Retailers under attack from weak demand, rising costs
Australian businesses are under fire from both sides as conflicts in the Middle East drive up prices and weaken demand.
After first being lit by fuel costs, the effects of the US-Israeli-led war in the Middle East have begun to spread to the rest of the Australian economy, increasing price pressures, according to the latest Deloitte Access Economics Retail Forecast.
Fuel, energy, plastic and fertilizer prices are soaring, while the rising cost of living is tightening household budgets and reducing consumer spending.
All of these will accelerate retail sector growth, and retail turnover is expected to increase by 1.8 percent in 2026, from 2.3 percent in 2025, the report said.
“Events in the first half of 2026 mean Australian retailers face a simultaneous attack from both sides – rising costs and weakening demand,” said David Rumbens, partner at Deloitte Access Economics.
“Retailers generally pass on cost shocks to consumers relatively quickly during periods of high inflation.
“But retailers also need to be aware that consumers can only buy so much.”
Australia’s central bank raised interest rates for a third consecutive month in May, raising consumer concerns.
With average annual inflation falling to 3.4 per cent, coupled with gloomy forecasts for economic growth and real wages, Mr Rumbens warned that demand-side pressures were “threatening to bite”.
“In recent months we have seen some of the worst consumer confidence readings on record, with households increasingly worried about their finances,” he said.
Discretionary spending growth is expected to slow from 2.5 percent per year to December 2025 to 0.7 percent per year to December 2026 due to continued interest rate increases, high inflation and uncertainty about the Middle East.
On the other hand, spending on basic needs is expected to increase from 2.5 percent to 3 percent in the same period, but the figure is expected to decline as households seek savings and savings.
Mr Rumbens said the effects on Australian retailers were expected to worsen due to the knock-on effects of the Reserve Bank’s interest rate hikes on mortgage costs and the spread of the Middle East war.
If conflict continues, high prices and shortages of certain goods will have knock-on effects on inflation, interest rates and economic growth.
The Deloitte Access Economics report encouraged business owners to plan for future scenarios, manage cost pressures and make strategic decisions.
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