Overview

Global

Sub-par global growth is expected to continue. Global growth is expected to ease to 3.1% in 2025 and 3.0% in 2026, though there is significant policy uncertainty, particularly in the US.

Monetary policy settings in advanced economies are expected to ease further, but at a slower pace than 2024. We expect the Fed to hold for the first half of the year before cutting 50bps in the second half and then 50bps in 2026.

There are notable risks to the year ahead. Uncertainty is elevated, particularly around the timing and scale of US tariffs and whether retaliation leads to further tariff rate escalation.

Australia

We have brought forward our expected first rate cut to February, though maintain that this will be a gradual easing cycle. We continue to see value in waiting for more clarity on the outlook but given the RBA’s December communication and the softer outlook on key inflation components it is unlikely to be compelling enough to shock market pricing for a cut.

We believe that despite its resilience, current labour market dynamics are not inflationary. The RBA’s re-assessment of labour market tightness in February will be a critical consideration in monetary policy, as will their revised inflation outlook.

Our forecasts are broadly unchanged. Growth is expected to pick-up this year, driven by improving consumer spending. This will take annual GDP growth to about 2.25% over 2025 and 2026. The labour market is expected to loosen (but not significantly), with unemployment edging up to 4.3% by the end of 2025. Underlying inflation is expected to moderate further and re-enter the RBA’s target band as early as Q1 2025.

However, there is still uncertainty around the timing and scale of the consumer spending recovery. If muted, cautious consumption may weigh on growth prospects but could accelerate disinflation progress. There is also a risk that the labour market re-tightens with the pick-up in growth later this year, which could pose new wage inflationary risks.

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