Our economic outlook for Australia
February 21, 2025
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
The pace of core inflation slowed in the fourth quarter of 2024. Annual trimmed mean inflation, which excludes items at the extremes, was 3.2%, down from 3.6% in the third quarter. Headline inflation slowed to 2.4% in the fourth quarter from 2.8% in the third. However, given low productivity growth and its resulting higher unit labor costs, we don’t foresee core inflation falling sustainably to the midpoint of the RBA’s 2%–3% target range set by the Reserve Bank of Australia (RBA) until later in 2025.
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 increased to 4.1% on a seasonally adjusted basis in January. 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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