Outlook 25: hardest part behind us

It looks like the Australian economy might have made it through the toughest part of the cycle.

There are signs that point to a gradual recovery in household spending growth in 2025, and underlying inflation is also moving back towards the Reserve Bank of Australia’s (RBA) 2 per cent to 3 per cent target band.

ANZ Research now expects the RBA to cut the official cash rate at its February meeting. November inflation data were a bit weaker than expected, and it now looks like annual underlying inflation will fall to 3.2 per cent in the December quarter — below the RBA's forecast of 3.4 per cent.

ANZ Research also expects services inflation will come in lower, and we’ve seen a sharper-than-expected slowdown in wage growth and an extended period of weakness in economic growth - particularly in the private sector.

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Added together, ANZ Research expects this will be enough for the RBA to cut the cash rate by 25 basis points at its February meeting. However, expect only two 25 basis-point rate cuts in this cycle, with the second to follow in August after an extended pause.

One of the key reasons for that is ongoing resilience in Australia's labour market. Employment growth accelerated in the second half of 2024 and we also saw labour demand indicators like ANZ-Indeed Australian Job Ads and Australian Bureau of Statistics job vacancies data start to pick up.

The good news is it looks like Australia's economy can maintain a lower unemployment rate — potentially at 4 per cent or a bit below — and still have inflation within the RBA's target band of 2 per cent to 3 per cent.

Signs of improvement in household spending growth are beginning to emerge, and things like tax cuts, cost-of-living relief and positive real-wage growth are all helping to boost household disposable income and confidence. And that’s before a potential rate cut provides another boost to household confidence.

Catherine Birch is a Senior Economist at ANZ