The International Monetary Fund has held firm on its growth projections for Australia, forecasting GDP increases of 2.1% in 2025 and 2.2% in 2027, even as the nation grapples with persistently elevated inflation that threatens to complicate the economic landscape for businesses and investors alike.
With headline inflation currently sitting at 3.4%, well above the Reserve Bank's 2-3% target range, Australian businesses face a delicate balancing act. Treasury estimates suggest inflation will remain stubbornly above target until at least June 2025, creating an extended period of uncertainty for companies planning major investments or expansion initiatives.
The inflation challenge
Martin Iglesias has unique insight into the cascading effects that sustained inflation has on business operations and funding strategies. As a Credit Analyst at Highfield Private with over two decades of experience in corporate banking, he’s guided clients through various market cycles and bouts of inflation.
“Inflation is based on cost of living, and the cost of living is going up in Australia a lot,” Iglesias explains:
“The monthly expenditure has increased by about $1,000 per month and that’s curtailing the borrowing capacity for customers and offsetting future rate reductions.”
The drivers behind Australia's persistent inflation are multifaceted and deeply embedded in the domestic economy. Housing costs remain the largest contributor to inflation, rising 5.9% annually, whilst food and non-alcoholic beverages have increased 3.3%, with meals out and takeaway food climbing 3.5% due to elevated wages and ingredient costs.
A broader warning from the IMF
The IMF's report extends beyond Australia's immediate inflation concerns, cautioning that global economic uncertainty could intensify should optimism surrounding artificial intelligence falter. The fund warns of a potential “prolonged correction” in stock market valuations, particularly affecting technology firms that have been driving recent market gains.
This global backdrop adds another layer of complexity for Australian small businesses navigating funding decisions. The confluence of domestic inflation pressures and international market volatility requires a more nuanced approach to financial planning than many organisations typically employ.
Strategic implications for Australian businesses
For mid-sized Australian businesses considering expansion or major capital investments, the current environment demands careful preparation. Iglesias has observed firsthand how inadequate financial planning can derail promising growth opportunities.
“Oftentimes, business owners are more reactionary with their funding, so they go and seek financing once they've already taken the steps,” he says.
His advice to them is simple: “Don't put the cart before the horse.”
Instead, he suggests they focus on establishing robust corporate governance and financial management systems before approaching lenders.
Iglesias explains:
“What they need to focus on is managing their financial situation, which is something that a lot of business owners, particularly entrepreneurs and CFOs, disregard. They look at the sales and they look at how much they can sell, and the customers, but they don't look at things from a backward perspective historically.”
The lending landscape
Despite the challenging conditions, opportunities exist for well-prepared businesses. The proliferation of alternative lenders beyond the traditional banking system has created more options, though these come with trade-offs.
“The biggest opportunities would be because you can access a wide range of alternative lenders and they get higher LVRs, which is loan-to-value ratios,” Iglesias notes. However, he's quick to point out the cost implications: “The alternative lenders, you're paying a higher interest rate.”
Major banks, meanwhile, are showing some flexibility. “The major banks are starting to sort of come a little bit more flexible around shifting to just one year's worth of financials for some particular sort of applications,” Iglesias says. Previously, banks often required two to four years of financial history.
Looking ahead
For businesses planning for growth in 2026 and beyond, the key lies in thorough preparation and realistic expectation management. Tax compliance remains non-negotiable.
Iglesias cautions:
“They can't be going to a bank with taxes in arrears, because the banks would just get very jittery about that. They just won't give it any thought if that's the case.”
The IMF's steady growth projections suggest Australia's economy will continue expanding, but the path forward requires businesses to navigate persistent inflation, conservative lending practices and potential global market volatility. Those who approach funding strategically, with comprehensive financial documentation and clear cash flow modelling, will be best positioned to capitalise on growth opportunities in this complex environment.
