Slow grind' tipped for 2025 economy as interest rates, unemployment, inflation, China and Trump collide

Several prominent economists have described 2024 as a year of "severe divergence," where economic well-being largely depended on an individual's housing situation. Interest rates and inflation have put pressure on millions of renters and those paying off mortgages, while simultaneously, the wealth of asset owners, stock portfolio holders, and older individuals who have paid off their mortgages has increased significantly.

Jonathan Kearns, chief economist at Challenger Group, believes that 2025 will bring changes, but not quickly. “I think we’ll be slowly working our way out of the current situation,” he stated. He predicts that as the impact of high inflation gradually subsides, gross domestic product (GDP) growth will slowly recover, and consumer confidence will strengthen once interest rate cuts begin. However, he expects that GDP growth in 2025 will recover, but at a slow pace. This is a complex forecast for the economic situation in the coming year.

ABC News interviewed several prominent economists whose views influence the allocation of billions of dollars. They believe that if the Reserve Bank of Australia's statements are to be taken as "gospel," then inflation needs to be effectively controlled before interest rate cuts can begin. However, most market participants and analysts who have studied the area in depth believe that the central bank is likely to start cutting interest rates at its May board meeting. Diana Mousina, deputy chief economist at AMP, stated, “Our view is that the Australian economic backdrop will slow at a faster pace, and that will force the Reserve Bank of Australia to start cutting interest rates at the beginning of 2025.”

Independent economist Nicki Hutley stated that she would "aggressively" start cutting interest rates from February, but at the same time, she does not expect the Reserve Bank of Australia to adopt her advice. She said, “If we don’t see interest rates coming down in the first half, or even the first quarter (of 2025), that would be quite unusual.” However, she cautioned borrowers who are expecting relief from large variable mortgage repayments. “We can’t expect big interest rate cuts – the neutral rate, the cash rate, is just above 3% in most people’s estimates,” she said. “So yes, we may see a few cuts, two or three, but we shouldn’t expect to see very dramatic or large cuts during that time.”

Economists predict that the rate of price increases, inflation, will slow to within the central bank's "target range" of 2% to 3% per year, which is why we expect interest rate cuts. The latest data shows that annual price growth is 2.8%, the lowest rate since inflation began to surge in mid-2021. However, the underlying inflation "trimmed mean" indicator, which the Reserve Bank of Australia closely monitors, rose to 3.5% per year in October. Ms. Hutley believes, “I think underlying inflation, which is obviously what the Reserve Bank is concerned about, will come back within the target band.” George Tharenou, chief economist for UBS Australia, believes that both headline and trimmed mean inflation will continue to “moderate.” He expects that the federal government's energy bill subsidies will continue beyond their scheduled end. “That will help keep headline inflation around where it is now, just below 3% year-on-year.”

The strength of the labor market in 2024 has been surprising. So, what will 2025 be like? Dr. Kearns predicts, “I think we’ll see unemployment lift a little bit.” The Reserve Bank of Australia has stated that it needs to see unemployment rise as a prerequisite for cutting interest rates and is predicting a 4.3% unemployment rate for 2025. This guess may be too low in the long term. “Historically, we’ve actually seen unemployment peak after the cash rate starts to come down, so we may still see unemployment rise in the back half of next year.” Ms. Hutley also believes that unemployment will rise this year and predicts that wage growth has “certainly” peaked. She said, “We know the public sector can’t keep adding (jobs) forever, that will take pressure off the labor market.” Mr. Tharenou expects unemployment to rise in 2025, but not to deteriorate into a major problem. “Simply because the economy is growing below trend or potential, so companies are having a tough operating environment, profit growth is quite modest.”

Australia is heavily reliant on the economy of its largest trading partner, China. The Chinese economy has struggled this year, with bank failures, a downturn in construction, weak consumer demand, and stimulus packages that have failed to boost the economy. Ms. Hutley doubts we will “see much change,” and the large-scale injections of spending – which once boosted demand for our exports like iron ore – are a thing of the past. “The government there doesn’t seem to be willing to go back to the old playbook of ‘let’s have massive infrastructure spending,’ which Australia used to benefit from.” Ms. Mousina disagrees, believing that there will be more stimulus measures as the government tries to boost the flagging economy. “People often forget that the Chinese economy is still growing at about 5% a year,” she said, and the economy is about five to six times the size it was a decade ago. “For our commodities and such, you don’t need the same level of demand as 10 years ago to get the same upside.”

This month, incoming US President Donald Trump will begin his second term. He has promised mass deportations of migrant workers and significant deregulation of government across different industries. For the economy, the biggest impact may come from tariffs on foreign goods, including those from Mexico, Canada, and China. For China? The impact would be greater. “We don’t trade a lot with the US, so we are less directly impacted,” Jonathan Kearns said. But China is our largest trading partner. “If China is negatively impacted by a trade war with the US, that will spill over to Australia.” AMP’s Diana Mousina believes that Donald Trump views the stock market “as a barometer of how he’s performing,” which may be a protective factor, meaning he is unlikely to deliver on his more outlandish tariff promises.

Aside from the “volatility” that Mr. Kearns believes the incoming US president will bring, the chief economist at Challenger Group believes that 2025 may be a calmer year. He added, “We’re all waiting to see if productivity growth can pick up.” Mr. Tharenou described 2024 as a “winner-takes-all” economy and expects this to continue this year. “This trend of divergence is likely to persist,” he said, with unusual factors like the resilience of house prices causing a split in the economy. Nicki Hutley believes the economic situation in the coming year will be “much the same.” Tax cuts will help households, “slow” growth rates should improve, and as people get over the impact of inflation, “modest real wage growth” will make life easier, she added. “Overall, there will be some improvement, but it will be very limited improvement, nothing to shout from the rooftops about.”