‘Slow Grind’ Predicted for Australia’s 2025 Economy Amid Complex Challenges

dependent on improved consumer confdence and falling interest rates.

The Australian economy faces a challenging 2025 as interest rates, infation, unemployment, China’s economic slowdown, and the return of Donald Trump to the US presidency combine to shape an uncertain year. Economists anticipate a slow recovery, with modest growth and continued economic divergence among households.

2024: A Year of Divergence Sets the Stage

Leading economists described 2024 as a “winner-takes-all” year.

Renters and mortgage holders were hit hard by soaring interest rates and infation, while asset-rich households — particularly older Australians with paid-off homes and booming share portfolios — benefted from economic conditions. This divergence left many households struggling, while others prospered.

2025: Recovery

Expected, But Gradually

Challenger chief economist Jonathan Kearns forecasts slow GDP growth in 2025 as the effects of infation ease. While the economy is expected to regain momentum, the process will be gradual,

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Australia’s economy is set for a challenging 2025, as the interplay of high interest rates, infation, rising unemployment, China’s economic slowdown, and global uncertainty under Donald Trump’s second US presidency shapes a complex year. Leading economists predict a slow recovery, with growth remaining below trend.

Recovery Will Be Gradual

Challenger chief economist Jonathan Kearns forecasts that

“GDP growth will slowly pick up as infation dissipates, and consumers will have more confdence to spend once we see some rate cuts,” Kearns said.

However, he emphasized that growth in 2025 will remain below trend, refecting lingering economic challenges.

Interest Rates: Cuts Are Coming, But They’ll Be Modest

The Reserve Bank of Australia (RBA) is expected to start reducing interest rates in mid-2025, with May being a likely starting point. Independent economist Nicki Hutley, however, advocates for earlier cuts, starting in February, though she acknowledges the RBA may wait longer.

“I think we’ll see two or three cuts, but borrowers shouldn’t expect substantial relief,” Hutley cautioned.

AMP deputy chief economist Diana Mousina notes that the RBA will require strong evidence that infation is under control before implementing rate cuts.

Infation: Easing into Target Range

Economists expect infation to fall within the RBA’s 2–3% target band in 2025, driven by slowing price growth and reduced consumer demand. The latest infation data shows annual headline infation at 2.8%, the lowest since 2021, but the RBA’s preferred measure, trimmed mean infation, remains higher at 3.5%.

“We’ll see underlying infation come back into the band,” Hutley predicts. UBS’s George Tharenou agrees, expecting both headline and trimmed-mean infation to moderate further. Extended federal energy bill subsidies could also help ease cost pressures.

Unemployment: Rising, But Manageable

The strong labor market of 2024 is expected to soften in 2025, with unemployment rising to 4.3%, according to growth and weaker business conditions will likely curtail hiring.

“Public sector job growth can’t continue indefnitely, which will ease labor market pressure,” Hutley said. Wage growth, which peaked in 2024, is also expected to decline.

Tharenou predicts unemployment will rise but stop short of becoming a major issue, as businesses adapt to modest proftability growth.

China’s Struggles

Weigh on Australia Australia’s reliance on China, its largest trading partner, remains a signifcant risk. China’s economy has been plagued by sluggish growth, a struggling property sector, and weak consumer demand.

While Mousina predicts more stimulus from Beijing, Hutley remains skeptical, expecting limited improvement in Chinese demand for Australian commodities.

Trump’s Return: Uncertainty Looms

Donald Trump’s second term as US president brings potential volatility, with promises of steep tariffs on China, Canada, and Mexico.

While Australia’s direct trade with the US is minimal, the impact on China could ripple into Australia’s economy.

“Trump’s policies might create volatility, but his use of the share market as a performance barometer may temper his actions,” Mousina suggested.