• Data released over the past month continue to reflect resilience in the economy.
• Our forecasts are largely unchanged, with growth returning to trend this year (~2.25%), unemployment edging up to 4.25% and underlying inflation settling around 2.5% from mid year.
• We see growing downside risks to economic activity amidst elevated global uncertainty.

The economy grew 0.6% q/q in Q4, taking growth over 2024 to 1.3%. This is broadly as we expected, supported by an uptick in household consumption (0.4% q/q, after two quarters of small declines) and continued strength in public demand. Business investment on the other hand remains sluggish, while stronger growth in exports than imports meant net exports added 0.2pts to growth.

The labour market remains resilient, with stronger growth in Q4 market sector employment than seen in earlier parts of the year (which was dominated by non-market employment gains). The January CPI print encouragingly confirmed the weaker outlook on housing and market services components.

Overall, our forecasts are largely unchanged this month. We continue to expect inflation to ease gradually from here (including 0.6% q/q for Q1 underlying inflation) and reach the midpoint of the target band by Q2. This is more optimistic than the RBA’s forecast (0.7% q/q for Q1), which we expect will trigger the next rate cut in May as a result. We expect the RBA to gradually ease rates from there, reaching 3.1% in early 2026.

We continue to expect that a pick up in household consumption will drive growth closer to its long run trend over 2025. However, it will be important to see both business investment and dwelling investment pick up to sustain growth – especially as some uncertainty around the extent of the consumer recovery remains. Estimated business investment growth for FY25 is notably softer than previous years, though early expectations for FY26 capex in the NAB survey are around long-run average levels.

The impact of escalating trade wars and the associated uncertainty is a key risk to our outlook. Overall, we expect tariffs and slower global growth to be disinflationary for Australia (via lower commodity prices and national income), though a lower exchange rate would offset some of the weaker income effects. However, tariff uncertainty may weigh on consumer and business sentiment.

For further details, please see The Forward View Australia (March 2025)