Chalmers Warns Economy to Worsen with Higher Unemployment and Weaker 2026

Treasurer Jim Chalmers has warned that the Australian economy is set to worsen, with higher unemployment and weaker growth projected in the upcoming mid-year budget update. In a speech on Friday morning, Chalmers will say that higher inflation and tighter monetary policy are weighing on domestic activity, and that the softening labour market is already visible.

The warning comes just two days after a senior Reserve Bank official foreshadowed the potential for another interest rate hike in under two weeks. It also follows jobs data showing unemployment reached 4.7% in September, the highest in nearly five years. With the Albanese government already under pressure from its ambitious tax reforms, the deteriorating economic outlook is a further blow to Labor and Chalmers' popularity.

Chalmers Flags Softer Growth and Slightly Higher Unemployment

According to speech extracts seen by Guardian Australia, Chalmers will say: "Higher interest rates and higher inflation are likely to mean softer growth and slightly higher unemployment." He will also note that Treasury is in the process of revising all the numbers for the mid-year update.

The treasurer's comments reflect a challenging balancing act: the government is trying to support households while the Reserve Bank continues to tighten monetary policy to combat inflation. Chalmers will acknowledge that "higher inflation is putting people under pressure" and that "tighter monetary policy is weighing on domestic activity."

Households Deeply Pessimistic About the Outlook

Australian households are deeply pessimistic about the economic outlook, according to recent surveys. Jonathan Kearns, chief economist at Challenger, said "things have to get worse before they get better," capturing the mood of many economists who expect a difficult six months ahead.

This pessimism is likely to weigh on consumer spending, which is a key driver of economic growth. With interest rates at their highest level in more than a decade, mortgage holders are feeling the pinch, and businesses are reporting softer demand.

Key Takeaways for Households and Businesses

• Weaker growth and higher unemployment are expected in the mid-year budget update.
• The Reserve Bank may raise interest rates again in under two weeks.
• Unemployment already hit 4.7% in September, the highest in nearly five years.
• Households are deeply pessimistic, with consumer spending likely to remain subdued.
• Economists warn the next six months will be difficult before conditions improve.

Economic Indicators: What the Numbers Show

The table below compares key economic indicators before and after the latest data, highlighting the deterioration in the labour market and the potential for further rate hikes.

Note: The cash rate figure reflects the potential for another hike, as foreshadowed by a senior RBA official. The growth forecast is expected to be revised down in the mid-year update.

Political Fallout for Chalmers and Labor

The worsening economic situation comes at a politically sensitive time for the Albanese government. Chalmers has faced criticism over his handling of tax reforms, and the latest economic news is unlikely to improve his standing. As we reported in our analysis of Australia Budget 2024: Chalmers and Gallagher Present Final Outcome, the government has been walking a tightrope between fiscal discipline and cost-of-living relief.

The treasurer's challenge is compounded by internal party tensions. Recent weeks have seen Jim Chalmers' bad week: economic pressure and Labor tensions dominate headlines, with speculation about leadership and policy direction. The mid-year update will be a key test of Chalmers' credibility.

What to Watch Next

Economists will be closely watching the mid-year budget update for revised growth and unemployment forecasts. The Reserve Bank's next meeting in under two weeks will also be critical, with markets pricing in the possibility of another rate hike. As Chalmers warns global turmoil will drive budget cuts, the government may need to tighten spending further.

Households should brace for a difficult six months. With unemployment rising and growth slowing, the risk of a recession is increasing. However, some economists believe that once inflation is under control, conditions will improve. For now, the outlook remains challenging.

FAQ

The political and economic stakes are high. As the government grapples with these challenges, further controversies may arise. For instance, Jim Chalmers denies Albanese rolled him on credit card tax payments, showing the internal friction. Meanwhile, policy debates continue, such as Australia superannuation reform: Chalmers vs Hanson, which could shape the economic landscape.

Public sentiment is also shifting. As reported in Australian politics live: Chalmers on One Nation supporters, the treasurer is facing questions about his appeal to voters. With inflation a persistent issue, Australia inflation hits 4%: Chalmers blames fuel costs and energy, the government's narrative is under scrutiny.

Looking ahead, the mid-year update will be a pivotal moment. For a broader view of the government's agenda, see Australia news live: Chalmers migration, birth rate, Sydney smart. As the economy slows, the choices made now will shape the recovery.