‘Grinding higher’: Australia’s economy tipped to grow on improving household budgets

Australia’s economy might be hitting a turning point on the back of better household spending – but economists are warning more work needs to be done.

The Australian economy has passed its low point, but short of meaningful productivity gains or tax reform it will continue to grind higher, industry experts suggest.

In its latest Business Outlook Report, Deloitte access economics partner and report lead author Stephen Smith said the economy will improve in the coming years albeit off a low base.

“In terms of the pace of growth, the low point is behind us, but that is not to say things are really rosy and will bounce back quickly,” Mr Smith told NewsWire.

“We see a really slow grind in terms of slightly strengthening growth through 2025 and 2026.”

The Australian economy is tipped to improve over the coming years. Picture: NewsWire / Nicholas Eagar

This comes as the Australian economy grew by just 0.3 per cent in the September quarter giving a yearly growth rate of 0.8 per cent. While economists tip growth to pick up slightly in the December quarter when the figures are released, even still, the economy is growing at its slowest pace since the 1980s outside of the pandemic.

According to the report, much of the improvements in the Australian economy will be consumer led as wage growth is tipped to improve and Aussie households benefit from falling interest rates.

“The effect of lower interest rates on household incomes is anticipated to be a major driver of the forecast recovery in the Australian economy in 2025.

Treasurer Jim Chalmers says Australia is on track for a soft landing based on lowering inflation. Picture: NewsWire / John Gass

“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,” the report said.

“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.”

Households will also benefit from modest real wage gains, government spending and the likely extension of cost-of-living rebates.

Growth in household consumption is forecast to accelerate in 2025 and 2026, but it may take until later this decade until spending – adjusted for inflation and population growth – returns to pre-pandemic level.

Australian treasurer Jim Chalmers said the Deloitte report makes it clear Australia is on track for a soft landing.

“Inflation is down, wages are up, unemployment is low, we’ve overseen the creation of more than 1.1 million jobs and as a result Deloitte expects growth in Australia to pick up this year,” Mr Chalmers said.

“We’ve also made substantial progress in the budget cleaning up the mess we inherited with two surpluses, a smaller deficit, a $200 billion fiscal turnaround, $177bn less debt and significant progress managing the key structural spending pressures.”

Aussies are tipped to have $8000 more to spend after six interest rate cuts between now and the end of 2026. Picture: NewsWire / John Appleyard

Mr Smith said Australia needed meaningful reforms if it was to have a meaningful tick up in economic growth.

“The biggest one that should happen is tax reform. We have been in a position where there hasn’t been any significant tax reform since the GST was introduced.

“As spending continues to rise on programs that are very worthy causes, revenue will have to rise as well so we will all be paying more taxes in the future than we are today.

“But how we raise that revenue is really important. Shifting away from reliance on income and business taxes and shifting towards GST, taxing resources and removing loopholes such as the capital gains tax discounts are important changes that should happen.

While labelling the stage 3 tax cuts as good economic policy, Mr Smith says they should go further to help spur on the Australian economy.

Deloitte also highlighted the need for productivity boosts, which is “desperately needed”.

“Recently announced aged care reforms and the new $900m National Productivity Fund both represent good policy, alongside the energy transition reforms that are underway,” Mr Smith said.

“However, more generally, there has been a lack of substantive economic reform in Australia over a period stretching more than two decades. This is a problem because productivity is the key engine of prosperity.”

Mr Chalmers agreed saying the government is working towards creating meaningful productivity boosts.

“We’ve made this progress together in the economy and the budget at the same time as keeping the reform wheels turning, including with our five pillar productivity agenda to make our economy more competitive, resilient and dynamic,” he said.