The 2025 mid-year economic outlook

The global economy’s resilience is being challenged this year. How is Australia positioned amid the uncertainty?

Macquarie Group’s Chief Economist, Ric Deverell, looks at Australia’s position as global instability continues – covering domestic growth, Australia’s advantages as trade tensions endure, and the all-important cash rate.

1. Australia can manage through headwinds

This year, the global economy is being challenged by a US-led trade war, with growth likely to slow over the second half of the year. Like our global counterparts, these headwinds will impact Australia; however, we are well positioned to respond to global developments.

“Australia has always been in the middle. It’s not as weak as Europe, it’s not as strong as the United States, and that looks like it’s going to persist,” says Deverell.

“Where I think we do have an advantage is we’re less reliant on the United States in terms of trade. We have a much stronger fiscal position and we also have inflation back into the middle of the RBA’s band,” he says.

"We actually have lots of policy space to react to any weakness that comes our way.”

2. More cash rate cuts are in sight

With inflation now back within the RBA’s target band of 2-3%, the central bank has been easing policy this year, with the first cuts to the cash rate since November 2020. What the RBA does next is “very much” dependent on how the economy tracks for the rest of the year, says Deverell.  

“Given that inflation has come back where the RBA wants it to be, the economy is soggy and we have got global headwinds, I think they’ll cut a little bit more, but I don’t think they’ll cut very much.

“To get a really large cut from here, you would need something bad to happen in the global economy.”

3. Labour market set to stay strong

The labour market has remained robust despite weaker economic growth and is positioned to stay resilient in the months ahead.  

"Employment growth has stayed very strong, and part of the reason for that is we’ve had very strong growth in the care economy for the non-market sector,” says Deverell.

“That growth is starting to slow back down, but I think that will coincide with a pickup in employment in the market part of the economy.

“So my guess is that unemployment stays where it is, and maybe drifts a little bit higher in the next year, but I think the labour market will remain relatively robust.”

4. Property price pressures continue

Overall, the Australian property market has been relatively sluggish over the last couple of years, as affordability constraints persist. Those constraints are keeping a ceiling on price growth, even though the RBA’s cash rate cuts have relieved some pressure.

"As always, it’s not one property market. Sydney is on a very different cycle than Melbourne which is on a very different cycle to Perth,” says Deverell.

“It’s interesting if you look through that, it looks like house prices at a national level will go up a bit in the next year. But given we still have really significant affordability constraints, I don’t think they’re going to go up very much.”