As we enter 2025, Australia’s economic and financial markets will be shaped by both domestic and global factors, with key themes including inflationary pressures, government policy and potential shifts in interest rate policies.

Below is an overview of the main considerations.

1. Economic Growth and GDP Outlook
Australia’s economic growth in 2025 is expected to remain moderate. After a strong post-pandemic recovery, growth is likely to stabilise around 2.5-3%. While the country faces global uncertainties, such as geopolitical tensions and slowing growth in key trading partners (including China), the Australian economy is supported by strong domestic demand, a robust labour market, and ongoing infrastructure investment.

However, inflationary pressures continue to linger. While inflation has cooled from its pandemic highs, it is expected to remain elevated, hovering around 3-4% throughout the year. Rising wages, high housing costs, and global supply chain disruptions may keep cost pressures persistent.

2. Inflation and Monetary Policy
Inflation will be a key issue for the Reserve Bank of Australia (RBA) in 2025. After several rate hikes in recent years, the RBA is likely to adopt a more cautious stance, balancing the need to keep inflation in check without stifling economic growth. The expectation of rate cuts early this year have waned, however cuts could become a possibility if inflation tapers around the mid part of the year.

The Australian dollar will also face volatility due to global inflation, with the strength of the US dollar being a key influence. A weaker AUD may impact import prices, especially for energy and consumer goods, adding to inflationary pressures.

3. Housing Market Trends
Australia’s housing market will continue to experience challenges in 2025. While the rapid price increases observed in previous years have slowed, affordability remains a significant issue for many Australians. First-time homebuyers and lower-income households will continue to feel the pressure in the early part of the year as interest rates remain high.

The focus from the Government has shifted toward housing supply solutions, with both state and federal governments exploring ways to improve housing affordability.

4. Financial Markets and Investment Outlook
In 2024, the US S&P 500 outperformed Australia’s S&P/ASX 200. The S&P 500 surged 23%, driven by tech giants like Nvidia, AI advancements, and Federal Reserve rate cuts. In contrast, the S&P/ASX 200 returned 11.2%.

Although the strong returns over the past two years have led to some investors getting nervous, it is important to note that the past five-year returns, being around 11% per annum for the S&P 500 and 9.8% the S&P/ASX 200 are within the 30-year average of 10.98% and 9.2% respectively.

5. Commercial Property
In 2024, Australia’s office property market exhibited mixed performance across major cities. Sydney’s Central Business District (CBD) saw a slight improvement in vacancy rates, driven by increased demand for premium-grade office space. Conversely, Melbourne’s CBD experienced the highest vacancy rate among Australian cities.

Looking ahead to 2025, the office market is expected to benefit from anticipated interest rate cuts, which will enhance the attractiveness of these assets. Further, as supply wanes due to cost pressures and vacancy rates decline, we expect this sector to be a standout over the next 12 to 24 months.

6. Risks and Uncertainties
Key risks to the Australian economy and markets in 2025 include a potential global recession, further tightening of monetary policy, and ongoing commodity price volatility. Domestic risks such as natural disasters, labour market shifts, and political instability could also disrupt growth projections.

In conclusion, 2025 will be a year of moderation for Australia, with resilient growth but significant challenges in inflation, housing affordability, and global economic uncertainty. A balanced approach to investment will be crucial in navigating these turbulent times.