Australia’s economy tipped to grow on interest rate cuts
The Australian economy is expected to experience brighter days ahead off the back of expected interest rate cuts, but there is a massive catch for workers.
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The Australian economy is tipped to recover from the slowest growth rate outside of the pandemic in the past 33 years when mortgage holders finally get a rate cut in 2025, economists predict.
Commonwealth Bank and KPMG have come out with upbeat economic forecasts off the back of expected rate cuts which could start as soon as next month.
They say off the back of below trend economic growth in 2024, gross domestic product (GDP) will pick up to 2.2 per cent by the end of 2025, compared to 1.1 per cent in 2024.
Commonwealth Bank head of Australian economics Gareth Aird said the national economy has been “primarily impacted by restrictive monetary policy” as rising mortgage repayments take money out of the economy.
“The good news is that the economic slowdown has seen inflation fall on both headline and underlying measures. This bolsters the case for the RBA to commence normalising the cash rate,” Mr Aird said.
“Specifically, we expect the RBA to commence a modest easing cycle in February 2025 if our forecast for the Q4 24 trimmed mean of 0.5 per cent quarter growth comes to fruition.”
While predicting a similar yearly growth rate, KPMG chief economist Brendan Rynne believes most of the increase in GDP will occur in the second half of 2025, when the RBA moves on rates.
“We still see those cuts starting in mid-2025, although there is some impetus and justification for going sooner,” Dr Rynne said.
After more than a year of the RBA keeping rates at 4.35 per cent, the central bank’s board will first meet on February 17-18. Money markets predict a better than 66 per cent chance of a rate cut during this meeting.
If the RBA holds rates in February, the next opportunity to cut rates will be the 31 March-April 1 meeting. Markets are pricing in a 100 per cent chance of a rate cut by this meeting.
But it is not all good news for Australian workers with the unemployment rate tipped to rise during the year.
Currently sitting at 4 per cent, KPGM predicts the unemployment rate to rise to 4.2 per cent, while CBA says it will rise to 4.3 per cent.
“Last week’s figures seemed impressive but almost all the new jobs were part-time while full-time unemployment rose,” Mr Rynne said.
“This suggests that the Australian labour market, which has demonstrated considerable resilience over a long period, may now be showing signs of fragility.
“At some point the reliance on public sector jobs, fuelled by government spending, for employment growth, will have to slow.”
Mr Aird said the labour market was unusually strong in 2024 but predicted it to weaken in 2025.
“We do not expect non-market employment growth over the coming years to be as strong as it was in 2024,” Mr Aird said.
“And we forecast it broadly holding there over H2 25. In 2026 we see the unemployment rate edging down a touch as the lagged impact of better GDP growth supports private sector job creation.”
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