1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 74
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
ease to around 1.1% in 2026. While recession risks remain low, the economy continues to struggle
to generate self-sustaining private sector growth, leaving activity overly reliant on the public
sector at a time when fiscal space is increasingly constrained.
Strength earlier in 2025 proved temporary. Activity was supported by front-loaded spending
ahead of tax and policy changes, alongside a boost from government expenditure. As these
effects faded, growth slowed back toward its underlying pace, exposing persistent weakness in
household demand and a loss of momentum in private investment. With fiscal policy expected
to become less supportive over the coming quarters, the outlook points to continued sub
potential expansion through much of 2026.
Household consumption remains restrained despite some improvement in real income
dynamics. High interest rates over the past two years, an elevated tax burden, and uncertainty
around future fiscal adjustments have weighed on confidence and reinforced cautious spending
behaviour. Although headline inflation is expected to slow meaningfully over the medium term,
the persistence of services-led price pressures, in relation to higher labour costs, has delayed the
normalization of inflation. As a result, consumption growth is likely to remain modest and is
unlikely to become a large driver of GDP.
Private investment is also losing traction. While business capex showed resilience in the post
pandemic period – supported by energy transition projects, digital investment, and labour-cost
savings technologies – recent indicators point to growing caution. Elevated borrowing costs,
softer demand expectations, and policy uncertainty are encouraging firms to delay or scale back
investment plans. Rather than responding to a discouraging economic backdrop through
aggressive job cuts, companies appear increasingly focused on controlling costs by limiting hiring
and allowing headcounts to decline gradually through natural attrition.
This adjustment is becoming more evident in labour market dynamics. Employment growth has
slowed as vacancies decline and hiring freezes spread across the private sector, even as outright
layoffs remain contained. Higher minimum wages, increased employer pension contributions,
and broader payroll cost pressures have raised the marginal cost of labour, incentivizing firms to
operate with leaner workforces. Public sector hiring continues to offset some of this weakness,
but overall labour demand is clearly cooling.
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