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Hedge Clippings | 23 October 2026 Slowing down, but still running hot Australia's economy is slowing. Unfortunately, inflation appears reluctant to follow. That leaves the Reserve Bank contemplating another interest rate increase, the Treasurer preparing weaker growth forecasts, and households wondering how much more slowing they are supposed to accommodate. Speaking at today's Citi A50 Australian Economic Forum, Jim Chalmers acknowledged that higher inflation and interest rates would probably mean softer growth and slightly higher unemployment. There was an encouraging qualification: Treasury now expects business investment growth this financial year could exceed 5%, compared with May's forecast of 2.5%. The economy is losing momentum unevenly, with investment providing support while households feel the squeeze. Two days earlier, RBA Deputy Governor Andrew Hauser delivered the less comforting side of that picture. The inflation outlook had become "materially worse" than anticipated in August. Higher oil prices, strong AI-related demand and domestic capacity constraints were all contributing. More concerning was evidence that some businesses increasingly regarded inflation of 3-3½% as normal. Once that expectation influences pricing decisions, bringing inflation down becomes harder. The Treasurer and the RBA can therefore both be right about slowing growth. The disagreement is over how much slowing is necessary, and which policies should deliver it. Chalmers emphasised today that public demand growth had halved last financial year while private demand growth had tripled. That is relevant. It does not, however, settle whether government spending is adding to inflationary pressure. Slower growth in spending still leaves spending growing. And its effect depends on the economy's ability to supply the workers, materials and services being purchased. When capacity is constrained, public spending competes for resources alongside private spending. The RBA responds to the total. Nor does public demand capture the entire fiscal picture. Tax cuts and transfers affect household purchasing power without all appearing as government purchases in the national accounts. The RBA itself notes that budget balances provide a broader indication of fiscal policy's effect because they incorporate taxes and transfers as well as spending. May's Budget projected Commonwealth cash payments of 26.8% of GDP and an underlying cash deficit of $31.5 billion, or 1% of GDP, for 2026 - 27. Those are forecasts awaiting December's update. Neither figure tells us precisely how much inflation fiscal policy causes, and a deficit alone does not establish that policy is becoming more expansionary. But the scale of spending deserves scrutiny alongside the Treasurer's emphasis on its slowing growth. The fair criticism is that fiscal restraint could share more of the work currently being done by interest rates. The government cannot control world oil prices. It can control spending priorities, the targeting of assistance, and whether new commitments are offset elsewhere. Productivity-enhancing investment can expand supply over time, although construction spending adds demand before those benefits arrive. That creates an uncomfortable political choice. Broad relief is popular, but it supports spending when the RBA is trying to restrain it. Better-targeted assistance and credible savings offer a more disciplined response. Claims that Canberra caused all inflation are implausible; the Treasurer's suggestions that its choices have little bearing on the task are equally unconvincing. The housing market shows how uncomfortable this combination has become. Domain's September Quarter House Price Report, released on Thursday, recorded falling median house prices in every capital city - the first simultaneous decline in 15 years. Combined capital city house prices fell 4.7% over the quarter. Domain identified higher interest rates, persistent living costs and changes to housing investment taxes as contributing pressures, with investors pulling back. Albanese and Chalmers may be tempted to present cheaper houses as evidence that their affordability policies are working. Before claiming victory, they should consider whether prospective buyers can actually afford the repayments. Lower prices reduce the deposit and loan required, which certainly helps. But higher mortgage rates reduce borrowing capacity, while persistent inflation eats into the income available to service the loan. For buyers dependent on substantial borrowing, those pressures can swallow the benefit of a cheaper purchase price. Affordability involves more than the number on the sales contract. Meanwhile, existing homeowners face the other side of the equation: falling property values erode their equity, even as repayments remain elevated. Recent buyers with small deposits are particularly exposed. The downturn was already underway before May's Budget, so Canberra cannot claim - or be assigned - all the responsibility. Its tax changes have nevertheless added another pressure to an already weakening market. A smaller deposit hurdle for tomorrow's buyer, a larger repayment burden, and less equity for today's owner. "Thank you, Albanese" may not be quite the electoral endorsement the government had in mind. For fund investors, that uncertainty now has a particularly tangible counterpart. Last week's Hedge Clippings covered the reliability of private asset valuations following the Firmus "fiasco" (which we expect still has a long way to run). This week MA Financial announced that its $106 million MA Secured Real Estate Income Fund would be wound up. Its principal underlying investment, the MA Secured Loan Series, will suspend redemptions from 31 October until at least 31 March 2027. The retail fund's outstanding redemption requests lose their previous priority, with investors instead participating proportionately in the wind-up. MA also cited an insufficient sustainable scale. The notice does not establish investors' ultimate loss, but it establishes that access to their money has changed substantially. The issues facing private credit for real estate and property development are real, but need to be viewed as a separate sector from commercial and corporate private credit lending. While both are subject to valuation concerns and potential liquidity mismatches, the other issues each face are significantly different. Going forward, FundMonitors.com will be allocating the latter to a new Peer Group consisting solely of Corporate Private Credit to give investors and advisors a clear differentiation between the two. Next Wednesday's inflation release will sharpen the debate before the RBA meets in the first week of November for their "Cup Day" meeting. Persistent inflation, followed by a further rate rise will only add to the government's flagging electoral support. News | Insights Quarterly State of Trend report - Q3 2026 | East Coast Capital Management Market Commentary | Glenmore Asset Management September 2026 Performance News |
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