The business world has grown quiet. Many are worried. The latter half of 2026 is shaping up to be significant – not just because of the November state election, Iran or the Strait of Hormuz. It’s more worrying – El Niño is on the way.
Forecasts from the Bureau of Meteorology (BoM) suggest a transition to El Niño conditions by late winter or early spring, potentially escalating to a “super” event. These conditions will have critical implications for our already strained agricultural sector.
El Niño, a recurring climate pattern, is typically characterised by very low rainfall. The primary concern is that Victoria’s western district farming regions have only just emerged from significant drought and February’s devastating fires.
Typically, El Niño events last between nine and 12 months. There is little buffer for another dry period, with soil moisture yet to recover and water storage low across Victoria.
The Victorian government has already activated the rarely used desalination plant in Wonthaggi, ordering 150GL for 2026-27. But it will only supply drinking water to the Melbourne–Geelong system, leaving many farming regions exposed to likely shortages.
Financially, most farmers were already facing difficulties, using their savings and overdrafts to purchase fodder last summer. Now, they must manage higher diesel and fertiliser costs resulting from the Iran conflict. If El Niño develops, costly water cartage, stock and crop losses will follow.
The struggles of the agricultural sector continue to impact the local economy, leading to higher grocery bills and slower economic activity.
The usual response to a slowdown is to cut interest rates and increase spending. At present, this approach will be challenging, due to high migration and low productivity and a state government with limited financial capacity.
The timing of this event is also likely to align with the period when our state government enters ‘caretaker mode’, and we will be effectively leaderless at a crucial time, if we are not already! Inaction could be disastrous.
Our ‘High Demand Economy’ which sees the price of goods and services rising across the board, creates inflation and is largely driven by migration. Recently released national migration numbers show a decline from 429,000 to 306,000 in 2024-25, but this remains high and well above sustainable levels.
Each additional resident in Victoria increases demand on police, hospitals, housing and the wider economy, making it harder to manage inflation and maintain service delivery. This puts pressure on everything including house prices, and this combined with the Iran conflict and higher fuel costs means inflation is expected to peak at 4.5 to 5 per cent before slowly returning to an estimated 3.7 per cent – still above RBA targets.
Which brings us to our zero-productivity growth. An economy with a strong private sector and strong productivity growth could trade itself out of slow economic conditions. Driven by weak support for the private sector and heavy taxation on property and business, productivity has stalled and the private sector is shrinking.
This will make it very hard for us to trade out of our issues. Victoria is not a big miner, we will not have the benefits of an uplift in commodities to fix our bottom line, such is the good fortune of our federal government, or was that sheer dumb luck?
Action will be needed. We need an immediate about-face of the property tax regime that our state government has relied upon to fund its Big Build. Business growth and productivity are driven by investment that has, for generations, been secured by property debt. Property has been the only source of security lenders are generally willing to accept and without it, we cannot borrow, invest or grow. This money grab from property has cost us our economic strength to endure.
A storm is coming – and it’s one without rain. At least the Cats are performing well, which may provide some distraction as we look toward the distant dark clouds.