Our economic outlook for Australia
January 24, 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 trimmed mean inflation, a core measure that excludes items at the extremes, slowed to 3.2% year over year in November, down from 3.5% in October. 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 until later in 2025.
3.5%
Monetary policy rate
The Reserve Bank of Australia left its policy rate target unchanged at 4.35% on December 10 but softened its language around future policy decisions. The central bank noted that it was “gaining some confidence that inflation is moving sustainably toward target.” However, we expect the RBA to remain patient and that a tight labor market will keep it from initiating rate cuts until the second quarter of 2025.
4.6%
Unemployment rate
Stagnant labor productivity continues to contribute to elevated inflation. The employment-to-population ratio, at 64.5%, and the labor force participation rate, at 67.1%, both set records in December. With the economy close to full capacity, businesses still need to hire, keeping the labor market tight and unit labor costs high. The unemployment rate rose to a seasonally adjusted 4.0% in December, up from 3.9% in November. We expect the unemployment rate to rise to around 4.6% in 2025 as financial conditions tighten amid elevated 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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