Australia's Economic Outlook for 2025: Recovery and Growth

Australia’s Economy in 2025: A Year of Recovery and Growth

Australian households and businesses are poised to benefit from lower interest rates and improved market conditions, setting the stage for a year of recovery, according to a leading economist from the University of South Australia.

Dr. Susan Stone, UniSA’s Credit Union SA Chair of Economics, predicts that global economic growth will improve in 2025, with G20 economies averaging a growth rate of 3.35%. India and Indonesia stand out as key markets, offering significant opportunities for Australia as both countries are major trading partners.

Inflation and Interest Rates: A Positive Outlook

Inflation is expected to recede further, with central banks in nearly half of the world’s advanced economies (such as the US, UK, Canada, and Japan) reaching their monetary policy targets. In emerging markets like India, Brazil, and South Africa, around 60% of central banks are on track to meet their inflation targets.

“Inflation is coming down in Australia, and rate cuts are expected in the first half of the year, with many economists predicting one as early as February,” Dr. Stone explains. “However, concerns remain regarding the impact of Commonwealth payments on consumer price index (CPI) figures, rising rents, persistent services inflation exceeding 4%, a tight housing market, and low unemployment.”

Despite these concerns, she notes that the overall economic outlook is positive, with controlled inflation and lowered interest rates expected to stimulate economic growth while avoiding a resurgence in inflationary pressures.

Labour Market and Sectoral Growth

The employment landscape remains complex, with growth in full-time jobs slightly outpacing part-time employment since the COVID-19 pandemic. However, sectoral variations are significant. The electricity, gas, and water (EGW) industry has seen the strongest employment growth, doubling its rate compared to the 10-year average. This growth, however, has been driven primarily by part-time positions (11%) rather than full-time roles (3%).

Construction and healthcare have also demonstrated strong employment growth at 1.6% and 1.5%, respectively, with full-time job gains outpacing part-time increases. Manufacturing, while a smaller sector, has shown notable improvements, with a shift towards full-time employment and a decline in part-time roles.

“Construction, in particular, has bounced back significantly from pre-COVID levels, with full-time job growth now at 1.7%—more than twice the rate before the pandemic,” Dr. Stone notes. “This suggests continued tight labour conditions in the construction sector into 2025.”

Household Spending and Business Investment: Catalysts for Growth

With inflation declining and real wages rising, Australian households are expected to experience some financial relief, which should translate into increased consumer spending. Dr. Stone highlights that retail spending has been on the rise, particularly in household goods, indicating that consumers are spending not just due to inflation but also due to improved purchasing power.

“As the CPI falls faster than the wage price index (WPI) and with expected interest rate cuts, household budgets should see some recovery in 2025,” she says.

Business investment will play a crucial role in sustaining Australia’s economic momentum. Addressing structural challenges in housing, fostering innovation, and enhancing business investment will be critical to ensuring long-term growth.

Navigating Global Trade and Economic Shifts

Following Donald Trump’s return to the US presidency, Australia, like many other nations, is adapting to potential new trade policies, including tariffs on key trade partners like Canada, Mexico, and China.

Although the US accounts for only 5% of Australia’s total exports, it remains the fifth-largest export destination and a significant market for advanced manufacturing. Australia exports high-tech products such as aerospace components, machine tools, and sophisticated engineering equipment to the US. Additionally, the US is Australia’s second-largest services export market, comprising over 10% of total services trade, spanning areas such as software, engineering, and transport services.

Dr. Stone acknowledges that global markets are likely to remain volatile, but she remains optimistic about Australia’s prospects. “A weaker Australian dollar will support exports, but addressing key structural issues in housing, innovation, and business investment is essential for sustained economic growth.”

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