Global markets remained remarkably resilient throughout 2025, with growth assets such as shares, property and infrastructure delivering another year of double-digit returns. This performance has come despite a prolonged period of disruption, including a global pandemic, rising inflation and interest rates, ongoing conflict in Europe and the Middle East, and more recently, US trade tensions and a US government shutdown.

Supportive macroeconomic policy settings have underpinned this resilience. Monetary policy has eased in recent years, while fiscal policy across most developed economies has remained expansionary. At the same time, major global megatrends, particularly artificial intelligence, defence spending and the reshoring of supply chains, have supported technology and commodity markets. As a result, global economic growth has remained relatively steady at around 3.0% per annum over the past five years.

However, longer-term risks continue to build. Budget deficits and government debt levels are expanding across the developed world, with Germany the latest economy to shift towards higher public debt. Debt-to-GDP ratios now exceed 100% in many advanced economies, increasing pressure on central banks to keep interest rates low and provide ongoing support for bond markets through quantitative easing.

This sustained intervention in interest rate markets raises the risk of future inflation through currency debasement. One reflection of these concerns has been the sharp rise in gold prices, which gained approximately 64% over the past year, driven by both inflation hedging and heightened geopolitical uncertainty.

Looking ahead to 2026, monetary and fiscal policy remain supportive, but the global easing cycle appears to be nearing its end. Japan has already begun raising interest rates from historically low levels. Commodity strength has broadened from precious metals into industrial metals, prompting questions about inflationary pressures further down the track. While the technology sector remains structurally positive, concerns persist around whether large-scale capital expenditure on AI infrastructure will ultimately deliver acceptable returns. In summary, near-term conditions remain constructive, but medium- to long-term risks are gradually increasing.

Is the Australian economy recovering in 2026?

The Australian economy is currently growing at approximately 2.0% and is showing signs of renewed momentum, with private sector demand beginning to recover. The Reserve Bank of Australia reduced the cash rate to 3.6% during 2025, and the lagged impact of this stimulus is expected to flow through the economy during 2026. Commodity prices have also rebounded strongly since mid-2025, providing additional support.

Inflation remains the key domestic risk. Headline inflation is running at 3.4%, with core inflation at 3.2%, above the RBA’s target range. This places the central bank at risk of needing to raise interest rates later in 2026. However, current inflation readings have been influenced by temporary factors, including the expiry of electricity subsidies and the introduction of a new monthly inflation series by the Australian Bureau of Statistics. These effects are expected to unwind as the year progresses, allowing inflation to moderate.

Markets are currently pricing in the possibility of one interest rate increase by mid-year. The shift in expectations has pushed bond yields higher, with the Australian 10-year bond yield reaching 4.8% late in 2025. This weighed on interest-rate-sensitive sectors such as financials, retail, property, infrastructure and technology. In contrast, materials stocks performed strongly, supported by rising commodity prices, and emerged as the leading sector for the year.

From a fiscal perspective, government spending remains elevated and budget deficits are expected to persist in the medium term. Importantly, Australia’s fiscal position remains comparatively strong, with deficits estimated at 1–2% of GDP and government debt around 40–50% of GDP – well below levels seen in most other developed economies. Australia also retains its AAA sovereign credit rating, while the domestic banking system continues to be rated AA-.

Overall, the Australian economy remains relatively well balanced when compared with larger peers in Europe, Japan and the United States, where expansionary fiscal policy and central bank intervention are being pushed to their limits. Australia’s key structural challenge remains weak productivity growth and a lower level of innovation relative to the US.

What is the market outlook for 2026?

Markets successfully climbed a “wall of worry” throughout 2025, navigating US trade tensions, a government shutdown and renewed inflation concerns. Expansionary fiscal and monetary policy, particularly in the United States, alongside continued enthusiasm for AI-related investment, have provided strong support for growth assets.

As 2026 begins, a key question is whether inflation will re-emerge as a more persistent challenge for global central banks, many of which appear willing to tolerate inflation running above target levels. In an environment of elevated public debt, there is a risk that inflation becomes a de facto policy tool. However, sustained inflation would place pressure on households through higher living costs and push bond yields higher, increasing funding costs for governments.

In the short term, conditions remain supportive for growth assets due to accommodative policy settings. Over the longer term, risks are accumulating around the unintended consequences of prolonged stimulus, including inflation, rising bond yields and currency debasement. There is also the longer-term risk that the AI investment boom fails to generate sufficient returns, although this remains a structural issue rather than an immediate concern.

LDB market insight and advice

Understanding how global and Australian market conditions may affect your investments, superannuation and long-term financial position is essential, particularly as policy settings shift and risks begin to build beneath the surface.

LDB’s financial advisors, accountants and tax specialists, based in Blackburn in Melbourne’s City of Whitehorse, can help you interpret market movements, assess potential impacts on your portfolio and ensure your financial strategy remains aligned with your goals in a changing economic environment.

Call us on (03) 9875 2900 or get in touch online to discuss your situation. You can also follow LDB on LinkedIn for regular insights on markets, investing, superannuation and wealth management.