The Australian consumer is back in business. Following a slump caused by higher credit prices, the private sector is resuming consumption and investment.
This bodes well for the economy at a time when the outlook for global trade remains highly uncertain. Not cheap, the Australian stock market is reserved for the most dynamic profiles.
The price of credit: a vital variable
Australia has recently experienced some challenging years. In a country with high levels of household debt, the wave of inflation that followed the pandemic and the consequent rise in interest rates harmed households' disposable income and their ability to spend.
If consumers were less fit, they would still be more numerous. In 2015, Australia's population was around 24 million people. A decade later, it is estimated to be around 28 million. An increase of nearly 17% means that, if the GDP per capita had not increased, the total GDP would have been unable to continue growing.
Following years of strong population growth, the country found itself facing a very tight and increasingly expensive real estate market.
Households have therefore taken on significant debt to access property. At the same time, approximately 80% of home loans in Australia are offered with a variable rate. As a result, the surge in inflation in the post-pandemic period (to which the rise in property prices has contributed significantly) and the ensuing interest rate surge have been dramatic for households. According to the OECD, their disposable income has fallen by about 8% since the 1st quarter of 2022.
The State has not been left out. Public spending has increased to support the economy and prevent a recession. Traditionally, with a very dynamic domestic market, Australia has nevertheless had to adapt to a different reality.
Business resumes
But after this dry spell, things are changing. Expected to be 2.5% for the whole of 2025, inflation is now close to the targets of the Reserve Bank of Australia (RBA). The latter revised its key rates downwards for the first time in February, before adding a 2nd layer in May.
Having started 2025 at 4.35% (the level in force since the summer of 2023), the Australian rate now stands at 3.85%. Everything suggests that it will be revised downwards again in the second half of the year and 2026. This is not trivial for an economy such as Australia. With interest rates at lower levels – and set to fall further – credit to the private sector has been on an upward trajectory since the summer of 2024.
Naturally, the Australian consumer is taking advantage of this to show signs of vitality, and their spending will support the economy, giving it a boost that it has lacked in recent years. Following a slight increase in 2024, growth is expected to exceed 2% for the current year, before surpassing this level in 2026.
Trade and uncertainty: significant challenges
Like the rest of the world, Australia is worried about the future of its trade relations and the outcome of the wave of tariffs that the United States wants to impose.
Initially promised a 10% tariff, Australia would be happy with it. Ultimately, the country exports very little to the United States. On the other hand, Australians are concerned about the potential impact of a prolonged trade conflict with China, their primary export market.
For the time being, the Australian authorities aim to reassure the public. They believe that China has the means to stimulate its economy in the event of an unfavourable outcome to the negotiations. But they are still concerned about the impact that reduced visibility on the global trade front would have on investment in Australia and the rest of the world's appetite for its exports.
A stock market dominated by finance
While Australia is primarily known for its wealth of natural resources, including its mining sector, this sector represents only 17% of the MSCI Australia index. At this level, it is the second-largest sector of the Sydney Stock Exchange, which is dominated mainly by the financial industry (41% of the index).
Together, they dominate the equity market, far ahead of pharmaceuticals (9%), consumer discretionary goods (7%) and industrials or real estate (6% each).
This is an Australian market that is inward-looking, mainly, and is much more sensitive to changes in the domestic market, as well as the appetite of households and businesses for credit, consumption, and real estate, than to trade with the rest of the world.
Given the state of world trade, such a profile is reassuring. With a highly uncertain outlook for the global economy, markets with strong domestic demand are expected to be less turbulent than those that remain dependent on foreign trade, and they may well outperform the latter.
We therefore appreciate the potential of the Australian market and the Sydney Stock Exchange. But it is not cheap. With a price-to-earnings ratio of around 20x, the MSCI Australia is slightly more affordable than the global index, but can hardly be described as inexpensive. However, it is a little more generous than others, with a dividend yield of around 3.5%.
Add to this a level of volatility that is closer to that of specific emerging markets, such as Mexico or India, rather than the European or American markets.
Despite its promising prospects, Sydney is best suited for investors with reduced risk aversion; therefore, it should be considered for purchase only as part of a dynamic portfolio. See our complete recommendations.
Not cheap at this stage, the Australian stock market nevertheless retains good potential, benefiting from the revival of domestic demand.