Our economic outlook for Australia

Despite tariff uncertainty, we maintain our outlook for full-year 2025 GDP growth of around 2%, though risks tilt to the downside. Though exports are a key driver of Australia’s economy, exports to the U.S. account for less than 5% of the country’s total exports. Amid global trade challenges, we expect policymakers in China to take steps to boost domestic demand, including through infrastructure investment, which would likely increase commodities demand from Australia.

The impact on inflation of U.S. tariff announcements is likely limited. We maintain our forecast for year-end trimmed mean inflation at around 2.5%, though downside risk to global growth creates a downside risk to local inflation. 

We expect the Reserve Bank of Australia (RBA) to make a dovish pivot amid weaker global growth and heightened uncertainty. We continue to foresee a 3.5% year-end policy rate, though we believe that a first 25-basis-point cut will come at the RBA’s May meeting. 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.  It followed by holding the policy rate steady on April 1.

A tight labor market and stagnant productivity continue to keep unit labor costs high. The unemployment rate stood at 4.1% on a seasonally adjusted basis in March. We expect the unemployment rate to rise to around 4.5% in 2025 amid still-restrictive interest rates.