The IMF kept Australia’s growth forecast steady at 2.1% this year, but warned inflation will linger above the RBA target far longer than expected. Here’s what it means for 2026.
What’s Happening: The International Monetary Fund released updated forecasts on Monday with mixed news for Australia. Growth remains on track at 2.1% for 2026 and 2.2% for 2027, but the fund warns inflation will stay above the Reserve Bank’s 2-3% target band for longer than previously expected.
Why This Matters: Australia’s inflation persistence complicates Reserve Bank decisions on interest rates while households and businesses struggle with cost pressures. Globally, the IMF’s AI warning signals that markets have grown dangerously dependent on a handful of companies for growth.
The International Monetary Fund’s World Economic Outlook update, released Monday night, offered a holding pattern for Australia’s economic trajectory. The fund kept Australia’s growth forecast unchanged, predicting GDP growth of 2.1 per cent this year and 2.2 per cent in 2027.
But underneath that steady growth sits a persistent problem. Australia’s headline inflation rate is currently 3.4 per cent, above the Reserve Bank’s 2 to 3 per cent target band, and Treasury estimates it will remain above target until at least June. The IMF’s assessment cuts deeper. The fund argues Australia is “projected to see some drawn-out persistence” in above-target inflation.
This isn’t unique to Australia. Treasurer Jim Chalmers acknowledged the broader context. “The global economy is incredibly uncertain, with persistently high inflation still a challenge for many countries around the world,” Chalmers said. Yet Australia’s sticky inflation poses distinct challenges for the Reserve Bank as it weighs whether rate cuts can proceed. With inflation refusing to fall as quickly as officials hoped, the RBA faces pressure to hold rates steady longer, putting household budgets and business investment plans on pause.
The timing matters. Australian unemployment has stayed near 4.3%, a historically tight labour market that keeps wage pressures alive. Lower immigration in recent years has tightened labour supply further. These structural factors, combined with delayed effects of tariffs trickling through supply chains, mean inflation isn’t simply a temporary phase.
For Australian households, the signal is clear: relief may come more slowly than hoped. For businesses, it signals continued caution on capital investment while costs remain elevated.
The AI concentration risk no one can ignore
While Australia navigates domestic inflation, the IMF sounded a louder alarm about a global threat: an artificial intelligence investment bubble concentrated in a narrow group of technology companies.
IMF economists Tobias Adrian and Pierre-Olivier Gourinchas warned that if AI optimism is pierced by disappointing outcomes, “a more prolonged correction in stock market valuations, which have increasingly been lifted by only a few technology firms, could ensue”.
The concentration is staggering. In late 2025, market performance has become increasingly dependent on a handful of large tech companies. The IMF warned that heavy reliance on a narrow set of sectors, particularly US technology and AI, could leave both the US and global economy vulnerable if investors reassess AI’s productivity potential, triggering a stock-market correction.
What’s remarkable is the speed with which this concentration built. Trillions in capital flowed into AI infrastructure, chip manufacturing, and data centre buildout over just two years. Companies like Nvidia, Microsoft, Meta, and others became the engine of broader market gains. Yet a critical question remains unanswered: Will the productivity gains from all this investment justify the valuations now priced into these firms?
The IMF sees parallels to past cycles. IMF chief economist Pierre-Olivier Gourinchas noted similarities between the late 1990s internet stock bubble and the current AI boom, with both eras pushing stock valuations and capital gains wealth to new heights, fueling consumption that added to inflation pressures. He pointed out that then, as now, the promise of a new, transformative technology ultimately may not meet market expectations in the near-term and trigger a crash in stock valuations.
But Gourinchas also noted a key difference. Investment in the sector is not built on leverage, but by cash-rich tech companies, meaning that if there is a market correction, some shareholders, some equity holders, may lose out.
The caveat is important: a correction needn’t trigger systemic financial collapse if leverage isn’t widespread. Yet spillovers would still reach ordinary investors, superannuation funds, and economies dependent on global growth.
What Australia must do now
For Australia, the implications are direct. If a sharemarket correction unfolds, wealth effects will compress consumer spending. Investment will slow. Global growth will decelerate, reducing demand for Australian exports. Financial conditions will tighten, making borrowing more expensive for households and businesses already stretched by inflation.
The IMF cautioned that a renewed reassessment of AI-driven productivity expectations could reduce investment and spark a sudden financial-market correction that spreads beyond AI-linked firms, eroding household wealth.
This is why Treasurer Chalmers framed Australia’s economic priorities carefully. Commenting on the report, Chalmers said “the three big economic priorities for the Albanese Government this year are addressing inflation, productivity and global uncertainty, and this report shows why that’s the right approach”.
Addressing inflation remains critical. So does building productivity growth. Yet global uncertainty now sits alongside these domestic challenges as an equal priority. The IMF report makes clear that Australia’s growth path depends not only on what happens here but on whether global markets can sustain their recent exuberance or whether a correction awaits.
The December quarter inflation data, due for release on 28 January, will offer fresh insight into whether inflation momentum is truly slowing. The RBA will release updated forecasts on 3 February. Together, these reports will clarify how much room the central bank has to cut rates and whether households can expect relief soon.
For now, the IMF’s message is that growth remains resilient but volatility is rising. Australia is well positioned for modest growth in 2026. But the year ahead is unlikely to be calm.
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