Australia's gross domestic product (GDP) growth is expected to slowing to around 1.3% in this year from 2.5% over 2025, as higher interest rates, elevated inflation, and falling house prices flow through to softer activity, National Australia Bank (ASX:NAB) said in a report on Friday.

It forecast the unemployment rate to rise to 4.8% by the end of 2027 as employment growth is expected to slow alongside cooler activity growth.

The July NAB monthly business survey continued to show weak confidence, but a stabilization in conditions. The labor market data continued to show a gradual cooling but not a significant deterioration in labor demand, the bank said, adding that the outlook for business investment remains subdued outside of data center-related investment.

The NAB Spend Trend suggests that household spending remained resilient in July, rising 1.1% month over month to be 7.7% higher on an annual basis in nominal terms. Growth was broad-based across both discretionary and essential categories. The bank expects real household consumption growth to slow to 1.4% over 2026.

The bank expects the Reserve Bank of Australia will keep the cash rate unchanged at 4.35% into 2027, with the next move in rates to be down, likely from the second quarter. The RBA now sees GDP growth of 1.4% this year and 1.6% in 2027, followed by a third year of below trend growth in 2028 at 1.8%. The lender's near-term forecasts are for 0.9% quarter-over-quarter trimmed mean

and 1.1% quarter-over-quarter headline inflation in the September quarter, implying the risk sits to the high end of the RBA's August forecasts at the margin.