Download the PDF
The Australian economy has spent the last couple of years battling a raft of headwinds caused by elevated inflation and interest rates which led to sharp falls in real disposable incomes. As inflation slowed, the lingering softness in activity contributed to the RBA’s pivot to an easing bias at its December meeting and February’s cash rate cut. With another quarterly national accounts just around the corner, in this week's brief we preview our expectations for real GDP growth in the final quarter of 2024.
So, what do we already know? This week we received new information on business investment, which painted a relatively dour picture for the sector. Real private capital expenditure (capex) fell by 0.2% in the December quarter, meaning it rose by only 0.6% over the whole year. The ABS survey also indicated that businesses were not confident about future spending intentions, with the first estimate of spending for 2025-26 less than 2% higher than the same estimate for 2024-25. Taking into account likely price increases, this means that businesses are essentially expecting no growth in their real investment spending.
It is clear that many businesses are feeling the strain of soft demand conditions. The RBA's liaison program has found that some businesses are having to cut their margins rather than pass price increases onto consumers in areas such as retail, household services, agriculture and manufacturing. A key area that remains under pressure is the construction sector, particularly residential construction. The fall in capex spending over the December quarter was led by falls in equipment, plant & machinery spending in the construction sector. Meanwhile, high construction costs along with delays in procuring finishing tradespeople for houses, has made the prospect of buying new home builds unappealing for many. Data suggests that, since September, construction companies have been forced to offer discounts, with the January CPI data released this week showing this discounting has continued into 2025.
While businesses are facing challenging conditions, we have long said that the recovery in the Australian economy would be driven by the consumer. On this front, recent information has been more encouraging. Retail sales momentum continued to improve in the December quarter, with sales volumes up 1%, a far-cry from the two quarters of contraction seen over the first half of the year. While growth was partly driven by sales promotions over the quarter, the result still indicates that consumers are benefitting from the recent tax cuts and cost-of-living subsidies.
With inflation moderating towards target, the labour market remaining in good health and an RBA rate cut in the bag, households are well positioned to lift their spending going forward. As the recovery in household consumption plays out over coming quarters and interest rates move modestly lower, we expect businesses will in turn begin to gain confidence in the outlook and ramp up their investment plans over the latter half of 2025.
Given this background, what is our expectation for real GDP growth over the December quarter? We expect the pickup in consumer spending to translate to a modest incremental improvement in real GDP growth, lifting to 0.4% from 0.3% in the September quarter. The weakness in business investment will weigh on the quarterly outturn. Public spending is expected to continue its run of solid growth, and movements in net exports and inventories will roughly offset each other. More broadly, we expect real GDP growth to continue to gradually improve over the year ahead, with annual average growth forecast to lift from 1% in 2024 to 1.8% in 2025. Importantly, our forecast recovery leaves growth still below trend in 2025, and we see risks as skewed to the downside. Domestically, a close fought Federal election is expected soon.
A change in government would likely see slower growth in public spending, an area which has been a key support to the economy in recent quarters. Should this occur, improving business investment would then need to play a more critical role in driving the economic recovery and be supported by more business-friendly government policies.
Globally, President Trump’s ever-expanding tariff trade war suggests increasing risks of stagflation. While tariffs may largely be used as a bargaining tool, as we’ve assumed, the risk of more substantive tariffs is clearly building. Trump has shown little signs of backing down on the 25% tariffs on Mexico and Canada due to go into effect next week. Over the course of this week, he also threatened the EU with 25% tariffs on all goods, and most critically for Australia, suggested he would place a further 10% tariff on China. These global developments increase uncertainty for Australian businesses, hindering their ability to make investment plans. As a result, risks remain weighted towards a more protracted period of below-trend growth in the Australian economy.
