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As Australia wraps up the festive season, it can be said that we have survived a tough year, one which came to an end with disappointing GDP figures that showed the national economy to have slowed to its slowest pace ever since the 1990s recession (or by 0.3% in the September quarter).
Adding to this is the chatter around our central bank, which has been under pressure to cut rates, but has largely resisted this, choosing instead to keep the cash rate steady at 4.35% – a position it’s held since November 2023.
Reflecting on how the Aussie economy has performed in 2024 – and how it might fare in the following year, given various headwinds including a second Trump administration in the U.S. and a continuing slowdown in China – ANZ senior economist Catherine Birch contributed several thoughts on the outlook.
Starting with the recent GDP numbers, Ms Birch said it showed the impact high inflation has been having on Australia.
“We did see the slowest annual GDP growth in Australia outside of the pandemic, since the 1990s recession, and that does show the economy is really feeling it at the moment,” Ms Birch explained.
“We have seen inflation really be a challenge for the economy. That has certainly caused some challenges for many industries and parts of the economy: construction is a big one in particular.
“We know a lot of construction firms have really struggled with the sharp rise we’ve seen in input costs. And some of the supply disruptions have really constrained how much can really be done, and therefore limiting growth as well.”
In response to high inflation, the RBA had taken a tough line on rate cuts – and had received pushback for this. But Ms Birch said it’s important to remember Australia had differed from other countries in terms of its initial experience with inflation, and how the RBA had chosen to respond to this.
“We saw inflation pick up later, we saw it peak later, but it’s also been slower to come down as well,” she said.
“And one of the differences, not only in the timing of rate changes versus other central banks, is that the RBA took our cash rate to 4.35% – well below a lot of comparable economies.
“For example, over in New Zealand, their OCR peaked at 5.5%, we saw over in the US, the rates peaked at 5.25-5.5% as well.
“So one of the reasons the RBA did that was that they were willing to tolerate a slower return of inflation back to target with the benefit being that unemployment wouldn’t rise as much if they took rates even higher to try and get inflation back to target sooner.”
Indeed, evidence of a consistently resilient labour market in Australia seems to have justified the Reserve Bank’s actions.
Looking into the new year, it was likely that – unexpected data notwithstanding – the RBA’s cautious policy would be likely to continue.
“We’re expecting that the RBA will start to cut rates in May and that there will be only two 25 basis point rate cuts in this cycle – so getting down to 3.85% by August next year, and then staying there,” Ms Birch said.
“A lot of people might not want to hear that sort of forecast. It will depend quite a bit on the data as to when the cuts start.
“If we see inflation and labour market data and household spending becoming weaker than expected over the next couple of months, it’s possible that they may start to cut rates in February.”
Turning to global headwinds in 2025, Ms Birch said the key word guiding predictions for both the Australian dollar and commodity prices was ‘volatility.’
The former would be likely to drop in the first half of the year, influenced by the anticipated impacts of Donald Trump’s promised tariff policy.
“We think that we’ll be seeing, by the middle of 2025, the Aussie dollar at around 63 US cents, but potentially there are periods where it gets lower, closer towards the 60 cents mark,” she said.
However, Ms Birch added several variables would enable Australia’s economy to survive these headwinds, with the dollar moving back towards 67 cents in the second half of 2025.
“We think Australia is still relatively well placed compared to a lot of other economies in terms of our growth outlook, and also our ability to deal with any shocks coming up as well, so that room we have on the fiscal policy side and monetary policy side,” she said.
Geopolitical and global economic volatility would likely also retain the strength of gold as a safe haven, she added, while other commodities would be shaped by trends coming out of Beijing.
“We think about something like lithium – the oversupply in batteries that we’re seeing in China will likely limit the near-term outlook at least, but the longer-term outlook still looks really positive,” Ms Birch said.
“And then of course there’s the China story as well: With that slowdown, that structural weakness that we’re seeing in the property sector only being partly offset by some of the stimulus measures and the move towards those new productive forces.
“So more investment in renewables and things like EVs and green infrastructure. Now, those sorts of things should boost things like aluminium and copper and some supply disruptions in those metals should also protect any price downside.”
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