Nearly 40% of Australian industry leaders expect business conditions to be weaker in 2026 than they were in 2025, according to the Australian Industry Group’s latest outlook survey. That figure sits alongside a regulatory and compliance sentiment score of -97 — the most negative reading of any factor measured. For anyone running a business in this country, those two numbers tell a story that goes beyond a bad quarter. They point to a structural shift in how global competition, domestic cost pressures, and government policy are reshaping the operating environment.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
The pressures are coming from multiple directions at once. US tariff policy under the Trump administration pushed average import tariffs to the highest level since 1930, and Australia could not secure a full exemption despite its treaty ally status, as the United States Studies Centre detailed in its January 2026 report. Meanwhile, a global steel glut — with OECD projecting excess capacity to rise from 640 million tonnes in 2025 to 745 million tonnes by 2028 — is threatening Australia’s domestic steel fabrication sector, which is worth between $3.4 billion and $7.4 billion. Domestically, wage costs remain the top concern for half of all business leaders, and energy costs have returned to levels not seen since the 2022 crisis. Here’s what you actually need to know.
The central concept driving this shift is something economists call the net balance — a survey measure that subtracts the percentage of respondents reporting a negative outlook from those reporting a positive one. A score of -97 on regulatory and compliance sentiment means nearly every business leader sees the regulatory environment as a drag. What I tend to notice is that many business owners treat these macro figures as background noise rather than signals that should shape their next twelve months. The inflation impact on Australian businesses is not abstract — it shows up in supplier invoices, wage negotiations, and energy bills that keep climbing.
The Cost Squeeze That Is Eating Margins Alive
The single most important figure in the Ai Group survey is the gap between cost expectations and price expectations. Input prices recorded a net balance of +78 — the highest on record, equal to the worst post-pandemic inflation periods. Energy prices hit +83, returning to 2022 levels. Sales prices, by contrast, sit at +39, which is roughly where they were before the pandemic. That gap — the difference between what businesses have to pay and what they can charge — is the largest ever recorded.
What this means in practice depends on the industry. Manufacturers feel the energy cost pinch harder than other sectors, according to the Ai Group data. The service sector reports a higher compliance burden. Constructors face the worst workforce shortages. Across the board, wage costs are the top concern for half of all respondents. The RSM manufacturing analysis confirms the picture: manufacturing productivity declined again in 2024–25, and the Performance of Manufacturing Index remained in contraction through the first half of 2026. Weak demand, higher input costs, and logistics expenses are all cited. Gross profit margins sit at -2 net balance — essentially flat, but flat while costs are surging.
Consider a small manufacturer with a $2 million turnover. If input costs rise 8% and energy costs rise 12%, but the business can only raise prices by 4%, that difference has to come from somewhere. It comes from reserves, from delayed equipment upgrades, or from reduced staffing. None of those options build resilience. The sustainable growth strategies for Aussie businesses that worked in a low-inflation environment need rethinking when the cost base is shifting this fast.
Three Ways Businesses Misread the Pressure
Treating cost increases as temporary
The most common mistake I see is assuming that input and energy price spikes will revert to pre-2022 levels within a year or two. The Ai Group data shows expectations for both remain far above historical norms. Businesses that held off on price adjustments or efficiency investments in 2023 and 2024 are now facing a third consecutive year of elevated costs. The net balance for input prices has not moderated. Waiting costs more than acting.
Investing in growth when the problem is structure
Business development remains the top functional priority at 59%, and process improvement sits at 50%. That sounds sensible. But when non-tech capital expenditure has a net balance of zero — meaning as many businesses are cutting it as increasing it — there is a mismatch. Companies are chasing new revenue while their cost structure is deteriorating. The more productive move, based on what the data shows, is to fix the cost base first. Technology investment for productivity, not growth, is where the RSM analysis points.
Underestimating trade exposure
The US tariff environment is not a negotiation phase that will pass. The United States Studies Centre report notes that structurally high US tariffs are the new norm, and that Australia needs to hedge by diversifying trade partners. The global steel glut is a separate but compounding factor. The Australian Steel Institute lodged a formal Safeguard application in late 2025, and a Productivity Commission inquiry is underway. Businesses that rely on imported steel, or that export into markets affected by US tariffs, need to map their exposure now. The weak wholesale partnerships challenge becomes acute when trade routes shift.
→ Scroll right to see all columns
| Industry | Top Pain Point | Secondary Pain Point |
|---|---|---|
| Manufacturing | Energy costs (higher than other sectors) | Input price inflation |
| Service sector | Compliance burden (highest of any sector) | Wage costs |
| Construction | Workforce shortages (most acute impact) | Skills gaps in higher-skill roles |
Building a Response That Holds Up for 2026–2027
Lock in operational efficiency first
The top cost management strategy among Ai Group respondents is improving operational processes, cited by 36%. That is the right starting point. Renegotiating supply contracts comes next at 31%, and sourcing new local suppliers at 21%. Fewer businesses intend to build inventories than last year — 12% versus 22% — which suggests a shift toward leaner operations. What I would add is that process improvement needs to be specific: map the three biggest cost inputs in your business and set a target for each. If energy is one of them, the Energy Efficiency Grants of up to $25,000 for SMEs are worth investigating.
- Map your three largest cost inputs and set a reduction target for each
- Review supply contracts for renegotiation opportunities before they auto-renew
- Evaluate local supplier alternatives for at least two imported inputs
- Check eligibility for the $20,000 instant asset write-off (extended to 30 June 2026)
- Apply for Energy Efficiency Grants if energy is a top cost driver
Make technology investment a margin play, not a growth play
Technology investment intentions are the only category rising, at +34 net balance. The National AI Centre estimates roughly 43% of Australian SMEs report some level of AI adoption. Collaborative robots, digital twins, and AI-driven predictive maintenance are being deployed in manufacturing. But the key is to invest in technology that directly reduces a cost line, not technology that opens a new revenue stream you are not equipped to pursue. For businesses selling online, platforms like Shopify can streamline ecommerce operations and reduce manual order processing. For businesses with remote or distributed teams, tools like ExpressVPN help secure operations without heavy IT overhead. The principle is the same: the investment should pay for itself through cost reduction within 12 months.
Diversify trade and supply exposure deliberately
The US Studies Centre report recommends Australian businesses consider wargaming different disruption scenarios. That does not need to be a formal exercise. It can start with a simple question: if your main export market or supplier country became inaccessible for six months, what would you do? The businesses that have an answer are the ones that have already diversified. The government’s Future Made in Australia agenda includes an investment package exceeding $22 billion in grants and incentives for green and advanced manufacturing. The National Reconstruction Fund had made around 28 investments by early 2026, including in semiconductor and quantum manufacturers. These are not just policy announcements — they represent actual capital flowing into domestic supply chains.
Emerging: Policy tools worth watching
Several policy changes are in motion. The $20,000 instant asset write-off for small businesses with turnover under $10 million was extended to 30 June 2026 and is set to become permanent from 1 July 2026, subject to legislation. The critical minerals and hydrogen production tax incentives represent one of the largest sector-specific tax packages in recent memory. The Buy Australian Plan exceeded its target of awarding 35% of contracts by value to SMEs. For beverage manufacturers, a two-year freeze on draught beer excise indexation and an increase in the excise remission cap to $400,000 from 1 July 2026 are directly relevant. These are not general stimulus measures — they are targeted at specific cost and compliance pressures that the Ai Group survey identified as the most severe.
Frequently Asked Questions
What does a net balance of -97 on regulatory compliance actually mean? ▾
Are US tariffs on Australian goods still in place? ▾
How long will the instant asset write-off be available? ▾
Which industries are most exposed to the global steel glut? ▾
Should I invest in technology now or wait until costs stabilise? ▾
What is the single biggest risk for a small manufacturer in 2026? ▾
The Real Cost of Waiting
The Ai Group data shows that eight of eleven sentiment factors returned net negative scores in the 2026 survey. Uncertainty intensified to a net balance of -70, with 83% of leaders viewing it as detrimental. Growth opportunities declined from +76 in 2025 to +45. These are not numbers that suggest a temporary dip. They reflect a structural realignment of costs, trade conditions, and regulatory burden that will not reverse in a single budget cycle. The businesses that emerge in better shape will be the ones that treated 2025 and 2026 as a period for restructuring their cost base, not just surviving it.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
If this was useful, you might also want to read fixing excessive logistics bottlenecks in Australia today.
Sources and Further Reading
Beyond the boom: sustainable growth strategies for Aussie businesses — Practical approaches for building resilience when external conditions are shifting.
Weak alternative revenue streams hindering business growth — Why relying on a single revenue source is riskier than ever.
Australian Industry Group (2026). Australian Industry Outlook 2026. 🔗
United States Studies Centre (2026). Australia’s economic security outlook: Trends and possible responses for 2026. 🔗
RSM Australia (2026). Australian manufacturing under innovation pressure. 🔗
HeavyQuip Magazine (2026). Global steel glut puts Australia on the front line of industry crisis. 🔗
