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South Australia’s economy is expected to strengthen in 2025/26, despite facing a difficult trading environment overseas, according to the latest SA Centre for Economic Studies (SACES) Economic Briefing Report from the University of ����vlog����.

Final spending in the State has picked up and the labour market is strong. A rebound in the upcoming winter grain crop driven by more favourable seasonal conditions, an easing of cost-of-living pressures and stronger growth in the Australian economy will support South Australia in the year ahead.

Economists from the University of ����vlog���� say that household spending in South Australia is finally showing signs of recovery after an extended period of weakness.

“Cost of living pressures, which have eroded disposable incomes and dampened consumer confidence, are gradually easing with the inflation rate now running below wages growth,” says Jim Hancock, SACES Executive Director at the University of ����vlog����.

“In addition, solid employment growth and recent interest rate cuts are helping to restore household incomes.”

Employment has grown strongly over the past year. Although the unemployment rate has edged up, this is the result of increased labour force participation with more people entering the labour market and actively seeking work. Underemployment has declined and the State’s labour force underutilisation rate – the combined unemployment and underemployment rate – is down to its lowest level since the 1970s. 

Key highlights from the Economic Briefing Report:

Economic growth:

• Global growth prospects have weakened as a consequence of rising tariffs and heightened uncertainty driven by the Trump administration’s protectionist trade agenda and reactions to it. The International Monetary Fund has downgraded its 2025 global growth forecast by 0.4 per cent to 2.8 per cent – the slowest pace since 2009, excluding the pandemic.
• Downward revisions to expected growth have been most pronounced for those economies directly affected by new trade measures, which includes key South Australian trading partners such as China and Association of Southeast Asian Nations.
• Australia’s Gross Domestic Product (GDP) growth was weaker than expected in the March quarter and the anticipated recovery in 2025 is slow in coming. Exports declined and domestic demand remained subdued.

Inflation, spending and investment:

• Consumer price inflation has continued to moderate, with both headline and underlying measures returning to the Reserve Bank of Australia’s (RBA) target band. Goods inflation has fallen sharply. Services inflation is trending lower but remains slightly above target, reflecting latent domestic price pressures, particularly from labour costs.
• Aggregate spending in South Australia strengthened markedly over the past year. Real state final demand rose by 3.1 per cent through the year to the March quarter 2025 – well ahead of population growth and well ahead of the corresponding national increase of 1.9 per cent.
• The acceleration in South Australia’s aggregate spending has been broadly based, reflecting sharp increases in public sector investment, dwelling investment, and a rebound in business investment. Growth in household consumption has also picked up after two years of stagnation.

Employment:

• Total employment in South Australia has grown strongly over the past year. The trend unemployment rate has risen slightly to 4.2 per cent, but this is because many people, particularly women, have been entering the workforce. The labour force participation rate rose by 1.5 per cent over the year to June, reaching 64.1 per cent – just below its record high of 64.2 per cent.
• Although unemployment has increased slightly through the year, it remains low by historical standards. Moreover, underemployment has declined sharply, and is now at its lowest level since the early 1990s recession and collapse of the State Bank.

Housing:

• The balance between housing demand and supply has improved somewhat, supported by slower population growth and a pickup in residential construction. However, housing availability and affordability remain severely constrained.

Agriculture:

• Agricultural output is expected to increase significantly this year with a return to more normal seasonal conditions. The Australian Bureau of Agricultural and Resource Economics and Sciences projects a 42 per cent increase in South Australia’s winter crop production to 7.5 million tonnes in 2025/26. However, this recovery remains contingent on the Bureau of Meteorology’s upbeat three-month rainfall outlook being realised. Many farmers are still contending with dry conditions.

“There are two main risks to the economic outlook for South Australia,” Hancock says.

“The first is that the United States chooses to go through with aggressive tariff increases and that some of its trading partners respond in kind. This would significantly weaken the international economy with detrimental flow-on effects to South Australia.

“So far, South Australia’s exports to the United States have held up well, but any further tariff increases on Australian goods would directly reduce our export competitiveness in the United States and, perhaps more impactful, higher tariffs more generally will damage economic growth and demand for our exports in key Asian destinations.”

Hancock says the second risk is that South Australia and Australia fail to restore stronger productivity growth rates.

“Productivity growth is fundamental to raising living standards and it has been weak over the last decade and more,” Hancock says.

“Raising productivity is a key challenge for Australian governments. There are no easy answers but a comprehensive review of a wide range of fiscal and regulatory measures will be needed to weigh up their costs and their benefits.”

The SACES Economic Briefing Report is delivered to Corporate Members from the SA business, government and not-for-profit community.