Industry leaders are starting the year with one big worry on their minds: rising costs.
Modest demand growth and ongoing uncertainty are other key causes for concern, those who attended our webinar exploring our annual Australian Industry Outlook report heard.
In response, Australian businesses are prioritising cost management to defend margins and improve productivity and near-term returns.
Growth strategies will focus on existing offerings while technology investment, including the use of AI, remains a top priority, those surveyed said.
“While economic conditions have improved slightly over the past year, they remain subdued by historical standards,” webinar host Louise McGrath, Australian Industry Group’s Head of Industry Development and Policy, said.
“Cost pressures are still growing, posing difficult challenges that are reshaping business strategy.”
To share the results of the 13th Annual Australian Industry Group Leaders Survey and to understand what it means to the broader economy, Ms McGrath was joined by:
The report, based upon responses from 225 senior leaders, provides critical insights into how they anticipate the coming year.
It’s also a useful benchmarking tool to enable businesses to see where they sit relative to others in their industry — and to then act on the intel.
“Industry is preparing for a mixed year ahead,” Ms Dowling said.
“On the one hand, the economy is recovering but only gradually. On the other hand, a number of pressures that had begun to ease, including inflation, have re-emerged.
“Supply chain pressures continue to ease, but concerns around energy costs have intensified.
“There are continued elevated levels of uncertainty, domestically and globally.
“Workforce challenges persist, especially for higher skilled roles.
“Sentiment remains marginally negative regarding general business conditions: Slightly more businesses expect conditions to be worse than better.
“Revenue expectations are positive. They’ve ticked up from last year but remain below the historical average.
“Profit margins tell a more concerning story. More businesses expect profits to fall than those that expect them to rise. That's a reflection of elevated input costs that continue to run ahead of selling prices.
“Taken together, these conditions are pushing businesses back towards cautious, targeted strategies, rather than the broad-based expansion we saw years ago.”
With expectations around customer demand only mildly positive, technology and innovation stand out as priorities.
“Technology remains the top priority for investment; it’s the only area where intentions have strengthened,” Ms Dowling said.
“Businesses are clearly leaning into technology to manage costs and lift productivity.”
Business development and process improvement are also high investment priorities.
In contrast, more traditional investment areas are slipping: R&D remains the lowest-ranked priority for spending.
As workforce constraints ease, training also becomes slightly less of a priority.
“This shows a clear preference for investments that deliver faster returns, rather than longer-term innovation,” Ms Dowling said.
Most businesses expect costs to continue to rise throughout the year, comparable to the post-pandemic inflation spike in 2022.
About 85% of businesses expect energy costs to rise.
“What's different this time is the source of concern,” Ms Dowling said.
“Previously, it was global markets. This time, it's the reliability and affordability of domestic markets.”
Selling prices tell a different story.
While just over half of businesses plan to lift prices, a significant number expects to hold prices steady or even reduce them.
“That tells us demand is fragile; many firms don't believe they can pass their rising costs on without losing customers,” Ms Dowling said.
For the first time in the survey’s history, businesses were asked to rank the factors having the greatest negative impact.
Wages emerge as a dominant pressure point.
“Wages are still growing faster than revenue, so that's pressure on margins,” Ms Dowling said.
Tax and compliance follow closely behind.
For many firms, it's the cumulative burden of taxes and regulation: the complexity and admin load are absorbing resources and stifling growth.
Workforce shortages remain an issue, and energy costs and supply chains round out the list.
“While fewer firms are affected overall, the businesses that are affected feel it acutely,” Ms Dowling said.
What’s happening around the world has a huge impact on Australia, AustralianSuper’s Felicity Emmett said.
“We are a small, open economy that relies on significant external demand for domestic growth,” Ms Emmett said.
“What we saw last year was a large swing around in forecasts.
“IMF forecasts for 2025 growth show the year started off relatively positive, then we saw a large downgrade around the time of the Liberation Day tariff announcements.
“Over time, we saw successive upgrades to global growth, including Australia, the US and China, and this showed the resilience of the global economy.”
Rather than a significant impact from higher tariffs and uncertainty, a confluence of positive factors helped growth recover quickly.
“We didn't have major retaliation on tariffs; we had quite supportive financial conditions,” Ms Emmett said.
“We had strength in private demand and a surge in tech investment in the US.
“That’s had significant global overflows, particularly in the case of demand for Asian technology exports but also into Australia in terms of our own technology investment.
“The IMF forecasts 3.3% for growth in 2026, so that’s a good starting point for Australia.”
After cutting interest rates last year, the Reserve Bank lifted the cash rate by 25 basis points this month.
“The market expects the Bank to lift rates at least once more, possibly twice, this year,” Ms Emmett said.
“That has really changed expectations for the economy and is lowering growth expectations through 2026.
“It’s all because of this resurgence in inflation.”
It has become an issue, Dr Wilson said.
“It's not just that costs are going up, it’s that we're not certain how much they're going up by,” he said.
“Inflation is now a fact of life. In 12 months' time, this will likely still be an issue business are grappling with.”
The increase in technology investment is making a significant contribution to the pick-up in GDP growth, Ms Emmett said.
“A lot of that is related to data centres and the AI boom,” she added.
“A lot of companies are pinning their hopes on the productivity gains from AI, and that's certainly something we feel optimistic about for the broader economy.
“This year is likely to see solid growth in (AI) investment; there’s a large pipeline of data centre investment.
“Those data centres will need to be built, and they'll need to be filled with equipment, and that will help drive the economy and GDP growth through 2026.
“However, it’s likely we’ll see a slowdown in the second half of the year, particularly in consumer spending and house building. That will see GDP growth slow a little.”
Industry is also turning to AI to improve their processes, Dr Wilson said.
“They want greater resilience and control. Some members say they'd like to manage supply chain problems and navigate increased costs and the like by reverting to in-house production.”
Australian Industry Group has long encouraged members to focus on digitalisation, decarbonisation and diversification.
Disgruntlement can be added to the list of Ds, Ms Emmett said.
“Communities are feeling the same uncertainty as business,” she said.
“Issues such as the energy transition, the cost of energy and how the AI boom might impact people's jobs are creating widespread uncertainty.
“These issues are interrelated: the housing crisis, for example, is impacting fertility rates, because home ownership is just so expensive.
“Disgruntlement is going to be a real challenge for politicians to address.”
It’s also emerging as an issue for employers, Ms McGrath said.
“Many young workers are acutely aware that whatever they do at work and the income they earn is less likely these days to enable them to buy a house,” she said.
“That has a huge impact on motivation — if the effort you put into your current employment is not going to be a foundation to your future wealth.”
Don’t forget about the future, Dr Wilson said.
“The survey has shown that in the past few years, business time horizons have been getting shorter. Costs are high, workforces are tight.
“When there’s a lot of uncertainty, it’s hard to think about the next five or ten years.
“However, it’s important to think longer term and ensure things like R&D don’t get lost.”
Ms McGrath added: “World events mean people are constantly reacting. After a while, that becomes a habit, and that's a risk.
“It's a real challenge for business leaders to take a moment to do the blue sky thinking — to, say, reimagine their production and then invest in technology.
“You really need that strategy and that time.”
Wendy Larter is Communications Manager at Australian Industry Group.
A former journalist for newspapers and magazines including The Courier-Mail in Brisbane and Metro, the News of the World, The Times and Elle in the UK, she is passionate about giving businesses a voice.
