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Australia in 2025

Paul Bloxham, Chief Economist, Australia, New Zealand & Global Commodities

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  • The RBA has stayed in the ‘narrow pathway’, with gradual disinflation on track in a still fully employed economy
  • But per capita national income is falling, productivity growth is dismal, and Australia’s next growth engines need to fire up
  • 2025 is an election year and it’s ‘crunch time’ to make reforms to support Australia’s longer-term growth prospects

‘Crunch time’ downunder

The good news is that despite the most aggressive Reserve Bank of Australia (RBA) tightening in modern history, a recession has been avoided and core inflation has been heading lower. Even better, the jobs market has been strong, and the unemployment rate ended 2024 at 4.0%, up only modestly from its 50-year low, of 3.5%, in late 2022. Dis-inflating while staying fully employed is the ‘narrow pathway’ the RBA had hoped to be in.

That said, the disinflation has not been costless, with growth slowing markedly in 2024, led by the consumer. And, having taken the gradual approach to disinflation, the RBA has not been able to cut yet. Having only delivered gradual disinflation, we think the scope for cutting will be only modest. We see only two 25bp rate cuts as likely in 2025. We see growth picking up pace, but still not strong, at 1.8% in 2025.

1.8%
Our GDP growth forecast for Australia in 2025

This doesn’t sound too bad, but below the surface, the picture is not as pretty. First, strong growth in public demand and hiring has been a key force supporting the jobs market and activity, with private sector growth weaker than overall economic growth.

Second, and fundamentally, a key reason that inflation has fallen only slowly is that the supply side of the economy has been constrained by falling productivity. Part of this is the ‘long-tail’ effects from the pandemic-related policy responses reducing economic dynamism. However, productivity is also structurally weak in an economy that has become less efficient, with a cost base that has been rising too quickly.

As the pandemic effects fade further and iron ore, coal and gas exports are likely to be less supportive of national income growth, we believe policy action is needed. With an election due by 17 May, we believe policymakers should focus on reform, including competition, tax, and regulatory policy. New growth engines, such as renewables, services exports and trade links with India and the ASEAN should be in focus.

All of this needs to take place against a backdrop of an increasingly uncertain global economic backdrop, particularly given likely abrupt shifts in US policy. But without a lift in productivity, Australian living standards could keep falling.

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