Paul Bloxham:
Where does productivity come from and what do we mean. What we mean is getting more GDP in principle for the hours that we work in the economy. But what we're really talking about is sort of setting up the economy with an environment that encourages businesses to then be able to innovate and invest and choose to innovate and invest.
So when I talk to businesses and say, well, you know, what is the thing that's actually constraining you from making that next investment decision or doing that next bit of innovation. And primarily the feedback is I'm really finding it hard to get the workers that I need. We've got a tight labour market. And the regulatory environment I face is actually really quite complex.
Tahn Sharp:
Welcome to INTHEBLACK, a CPA Australia podcast. I'm Tahn Sharp, editor of INTHEBLACK and host of today's podcast. Today we're speaking with Paul Bloxham, HSBC's lead economist for Australia, New Zealand and global commodities, who I hope will provide us with a relatively brief breakdown of what we can expect in economics across Australia and in the Asia Pac region for 2026. Paul, thanks for joining us.
Paul Bloxham:
Great to be here.
Tahn Sharp:
Now, I've heard you speak at a number of events recently and over the years, including at CPA Australia's recent Congress in the Gold Coast. So I'm confident that you'll be able to give us a good view on where the economy is heading next. And to kick off, I'll ask you, you know, after several years marked by pandemic disruptions, we've had surging inflation, interest rate increases and a lot of geopolitical upheaval that we'll get to later. You know, many might say that we've entered probably one of the most volatile periods in recent economic history. From your perspective, what phase is the Australian and perhaps the broader Asia Pacific economy in now. And what do you think the next phase might entail.
Paul Bloxham:
So I think that's absolutely right, that what we're looking at is a global economy and a local economy that is now more subject to supply shocks. So this is a kind of how economists think about things. They think about things as related to demand, how much people are spending, how much businesses are spending, how much is demand driven in the economy and how much is related to supply.
How much is about the ability of the economy to meet that demand with supply. And if you think about the things you've just described, you know, the pandemic was obviously an enormous negative supply shock because, well, we had a virus that constrained our activity and shut down borders and constrained people moving in various locations. And geopolitical effects can be big supply disruptions as well.
And then I think for Australia, you know, a big feature at the moment is that we have an economy that is quite supply constrained. Like we would like to grow our economy a bit faster than we can at the moment. And that's what's actually shown through in recent times. The economy picked up through 2025, growth was a bit stronger than expected. It wasn't super strong, but it was a bit stronger than expected.
But mostly what happened is the economy ran up against the ability of the economy to deliver the supply side. We haven't been building enough housing, we haven't got enough cheap energy. Productivity is particularly weak in the Australian economy. And that has meant that just a small rise, you know, more modest rise in GDP growth last year of 2.6% in the end was enough to sort of re inflame inflation.
We've got inflation picking up again, not because the economy's booming but because it hit those supply constraints. So I think that's the way I would sort of think about what we're facing. There was a period economists would describe as the Great Moderation, going through the late 90s and early part of the century, where primarily the big effects that drove cycles in the economy were about demand. Now we seem to be in an environment where there are more regular and frequent supply shocks. One of them is geopolitics. The pandemic was another. Another is climate change and the events that that's delivering. And so there's just more of these supply shocks going on.
Tahn Sharp:
It's an interesting way to frame it, especially when you think about all those bottlenecks and foundational flaws in things like housing supply. But you touched then on inflation, and rising inflation has been the dominant economic narrative now for quite some time in Australia and the broader Asia Pac region. And we saw that again with the RBA raising rates in February. Will that continue to be the case. Will we still be talking about rising inflation for years to come in Australia.
Paul Bloxham:
So this is great because the framework of demand and supply actually helps explain why inflation is rising again in Australia and why it's been such a persistent feature of the story. When the pandemic came through and shut down borders and activity, and then in 2022 when we reopened the economy, we saw the surge in inflation. That big wave got to about 8%, which is a multi decade high.
We reopened the economy after being told we couldn't do things for two years. We were cashed up because the government had given large fiscal transfers. Demand surged in 2022, but it hit an economy that wasn't ready to deliver. We didn't have enough workers and had supply related disruptions. That became the genesis of the inflation problem.
The RBA responded by lifting interest rates by 425 basis points in 2022 and 2023. The economy slowed in 23 and 24. By 2025, demand was almost back in line with supply. Inflation came down into the RBA target, getting to 2.7 on the trimmed mean. Then the RBA cut interest rates three times, growth picked up slightly, but inflation returned because the supply side was weaker than expected. We haven't been able to build enough housing, we haven't had enough cheap energy, and productivity has been weak.
So this is where we sit. Inflation is being driven primarily by domestic supply constraints rather than global factors.
Tahn Sharp:
Beyond central bank rhetoric, what indicators should people and especially business leaders be watching to understand where rates might go next.
Paul Bloxham:
The main one to watch is inflation. The RBA's mandate is to keep inflation between 2 and 3% in the medium term. The trimmed mean fell to 2.7 in 2025 but has since jumped back to 3.4. You also watch growth indicators like GDP and business surveys, consumer sentiment, and labour market measures. If the labour market is tight, wages rise and feed into inflation.
We have lots of indicators for demand but very few for supply. Inflation itself tells us whether demand is running ahead of supply or not. That's why inflation is the primary thing to watch when thinking about where the RBA might go next.
Tahn Sharp:
I want to take you back to the geopolitical uncertainty you mentioned earlier. What does that mean for Australia in the Asia Pac region.
Paul Bloxham:
We are part of the global economy. Most shocks that hit Australia come from abroad. Despite trade policy changes and geopolitical shocks, global growth has held up remarkably well. The global economy grew about 2.8% last year and no major economy went into a downturn.
Part of the reason is that countries adjusted to trade disruptions. China redirected exports to other markets. Another big factor is AI. In the US alone, about $500 billion was invested in AI infrastructure last year, contributing about half of US GDP growth. That infrastructure build has global spillovers through trade and wealth effects.
So far, the global economy has not delivered a big negative shock to Australia. Our recent economic story has mostly been driven by domestic dynamics rather than external shocks.
Tahn Sharp:
If we go a bit more micro, what will set apart the businesses that navigate these disruptions successfully from those that struggle.
Paul Bloxham:
Being nimble and adaptable is critical. Australia has had particularly weak productivity growth. Productivity means getting more output for the inputs we put in. Policymakers can help through deregulation, tax reform, and competition, but fundamentally it's about creating an environment that encourages businesses to innovate and invest.
When I talk to businesses, the main constraints they mention are difficulty finding workers and a complex regulatory environment. Policymakers are becoming more focused on addressing productivity, and businesses are increasingly looking at innovation, especially AI, as a pathway to improving efficiency and profitability.
Australia tends to be good at adopting new technologies rather than inventing them. The opportunity now is for businesses to lean into AI to streamline processes and improve productivity. Surveys show only a small proportion of firms are currently doing this in a broad way, and many are unsure how to start. That’s where there is opportunity.
Tahn Sharp:
Anything you'd like to leave accounting and finance leaders with as they plan for the rest of 2026 and into next year.
Paul Bloxham:
Inflation has reasserted itself and may require further interest rate increases. That’s the key macro challenge. At the same time, productivity is becoming a much bigger focus for policymakers. Businesses should be looking for the opportunities that this shift is likely to bring.
Tahn Sharp:
Paul, that's been a fascinating discussion and one I think our members will get tremendous value from. Thanks for joining us today.
Paul Bloxham:
Thank you.
Tahn Sharp:
For our listeners eager to learn more, check out the show notes for links to additional resources from CPA Australia.
And don't forget to subscribe to "INTHEBLACK" and share this episode with your colleagues and friends in the business community. Until next time, thanks for listening.
