Australian economic outlook: get ready for taxes as inflation rages

As 2026 continues, it will be critical for Australian investors to split their focus between compelling domestic and international concerns as they rethink their investment strategies and structures in readiness for sweeping tax changes (proposed by the Australian government in its May 2026 budget statement, to take effect from July 2027).

International factors and global headwinds

In an interconnected world, the fortunes of Australia are tied to the prospects for the rest of the world. Global growth prospects, geopolitical considerations, and the health or otherwise of the world’s major economies – China, Europe, and the USA – are critical factors in any assessment.

Many of these aspects are covered in more detail in other sections of moomoo’s 2026 mid-year outlook. The implications for Australia flow from key drivers – growth and inflation. In June 2026, the World Bank estimated a global growth rate for the year ahead of 2.5%. Not only is this down from the previous annual rate of 2.9% in 2025, it represents the lowest rate of global economic expansion since the onset of the COVID-19 pandemic. This deceleration is primarily driven by steeper inflation, increased borrowing costs, and severe disruptions to global commodity markets.

Geopolitical stress and commodity shocks

The conflict in the Middle East represents an ongoing threat in the form of a drawn-out inflationary impulse. Many international commentators drew attention to the impact of higher oil and gas prices, and the potential for higher fuel prices to increase the costs of industries such as transport and manufacturing. Following the closure of the Strait of Hormuz, the World Bank projected Brent crude oil prices to average US$94 a barrel in 2026 – a 36% jump above 2025 levels.

Less well-explored are the secondary impacts. Higher transport costs lift construction and engineering costs. Rising fertiliser prices drive global food prices up. And higher feedstock imposts for plastics may lift production costs in manufacturing. It is clear that in Australia and Japan interest rates are rising, and the worldwide impact of the Middle East conflict may see more countries come to the same conclusion. Under severe downside scenarios modeled by international agencies, if energy supply disruptions worsen and trigger broader financial stress, global growth could collapse to just 1.3% (World Bank), dragging major trading partners into stagnation.

Major trading partners: structural vulnerability

For Australian equity investors, the macroeconomic trajectory of our primary trading partners will require close monitoring:

• The US economy has shown relative resilience despite wide-ranging tariff implementations. In late June US real gross domestic product was released for the first quarter of the year, revealing an annual growth rate of 2.1% – half a percentage point above expectations. However, persistent inflationary pressures mean its central bank is forced to maintain elevated interest rates, restricting global liquidity.

• Growth in east Asia and the Pacific region is projected by the World Bank to fall to 4.2% in 2026. As China grapples with an ongoing property sector transition and softened domestic consumer demand, its appetite for industrial commodities may shift.

• The eurozone remains highly vulnerable to energy shocks, with the World Bank forecasting growth to slow to 2.1% in 2026. This stagnation limits secondary export markets for Australian goods.

The problems at home

An inflationary spiral is the most significant threat to the outlook for the Australian market. Australia already had an inflation problem before the Israeli/Iranian hostilities. While the headline rates of inflation bounced around, the monthly trimmed mean increased to 3.3% to 3.4%. The first quarter of 2026 saw core inflation increase to 3.5%.

Australian inflation and policy overview (mid-2026)

If international pressures accelerate this lift in inflation, the near and longer-term outlooks dim considerably. Commercial bank economists have warned that under a sustained central oil price shock, headline domestic inflation could peak as high as 5.4% in mid-2026 (the Reserve Bank estimates 4.8%).

The monetary policy dilemma

In the short term, if inflation continues its upward path, the Reserve Bank of Australia will be forced to jump on the brakes again. At its June 2026 meeting, the RBA monetary policy board opted to leave the official cash rate target unchanged at 4.35%. However, the central bank’s rhetoric remains resolutely hawkish. RBA governor Michelle Bullock has repeatedly emphasised that the board remains focused on containing domestic price pressures and will prioritise inflation control over short-term growth considerations.

The RBA will take no notice of slowing growth, because the longer-term threat is an inflationary spiral, with prices and wages chasing each other higher. This dynamic is hugely damaging to economies, and the RBA – and central banks everywhere – would rather risk a recession than uncontainable inflation.

Growth and consumer spending slowdown

Domestic economic growth is feeling the squeeze of this restrictive policy stance. Gross domestic product expanded by just 0.3% over the first quarter of 2026, marking a material step down from the 0.8% recorded in late 2025. Major banking institutions expect Australia's annual economic growth to ease to approximately 1.6% by late 2026 as households bear the brunt of elevated living costs.

The growth in real household disposable income – income adjusted for price inflation, interest payments, and taxation – has slowed sharply. While many families retain solid financial buffers from historical mortgage overpayments, consumer confidence has deteriorated, resulting in highly subdued retail and service spending.

A two-speed business landscape

While the consumer-facing sectors face severe headwinds, the broader domestic economy exhibits a stark divergence:

1. Private infrastructure and data centres: business investment is proving remarkably resilient, acting as a structural anchor for the economy. This is driven by massive, multi-year capital injections into renewable energy projects and cloud-data infrastructure. Private business investment accelerated by 6% in early 2026, powered by an extraordinary 13% quarterly surge in machinery and equipment procurement. This reflects the corporate race to build out artificial intelligence capabilities and localised data networks.

2. The industrial and construction slump: conversely, traditional commercial engineering construction has faced contraction, falling 6.6% in recent quarterly terms. Private-sector builders are facing intense competition for skilled labor and materials from massive public infrastructure projects, which have grown by 9% over the past two years. This public-sector competition has pushed up input costs, squeezing corporate profitability outside the technology and resources space.

3. Labour market: the employment market remains tight but is showing signs of gradual cooling. Job vacancies fell by more than 5% over the past year, driven entirely by a pullback in private-sector hiring. In May the unemployment rate was 4.4%, which economists project to drift up to roughly 4.6% by early 2027. While this rise brings personal hardship, the RBA views a softer labor market as a necessary prerequisite to ease domestic wage-price pressures and guide inflation back into its 2% to 3% target band.

Tax changes and the law of unintended consequences

The macro risks are made worse in Australia by recent proposed changes to the tax treatment of investments. At the time of writing, the proposed changes to capital gains tax, negative gearing, and minimum rates of tax for all trusts are yet to be legislated. However, the original plan announced on budget night would represent the most substantial changes to tax law in more than three decades.

The detail and long-term consequences of the mooted changes are undetermined. Nonetheless, it is clear they offend a key economic principle: that rewards for taking higher risks are potentially higher rewards. Yet the amended conditions mean those who take the higher risks of investing capital will face a more punitive tax rate than those who take a lower-risk approach through employment.

Distorting investment behavior

By altering the long-established equilibrium between capital growth and regular income, the federal budget proposals risk introducing significant distortions across the financial system. Historically, Australian fiscal policy has balanced the taxation of immediate income with concessions designed to foster long-term entrepreneurial risk-taking and asset accumulation.

If capital gains concessions are pared back while discretionary family trusts face flat, elevated minimum tax rates, the structural vehicles used by multi-generational investors, private business owners, and self-managed superannuation funds face severe disruption. This structural shift effectively penalises patient, long-term capital deployment in early-stage businesses, technology innovations, and speculative mineral exploration.

Implications for investment strategy

As we enter the new financial year there is a shift in the dominant investment themes. Gold and cryptocurrency exposures have faded with sharp falls in underlying prices. Some previously high-flying technology stocks are also under pressure, as enthusiasm and fear around artificial intelligence impacts fluctuate.

One of the more recent plays involves HALO stocks – companies with ‘heavy assets with low obsolescence’. This represents a structural rotation towards large machinery, physical plant, and established, reliable income streams. In an environment characterised by persistent inflation, high capital costs, and shifting tax legislation, businesses that own tangible, irreplaceable physical infrastructure possess a formidable economic moat.

The anatomy of a HALO asset

• High barriers to entry (multi-billion-dollar replacement costs)

• Pricing power (contractual or structural inflation-linked revenue)

• Low obsolescence (long-life assets unthreatened by rapid tech disruption)

• Tangible value (real plant, equipment, and resources underwriting equity)

Think major mining stocks, significant manufacturers, and large, built infrastructure. There are a number of large Australian stocks that fit this profile. These companies are largely insulated from the risk of technological obsolescence that plagues the software and electronic commerce sectors. A multi-billion-dollar rail network, an open-cut iron ore mine, or a deepwater liquefied natural gas platform cannot be rendered obsolete overnight by a software update or a new generative AI model.

Strategy AND structure

Investors adapting to the shifting tax environment in Australia may prove more important than market-related drivers in shaping the sharemarket in the year ahead.

The tax changes demand that investors consider not only their investment strategy, but also structures they’ve used to protect themselves and their families, such as companies, trusts and superannuation funds.

These matters are specific to individual circumstances, and there are no blanket answers. Investors without knowledge in these specialised areas should seek independent, expert advice.

The pivot from growth to yield

However, there is an important aspect of the changes that could directly shift local investor behavior. The prioritising of income over capital gains in tax treatment may see investors moving away from the higher-growth stocks that have dominated market performance for more than two years. (So the glamorous technology stocks listed in the US and Hong Kong may lose some appeal.)

Instead, investors may turn to stocks and sectors that produce income. Shares and exchange-traded funds that produce higher dividends and distributions, especially where there are attached tax-deductible franking credits, could see a surge in popularity. Australia's unique imputation system, which prevents the double taxation of corporate profits, becomes an incredibly powerful tool when capital gains concessions are minimised.

Strategic sector positioning

To navigate this dual challenge of macroeconomic deceleration and legislative tax reform, investors are re-evaluating the primary sectors of the Australian Securities Exchange.

Sector allocation framework – second half 2026

1. Resources and diversified miners

Resource stocks such as Woodside Energy, Fortescue, Rio Tinto, and BHP potentially fit both the HALO appeal and demand for higher dividends, in many cases with franking.

The global mining complex is deeply tied to physical assets. While bulk commodity prices such as iron ore and metallurgical coal are projected by the federal Treasury to moderate over the long term toward historical anchors, their current cash-generation capabilities remain immense. Furthermore, these multinational businesses hold diversified asset portfolios across copper, nickel, and lithium, positioning them to benefit directly from global decarbonisation and electricity grid overhauls.

In a world where inflation raises the cost of building new mines from scratch, existing operations with established infrastructure become significantly more valuable.

1. Regulated utilities and infrastructure

Infrastructure stocks such as Origin Energy and major telecommunications networks such as Telstra could attract investor demand.

These companies operate long-life, capital-intensive assets that provide essential services. Crucially for a high-inflation environment, their pricing frameworks are frequently linked directly to the consumer price index through regulatory settlements or long-term commercial contracts. This allows them to pass rising input costs directly to end consumers, preserving their profit margins and ensuring a predictable flow of fully franked income to shareholders.

1. The financial sector

Banks such as ANZ Group and National Australia Bank represent another pillar of a dividend-centric strategy.

The Australian banking sector operates within a highly consolidated market structure, enjoying strong regulatory oversight and robust capital cushions. While a slowing domestic economy and rising unemployment introduce higher credit risks and potential bad debt provisions, elevated interest rates support net interest margins. For investors seeking to counter the tax penalties levied on capital growth, the reliable, high-yielding franked dividends distributed by the major commercial banks remain a preferred defensive destination.

Summary

The second half of 2026 demands an analytical approach to portfolio management. The compounding effects of an international energy shock, sticky domestic inflation, and a restrictive monetary policy stance are slowing Australia's broader economic engine. When combined with a severe restructuring of federal investment taxation, the historical playbook of chasing speculative capital gains in high-multiple growth equities appears increasingly outdated.

To insulate wealth from these headwinds, the focus must shift toward corporate durability and structural efficiency. Navigating the 2026-27 financial year successfully will require focusing on companies with tangible, non-obsolescent assets and robust pricing power, while aligning investment portfolios with tax-effective, income-generating legal frameworks.

Michael McCarthy is market strategist and chief executive officer at Moomoo Securities Australia and New Zealand.