Our economic outlook for Australia
December 05, 2024
Our outlook for year-end 2025
2%
Economic growth,
year over year
Australia’s economy is poised to recover gradually in 2025 having likely experienced its slowest growth in 32 years in 2024 amid sticky inflation and elevated interest rates. We expect a modest improvement in economic momentum to be underpinned by rising real household incomes as inflation subsides. A rebounding housing market and rate-cut expectations should also be supportive.
2.5%
Trimmed mean inflation,
year over year
Inflation remains stubborn though slowly easing. Stagnant labor productivity growth leaves the economy operating near capacity despite softening demand, keeping inflation sticky. Given this challenge, we believe a period of subdued demand will be needed in the last mile of the inflation fight.
3.5%
Monetary policy rate
Unit labor costs persist at a level above what is consistent with the Reserve Bank of Australia’s 2%–3% inflation target. We expect the RBA to be patient, beginning an easing cycle from its current policy rate of 4.35% only gradually, beginning in the second quarter of 2025, alongside a weakening in both inflation and the labor market.
4.6%
Unemployment rate
The labor market remained tight in October, when 36,800 jobs were created on a seasonally adjusted basis, the unemployment rate was unchanged at 4.1%, and the employment-to-population ratio remained near a record high 64.4%. We expect the unemployment rate to rise to around 4.6% in 2025 as financial conditions tighten in an environment of elevated interest rates.
What I’m watching
The contribution of unit labor costs to sticky inflation
Throughout 2024, the Australian economy has struggled with sticky, though easing, inflation. Price increases above the central bank’s 2%–3% target range have persisted despite a slowdown in demand, because the supply side of the economy also has weakened. One supply-side driver of inflation is that unit labor costs have risen at more than 5% on a year-over-year basis, faster than before the COVID-19 pandemic. To further depress demand and finish the job of reining in inflation, the Reserve Bank of Australia has kept its target for short-term interest rates in restrictive territory—above 4% since mid-2023.
Victoria Zhang,
Vanguard Economist
Labor costs have driven consumer price inflation in recent years
Notes: For each quarter, the trimmed mean Consumer Price Index (CPI) is calculated by ordering all the CPI components according to their quarterly price changes and taking the expenditure-weighted average of the middle 70% of the price changes. Nominal unit labor costs measure the average cost of labor per unit of output produced in the economy. Data reflect the period from Q1 2015 through Q2 2024.
Source: Vanguard calculations, based on data from CEIC Data.
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