Our economic outlook for Australia
March 21, 2025
Our outlook for year-end 2025
2%
Economic growth,
year over year
Australia’s economy grew by 0.6% in the fourth quarter of 2024, its fastest pace of quarterly growth in two years, driven by households’ discretionary spending. Per capita GDP grew by 0.1%, the first quarterly increase in two years. However, for all of 2024, GDP increased by 1.3%, Australia’s slowest annual growth in 32 years, excluding 2020 amid the start of the COVID-19 pandemic. We expect Australia’s economy to recover gradually in 2025, with a modest improvement in economic momentum underpinned by rising real household incomes as inflation subsides. A rebounding housing market and rate-cut expectations should also be supportive. We foresee full-year 2025 GDP growth of around 2%.
2.5%
Trimmed mean inflation,
year over year
The pace of inflation largely held steady in January, according to monthly data released February 26. Compared with December, headline inflation was steady at 2.5% year over year, driven by an easing in the price of rent and new dwellings. The pace of trimmed mean inflation, which excludes items at the extremes, rose to 2.8% year over year in January from 2.7% in December. However, the prospect for sharp disinflation this year appears limited given a tight labor market, government energy and rent subsidies, and external uncertainty.
3.5%
Monetary policy rate
Amid faster-than-expected progress in the inflation fight, the RBA cut its policy cash rate target by 25 basis points to 4.1% on February 18. The cut was the RBA’s first since November 2020, when the rate target was trimmed to 0.1% in the first year of the COVID-19 pandemic. The RBA noted that recent data suggest that the labor market is somewhat tighter than previously thought, representing an upside risk to the cash rate. We continue to expect the RBA to proceed cautiously with further rate cuts. That’s because we see room for further disinflation as limited, given services inflation that remains sticky.
4.6%
Unemployment rate
A tight labor market and stagnant productivity continue to keep unit labor costs high. The unemployment rate remained steady at 4.1% on a seasonally adjusted basis in February. We expect the unemployment rate to rise to around 4.6% in 2025 as financial conditions tighten amid still-restrictive 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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