National Australia Bank (NAB) has painted a picture of an Australian economy that is slowing but not stalling. In a report released Friday, the bank said it expects growth to cool to about 1.3% this year, a marked slowdown from the pace seen in recent years. At the same time, NAB's own spending tracker showed that households opened their wallets in July, with spending up 1.1% from the previous month.
The combination of weak growth forecasts and resilient spending might seem contradictory, but it reflects the uneven nature of the current economic cycle. While higher interest rates are squeezing borrowers and weighing on business investment, consumer spending—particularly on services and everyday goods—has remained surprisingly sturdy.
What NAB is forecasting
NAB, one of Australia's 'Big Four' banks, expects the economy to expand by just 1.3% this year. That is a modest pace, especially when compared with the pre-pandemic average of around 2.5% to 3%. The bank also sees the unemployment rate rising to 4.8% by the end of 2027, up from its current level of around 4.0%.
The bank's outlook is built on the assumption that the Reserve Bank of Australia (RBA) will keep the official cash rate at 4.35% into 2027. That is a long hold—more than three years from now—which suggests NAB believes inflation will be slow to return to the RBA's 2-3% target band, but not so slow that the central bank needs to cut rates aggressively.
For everyday Australians, this means borrowing costs are likely to stay elevated for an extended period. Variable mortgage rates, which are directly influenced by the cash rate, would remain near current levels, keeping pressure on household budgets.
Spending holds up—for now
Despite the gloomy growth outlook, NAB's internal data shows that consumer spending rose 1.1% in July compared with June. That is a solid monthly gain, especially given the backdrop of high interest rates and cost-of-living pressures.
The spending tracker, which is based on NAB's own transaction data, provides a real-time read on household behaviour. It is often seen as a more timely indicator than official retail sales figures, which are released with a lag.
The resilience in spending could be due to a few factors. Many households locked in low fixed-rate mortgages during the pandemic, and those fixed terms are only now starting to roll off. Also, the labour market remains tight, with unemployment still near historic lows, which supports income growth.
However, NAB's forecast of rising unemployment suggests that this spending resilience may not last. As more people lose their jobs or see their hours reduced, discretionary spending is likely to weaken.
What it means for investors
For investors, the key takeaway is that the Australian economy is likely to remain in a slow-growth phase, but not necessarily in a recession. That has implications for a range of sectors.
Retailers and consumer-facing companies may continue to see moderate demand, but the risk of a downturn is rising. Banks, on the other hand, could benefit from a prolonged period of stable interest rates, as net interest margins—the difference between what they pay on deposits and earn on loans—tend to be supported when rates are steady.
The RBA's expected patience also means that the Australian dollar could remain relatively stable, as interest rate differentials with other major economies, like the US, may not shift dramatically.
For those with exposure to Australian equities, the focus should be on companies with pricing power and strong balance sheets, as they are better positioned to weather a slowdown. Conversely, highly leveraged firms or those reliant on discretionary spending could face headwinds.
It's also worth noting that NAB's view is just one forecast. Other economists may have different expectations for the RBA's path. Some market participants have been pricing in rate cuts as early as next year, but NAB's projection suggests that patience may be required.
The broader picture
Australia's economy is navigating a tricky path. The RBA has raised rates aggressively over the past couple of years to combat inflation, and those hikes are now working their way through the system. The slowdown in growth is a sign that monetary policy is having its intended effect.
But the resilience in spending shows that the economy is not collapsing. This is a delicate balance, and the RBA will be watching closely to see if inflation continues to ease without the labour market deteriorating too sharply.
Recent data on Australia's job market cooling has already boosted odds of a rate pause, and NAB's forecast aligns with that view. The bank's expectation of a long hold suggests it believes the RBA will want to see sustained evidence of inflation returning to target before considering any easing.
For investors, the message is clear: expect a period of low growth, but not necessarily a crash. The Australian economy is showing signs of resilience, but the risks are tilted to the downside. Keeping an eye on consumer spending and labour market data will be crucial in the months ahead.
As always, it's important to remember that forecasts can be wrong. The economy is complex, and unexpected shocks—whether from global markets, commodity prices, or domestic policy—can change the picture quickly. Diversification and a long-term perspective remain the best tools for navigating uncertainty.
