Australia
Growth slowed this year, falling to well below average. Importantly, the economy has not had a downturn.
A surge in immigration and fiscal loosening offset the impact of higher interest rates on the private sector.
The growing supply of labor outpaced demand for workers, leading to a gradual uptick in the unemployment rate. But labor market conditions are still tight by historical standards.
The forces that underpinned activity have also added to price pressures. As a result, the Reserve Bank of Australia (RBA) has shied away from lowering rates. With inflation expected to return gradually to the central bank’s comfort zone, we expect the RBA to finally relent next spring. A short, shallow easing cycle is our base case, given that the central bank had lifted its policy rate by far less than its western peers.
The long wait to join the easing cycle will come to an end.
The economy’s supply side has been constrained. Like in most of the western world, productivity has been weak in Australia, which also explains elevated unit labor costs. Improvement on this front will not only bode well for economic activity, but the supply-side boost could also allow the economy to disinflate.
There are clear green shoots visible for Australia’s economic performance in 2025. Further disinflation will allow real incomes to improve, and less restrictive monetary policy will underpin demand. However, weaker activity in China along with protectionist trade policies from America are the key downside risks for Australia’s commodity exports. We expect solid but not spectacular growth from Down Under.
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