be:

Frequently Asked Questions About Cost Of Living In Australia.

Here's what Aussies, international students, business people and investors want to know about living costs.

What is the cost of living for students in Australia?

Your weekly living costs will depend on whether you live in a major or regional city, live in on-campus accommodation, a homestay family or rental accommodation.

As a rough guide:

Apart from rent and tuition fees, your lifestyle can drastically impact your cost of living in Australia. Limit your spending on restaurant meals and takeaway lunches to save money.

How does the cost of living compare across major cities?

Let me confirm what Sydneysiders already know: your city is the most expensive in the country.

But Melbourne, Darwin and Brisbane trail closely behind. Hobart and Adelaide are still the cheapest cities to live in.

Final Thoughts On Australia’s Rising Living Costs.

While the cost of living in Australia remains high, there were positive signs of easing prices earlier in 2025. Disposable incomes and savings ratios have also started to improve.

But inflation hasn’t dissipated and the recovery in real income is expected to be slow. Plus, the forecast is for interest rates to remain on hold throughout 2026, with potential hikes if economic conditions worsen.

Until inflation and wages both start moving in the right direction again,  many Australians will continue to feel they’re amid a cost-of-living crisis.

Jody

Relative to the US dollar, the Australian dollar dropped close to five-year lows at the start of 2025. It’s been on a turbulent path since then:

If you were trying to “buy the dip” or time a breakout, you got hammered with a brutal sequence of false starts, sudden reversals, and emotional traps.

Trump’s tariff shocks and the Federal Reserve’s pivot toward rate cuts knocked the USD down nearly 11% in the first half of 2025.

Tip: Zoom out for better historical context of AUD/USD performance.

Yet the Aussie climbed despite suffering three interest-rate cuts at home. The unusual divergence left traders questioning whether the rally was built on solid ground.

Or thin air.

But the big question remains-

Is the Aussie primed for a breakout – or is it about to forfeit all gains it clawed back this year?

Let’s explore the forces that will decide whether the $0.70 dream is realistic.

Will The AUD Break Out In 2026?

The AUD/USD was trading at around $US0.645 at the time of writing. It traded at an average of around 65 US cents between June and December 2025. 

The Aussie experienced periods of strength against the greenback in late 2025 on the back of:

The Aussie hit a 10-month high of around 67 US cents, coinciding with the US Federal Reserve’s September meeting, which heralded the US’ first interest rate cut of 2025.

(Related: Will Australia Slip Into A Recession In 2026?)

The general outlook is for the AUD/USD exchange rate to close out 2025 higher, with a continued strengthening of the Aussie dollar into the first half of 2026.

But further twists and turns from a Trump-led US economy are likely.

6-Month Forecast For AUD/USD.

Major banks are forecasting a gradual increase in the Australian dollar exchange rate over the six months to June 2026:

The latest Consumer Price Index (CPI) from October 2025 shows core inflation is now at 3.3% in Australia.

That follows a higher-than-expected CPI result for the September quarter.

The resurgence in price growth puts inflation well out of target range. It could mean monetary policy easing from our central bank is over.

In contrast, the US Fed has only recently started its easing cycle. The Fed:

Above: The probability of a rate move by the Fed in December is high based on interest rate futures trading.  

With division among the Fed’s committee members, there are mixed views about the chances of a December cut.

But markets were pricing in an 80% chance of a cut as of November 2025.

Despite three 0.25% rate cuts in February, May and August – bringing our cash rate to 3.60% – the AUD has been more attractive than the USD.

Commbank economists suggested in a research note published in September 2025 that the AUD would move higher against the USD as the American currency bottoms out in early 2026.

But it won’t last.

The greenback’s rebound will be aided by tax cuts, interest rate cuts, investment from overseas, and the fading impact of tariffs, according to Commbank.

Downsides for the AUD include an expected drag on Australian commodity prices.

Above: USD gains were lost amid tariff chaos, as shown by a steep decline in the US Dollar Index, which tracks the greenback’s price against 6 foreign currencies.

A G10 FX Outlook 2026 report released by ING on 10th November argues the Australian dollar should outperform.

(Related: Best Cryptocurrency Exchanges In Australia.)

ING foresees “respectable” growth prospects for China and perhaps just one 0.25% cut from the RBA in Q1 2026.

But if or when uncertainty or US-China tensions spike again, the Aussie could reverse its gains.

The AUD/USD exchange rate dived to 59.15c in early April 2025 based on heightened fears on the eve of Trump’s Liberation Day tariffs being implemented.

(Related: AUD To Euro Forecast: More Surprises Ahead?)

NAB Senior FX Strategist, Rodrigo Catril, said the AUD’s depreciation on Friday, 4th April, was “the seventh-biggest drop in the Aussie” since it became a floating currency.

Above: Historical snapshot of bilateral and Trade-Weighted Index (TWI) AUD/USD exchange rates. Note that the TWI is more stable.

12-Month Forecast For AUD/USD.

Looking further ahead, some bankers expect the Australian dollar to appreciate further against the US dollar:

(Related: Why Is Living In Australia So Expensive?)

How Is The AUD/USD Exchange Rate Measured?

The RBA explains three key ways to measure an exchange rate:

The AUD Signals Most People Miss.

Throughout 2026, drivers of price movements for the Australian Dollar will include:

1. Domestic Economic Conditions.

In particular, investors monitor:

Above: The latest economic data makes additional interest rate cuts in 2026 doubtful, and has put hikes back into contention.

Interest rates, inflation and unemployment are particularly important, because:

In its November Outlook, the RBA stated the economy had been more resilient in the face of global trade conflicts than expected.

(Related: Best Share Trading Platforms In Australia).

But domestic demand has seen inflation flare up again.

Commbank Chief Economist, Luke Yeaman, said in a note released 25th November 2025 that recent data had, in fact, raised the risk of interest rate hikes in 2026.

Although the bank's current forecast is for no change to the cash rate over 2026.

Hikes only come into play if capacity is more constrained than anticipated, or economic activity heats up and outstrips supply.

2. US Fed's Interest Rates.

The RBA cash rate currently sits at 3.60%, while the US Federal Reserve's recent series of cuts reduced rates to 3.75% - 4.00%.

It’s unclear how many additional cuts are coming, but ING estimates that Australia will have the highest central bank rate in G10 by mid-2026.

Any benefit from differing rates of policy easing could be impacted by:

3. China's Economic Slowdown.

The world’s second-largest economy is our largest export market.

AMP economist My Bui said in October 2025 that Chinese economic activity had been losing momentum and retail spending was sluggish.

However, Bui said China’s economy was holding up:

It also has a ‘trump card’. It has scaled up production of rare earth commodities (which the US needs and largely imports) and key minerals involved in EV, chip, and energy infrastructure.

Above: China has the upper hand in trade negotiations with the US for now due to its majority production of minerals and rare earths.

On 21st November, global investment bank Goldman Sachs revised up its forecast for China’s 2025 real GDP growth from 4.9% to 5%, and made even larger increases to predictions for 2026 and 2027.

Continued strength in China’s manufacturing and exports have been boosted by two recent developments, the bank argues:

4. Terms Of Trade And Commodity Prices.

An increased demand for Australian exports means an increased demand for AUD. But export volumes and prices hinge on global demand.

(Related: Will Interest Rates Drop Below 3% In 2026?)

Iron ore is Australia’s largest export, and China is our largest export market.

A recent Australian Government resources update posits that lower iron prices would reduce national export earnings from $113b in 2025-26 to $103 billion in 2026-27.

Whether we like it or not, China’s thirst for our products affects our prosperity and currency strength.

Volatility in commodity prices driven by a range of other factors (e.g., supply chain disruptions or natural disasters) can also create volatility in the AUD foreign exchange rate.

5. Global Stability And Geopolitics.

Australia has a stable government, but our financial markets are not immune to increasing instability globally.

Currency swings could be impacted in 2026 by:

Increased geopolitical turmoil can significantly disrupt international trade and fuel ongoing concern about oil prices, which could increase inflationary pressure and a flight-to-safety by investors.

How Stable Is The AUD To USD Exchange Rate?

Historically, the AUD/USD exchange rate has averaged around 0.70-0.75c.

However, it’s dropped sharply on a number of occasions, such as following the attack on New York’s Twin Towers in 2001 and more recently during the COVID lockdowns in 2020 when it fell to an 18-year low of 0.55 US cents.

It appreciated against the US dollar in the decade up to 2011, largely driven by Australia’s mining boom, increasing from below US$0.50 in 2001, reaching parity in 2010, and then a peak of over $1.10 in 2011.

After starting 2023 around the US$0.68c range, the Australian dollar weakened throughout the year.

(Related: How To Buy Bonds In Australia).

Two likely causes: both local and global economic conditions were not positive, and our currency is risk-sensitive.

Is The Australian Dollar Set To Rise?

Broadly, the predictions point to a slight rise in the AUD relative to the USD over 2026.

The US currency has lost gains made in the rally prior to Trump’s re-election, damaged by Trump’s see-sawing decisions on tariffs.  

But trade tensions appear to be settling, meaning the USD could be bolstered.

Especially if the data indicates economic resilience and the fact that US interest rate cuts may be more gradual than anticipated.

Trump’s policies, inflation risk in both the US and Australia, and China’s growth levels, will all influence the Aussie’s value.

Jody