Deloitte Access Economics Business Outlook

28 January 2025: Releasing the December 2024 edition of the flagship  Business Outlook, Deloitte Access Economics Partner and report co-author, Cathryn Lee, “After a sluggish 2024, Australia’s economy looks as though it may be past the low point for this economic cycle, with the combination of a strong labour market, falling inflation, tax cuts, emerging real wage gains and imminent interest rate cuts contributing to a better-than-expected outlook in 2025.

“However, ‘better-than-expected’ is not the same as ‘good’, as has been revealed by escalating business insolvencies, considerable mortgage stress and a deep per capita recession. Indeed, nobody should get overly excited or complacent. The reality is that the Australian economy remains beset by challenges.

“Real wages are now grinding higher, but it is likely to be 2030 before Australian workers recover their pre-pandemic purchasing power. Dwelling construction activity is unlikely to get any worse, but Australia’s housing crisis is likely to persist. And while business investment was a key feature of the economic recovery after the pandemic, it has since faded.”/

Deloitte Access Economics Partner and report lead author Stephen Smith said: “The outlook for 2025 could be seen as a kind of economic Rorschach test – the interpretation depends on an individual’s perspective, something that will become increasingly obvious as we move towards the first Reserve Bank meeting of the year in February and onwards towards the federal election.

“Take the Reserve Bank. As the December quarter Consumer Price Index (CPI) data will likely show, underlying inflation is moving sustainably towards the target range of 2-3%. That trend, plus the fact that Australia has been in a per capita recession for over a year, with an economy growing at its slowest rate since the 1990s, outside of the pandemic, should open the door for an interest rate cut.

“Yet, the surprisingly resilient labour market, elevated government spending, and a falling Australian dollar is complicating the Reserve Bank’s decision. While the conditions for a rate cut are now real, a cautious Reserve Bank may well hold off until more information on the domestic economy and the rapidly changing global context is available, before cutting the cash rate.

“Deloitte Access Economics expects the Reserve Bank to cut the cash rate by a total of 75 basis points through the 2025 calendar year, followed by a further 75 basis points in 2026. By the end of the rate cutting cycle, a household with an average sized mortgage and a variable mortgage rate would be around $8,000 better off in today’s dollars."

Stephen Smith continued, saying that despite the prospect of a short-term turnaround in growth, the longer-term picture is less malleable: “Significant structural challenges weigh on Australia’s economic outlook. A lack of comprehensive economic reform, geopolitical risks, an uninspired policy discourse, and the unaffordability of decent housing suggests there is an opportunity to do better.

“Most notably, Australia’s middling productivity performance is cause for alarm. In real terms, economic output per hour worked has barely shifted over the past decade and has declined since 2020.

“At the same time, dwelling construction remains in the doldrums, but appears to no longer be getting worse. Fewer than 1 million new dwellings are now expected to be completed over the next five years, below the National Housing Accord target of 1.2 million homes, meaning Australia’s housing crisis is likely to last at least another decade.

“And while business investment was a key feature of the economic recovery after the pandemic, it has since faded. Businesses reliant on discretionary consumer spending such as those in the hospitality and retail trade industries are particularly impacted by sluggish household spending.

“Rapid public sector spending growth has helped to plug the gap left by falling business investment, with government spending forecast to rise to its highest share of the economy – excluding the pandemic – since 1986. This is coming at the same time as the temporary factors supporting government revenues – population growth, high commodity prices and inflation – are fading.

“These structural spending pressures will support the economic recovery in the near term, though substantive and productivity-enhancing changes to the tax system are needed to ensure government finances are resilient and sustainable over the medium term.”

Deloitte Access Economics is expecting economic growth in Australia of 1.6% in 2025, before picking up to 2.3% and 2.7% in 2026 and 2027, respectively.

Key forecasts: Deloitte Access Economics Business Outlook, December Quarter 2024

Business Outlook is a quarterly publication presenting detailed economic forecasts and commentary to help understand the economic forces shaping the business environment. The forecasts cover a detailed assessment of the national economy, world growth prospects, each of Australia’s states and territories, and industries.