As rates stayed firmly on hold throughout 2024, Bendigo Bank’s Chief Economist, David Robertson says a gradually but steadily improving domestic economy is likely in 2025.
The year that was
In his final economic update for this year, Mr Robertson said this week’s RBA meeting went to script, with the cash rate still at 4.35% after Tuesday’s policy decision, but it’s clear RBA is gaining confidence that inflationary pressures are declining.
“Rates remained unchanged throughout 2024, which was our forecast at the start of and throughout the year; and the RBA staying the course means a sustainable return to target inflation is still on track,” Mr Robertson said.
What’s in store for 2025
Mr Robertson said Australians can expect rates to start easing in the early part of 2025 as inflation is tamed, forecasting:
- The RBA to deliver interest rate relief by May.
- The unemployment rate to edge higher, mildly.
- That trading conditions and geopolitical tensions will remain tense and potentially even more volatile as US tariffs are imposed, but Australia should be less impacted than almost anywhere.
“While there’s been a growing chorus of opinion encouraging earlier rate cuts and suggesting the RBA is unnecessarily holding rates too high, this view seems to overlook two crucial factors.
“Firstly, the RBA were later than our peers in hiking rates back in 2022 and the RBA increased rates to a less restrictive level. A neutral cash rate in Australia (where we will likely return to next year) is estimated at 3½%, so we are less than 1% into restrictive territory, unlike other comparable economies.
“Any earlier cuts to rates could have jeopardised the ongoing fight against inflation,” Mr Roberson said.
“Secondly, those advocating for earlier cuts to help with cost-of-living pressures also ignore the root cause of the cost-of-living shock, which is inflation itself, so any sustainable solution to these pressures lies in thoroughly taming inflation.
“Nevertheless, we are getting closer to winning the war on prices with core inflation down to 3.5%, and the next two quarterly reads (on January 29 and then April 30) should give the RBA the evidence it needs to cut in May.”
Mr Robertson also said the latest GDP data confirms that restrictive interest rates are reigning in demand.
“GDP growth in the third quarter picked up marginally from 0.2% to 0.3% (and is at least still growing) but we remain in a per-capita recession and annualised growth is only 0.8%, its slowest pace since the 1991-recession, outside the pandemic.
“The fact that growth is so slow and only being propped up by public spending and population growth isn’t in itself a reason to cut rates now, but it is a reminder that monetary policy is doing its job and that rate cuts next year can help the private sector to recover, taking the reins from government spending.”
The global outlook in 2025
“We run a trade deficit with the US, with only around 5% of our exports (mainly beef, gold and pharmaceuticals) potentially subject to tariffs, so the transmission mechanism for global trade and tariffs will probably be via China, and earlier this week Chinese authorities surprised the market with another round of broad stimulus measures,” Mr Robertson said.
“Chinese data (including exports) has in general surprised on the upside over the last month, with some evidence of accelerating shipments ahead of the proposed 60% tariff. The 2018 trade wars did little to slow China’s share of global goods exports.”
Mr Robertson said tariffs have the largest impact on the country that imposes them, so the timing and sequencing of these policies will be critical to monitor next year for the US economy.
“As for China’s policy response and their fiscal expansion, there are questions as to how sustainable this approach is, but it buys time for 2025,” Mr Robertson concluded.
To watch David Robertson’s December Economic Update, please follow this link: December Economic Update
