2025: A preview amid political shifts

As we venture into 2025, Australia’s economic landscape will be shaped by political changes across the globe. In a week’s time a new President will re-enter the White House, and Australians will head to the polls for the 2025 Federal Election by May. 

There looks set to be a range of policy changes under the next US Presidential administration, which may have broad economic implications. The 47th president inherits a US economy which is arguably performing strongly, with the OECD estimating annual GDP growth of 2.8% for the US in 2024, outperforming Australia (1.1%), the UK (0.9%), and the Eurozone (0.8%). This momentum is expected to continue into 2025, driven by robust consumer spending and business investment, underpinned by now slightly lower borrowing costs and a healthy labour market.

There are some economic problems as progress on inflation reduction in the US has stalled. Core inflation (3.2%) remains above the 2% target, prompting the Federal Reserve to likely slow the pace of further monetary policy easing. Only one further rate cut is now expected during 2025. Tax cuts and deregulation could exacerbate US federal debt, while significant policy changes—which could include mass deportations of undocumented immigrants, a renewed withdrawal from the Paris Agreement, and cuts to green transition incentives—could impact the US economy. 

Bond markets around the world have reacted badly to the prospect of faster US growth, tariff hikes and more government borrowing. Yields on 10 year US Treasuries are sitting around 4.6%, which is the highest level since 2007. This has triggered increases in borrowing costs for other western nations, including Australia, where the 10 year government bond yield now sits around 4.5%, nearly 20 basis points higher than a month ago. 

Domestically, there is cautious optimism about a turning point in Australia’s economic cycle. Underlying inflation is edging closer to the RBA’s target band after falling to 3.2% in the year to November 2024, from 3.5% in October. Market expectations now ascribe a more than 70% chance of a February rate cut, and are fully priced in for a rate cut by April.

Chart 1: ASX 30 Day Interbank Cash Rate Futures Implied Yield Curve

As at market close 15 January 2025

Source: Australian Securities Exchange 

However, labour market tightness continues to complicate the inflationary picture. December 2024 labour force data released today shows that the unemployment rate rose slightly to 4.0%, but there was still labour market strength with a further 56,000 jobs created in December (and 440,000 over the past year). Attention now turns to the December quarter CPI print, which will be released at the end of the month. 

Although the monetary policy debate has taken centre stage, other economic challenges should also be part of discussions in the lead up to Australia’s Federal election.

Australia needs a more sustainable fiscal strategy. Over the last two decades both major political parties have fallen short of the standard of fiscal rectitude necessary to ensure the long-term health of the federal budget. The structural deficit – the budget balance corrected for economic cycles – remains deep, with surpluses dependent on commodity price booms. Australia’s tax policy is complicated and outdated. Proper tax reform could be good for the economy, good for the prosperity of Australians, and good for the budget. 

Another issue is productivity. With multifactor and labour productivity declining, Australia’s ability to sustain a high standard of living is under threat. The economy cannot rely indefinitely on public spending and population growth as the primary drivers of prosperity. Without bold reforms to stimulate productivity, future economic growth will be slow at best, and unbalanced.

The housing crisis is another critical challenge. Housing remains significantly undersupplied, leading to a surge in rent of 4.8% in 2024  while housing affordability fell to record lows . Home ownership and affordable renting will no doubt be a key election theme, and also a key measure of success for Australia’s next government.

This newsletter was distributed on 16th January 2025. For any questions/comments on this week's newsletter, please contact our authors:

This blog was co-authored by David Wu, Vacationer at Deloitte Access Economics

Click on the links below to read our previous Weekly Economic Briefings:

• 2024: A year in review (19 Dec)
• CFO Sentiment: Balancing confidence and caution (12 Dec)
• National Accounts: Government spending continues to prop up Australia’s economy (05 Dec)
• Deloitte Access Economics’ Budget Monitor – Soft landing, hard truths (26 Nov)