'Slow Progress' Ahead for 2025 Economy as Interest Rates, Unemployment, Inflation, China and Trump Collide

Prominent economists described 2024 as a year of great divergence, where economic performance depended on your housing situation.

Interest rates and inflation have undermined millions of renters and people paying off their mortgages, while boosting the fortunes of largely elderly people through their assets, burgeoning stock portfolios and their paid accommodation.

2025 will mark a change, according to Jonathan Kearns, Challenger's chief economist, but not a rapid one.

“GDP growth will slowly resume as the effects of high inflation wear off, and consumers will have a little more confidence in their spending once we start reducing interest rates,” he predicts.

But he expects growth in gross domestic product (GDP), the value of all goods and services created over a period of time, to recover in 2025, but only slowly.

It's part of a complex forecast for the economy in the coming year.

ABC News spoke to leading economists, whose opinions impact the allocation of billions of dollars, about what they see happening.

Interest rates will fall, but not quickly or soon

Diana Mousina, deputy chief economist at AMP, believes that if we take the Reserve Bank's statements as sacred texts, we would need inflation well under control before we start cutting interest rates.

But most market participants and analysts who cover the area in great detail predict that the central bank will cut rates, most likely starting at its May board meeting.

Independent economist Nicki Hutley would be “proactive” and cut rates from February, she says, while not expecting the RBA to follow her advice on this.

“I think it would be very unusual if we didn't see a rate cut in the first half (2025), or even the first quarter,” she says.

But it issues a warning to struggling borrowers waiting for relief from large repayments on variable mortgages.

“So yes, we might see a few rate cuts, two or even three, but we shouldn't expect very, very strong or substantial rate cuts over this period.”

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Inflation to slow 'in range' as price rises ease

The reason we can expect cuts is because economists predict that inflation, the rate of price increases, will slow to within the central bank's “target range” of between 2 and 3 percent. hundred per year.

Monthly and quarterly inflation figures now dominate our media, political and economic cycles. The latest “reading” showed prices rising by 2.1% per year, the lowest pace of growth since inflation took off in mid-2021.

But the “trimmed average” measure of underlying inflation that the RBA monitors most closely rose in October to 3.5 percent a year.

“I think core inflation, which is obviously what the Reserve is concerned about, will come back into range,” Ms Hutley predicts.

UBS Australia chief economist George Tharenou believes headline and average inflation continues to “moderate”.

He expects the federal government's energy bill subsidies to continue beyond the planned end.

Unemployment will rise as economic growth slows

The strength of the job market was the surprise of 2024. So, what does 2025 have in store for us?

“I think we're still going to see the unemployment rate rise a little bit,” Dr. Kearns predicts.

The Reserve Bank has said it must consider rising unemployment as a precondition for a rate cut, and forecasts it will reach 4.3 percent in 2025.

This assumption may be insufficient in the long term.

Ms Hutley agrees that unemployment will rise this year and predicts that wage growth has “definitely” peaked.

“We know that the public sector cannot continue to create jobs, which would alleviate pressure on the labor market,” she says.

Mr Theranou expects unemployment to increase in 2025, but without it becoming a major problem.

“Simply because the economy's growth rate is below trend or potential and businesses are therefore facing a challenging operating environment, profitability growth is quite modest.”

China's slow economy will impact ours

Australia is heavily dependent on the economy of its largest trading partner, China.

The country has struggled all year, with bank collapses, a declining construction sector, sluggish consumer demand and stimulus packages that have failed to revive the economy.

Ms Hutley suspects we “won't see much change”, with the massive spending injections that boosted demand for our exports, such as iron ore, a thing of the past.

Ms Mousina disagrees, advocating more stimulus announcements as the government tries to revive a faltering economy.

“People often forget that China's economy continues to grow at about 5 percent a year,” she says, with the economy about five to six times larger than it was a decade ago.

“The demand we need to see for things like our raw materials doesn't need to be of the same magnitude as it was 10 years ago to create the same type of upside potential.”

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Trump's 'volatility' as president-elect discusses Trade War II

This month marks the inauguration of new US President Donald Trump for a second term.

He promised mass expulsions of migrant workers and a dramatic reduction in government regulation of different industries.

For the economy, the biggest impact will likely come from tariffs imposed on goods from foreign countries, including high taxes on Mexico, Canada and China.

For China? Much more.

“We don't have a lot of trade with the United States so we will be less directly affected,” explains Jonathan Kearns.

But China is our biggest trading partner.

AMP's Diana Mousina expects that the way Donald Trump uses the stock market “as a sort of barometer of his performance” could be a protective factor, meaning it's unlikely he keeps his wildest price promises.

“There is nothing to sing or dance about” as 2025 approaches

Aside from the “volatility” Mr Kearns believes the new US president will bring, Challenger's chief economist believes 2025 could be a quieter year.

“We are all waiting to see if productivity growth can accelerate,” he adds.

Mr Tharenou described 2024 as a winner-takes-all economy and expects that to continue this year.

“This divergence in trends is likely to persist,” he says, with unusual elements like the resilience of house prices leading to a split in the economy.

Nicki Hutley sees “the same thing” for the economic year ahead.

Tax cuts will help households, “slow” growth rates are expected to pick up and “slight real wage growth” will make life easier as people get inflation under control, she adds.