Australian economy on the up in 2025: Vanguard

Vanguard expects Australia's Gross Domestic Product (GDP) will gradually recover and increase by 2% in 2025 after experiencing its slowest growth rate in 32 years during 2024.

Vanguard said this improvement will come despite the overhang of sticky inflation and elevated interest rates.

Additionally, it predicts the core inflation rate will fall to 2.5% during 2025, and that the Reserve Bank of Australia's (RBA) cash rate will be lowered to 3.5% from the current 4.35% level by year end.

Pointing to Wednesday's Consumer Price Index (CPI) release, Vanguard suggests inflation is continuing to decline within a tight jobs market, despite the underlying inflation rate remaining well above the RBA's target range of 2-3%.

"The RBA shouldn't draw a firm conclusion from the November CPI indicator, in our view," Vanguard senior economist Grant Feng said.

"That said, the RBA will likely stay on hold until the second quarter of 2025, as the last mile of the inflation fight will take longer to conquer.

"We expect a modest sequential improvement in economic momentum, underpinned by rising real household incomes as inflation levels slowly subside, a rebounding housing market, expectations of rate cuts, and structural drivers of public investment."

Feng said that while private demand has weakened in response to the RBA's monetary policy tightening, public sector demand remains robust, a trend which he expects will continue in the lead-up to the 2025 federal election.

"Moreover, a significant factor contributing to the stickiness of inflation in Australia is stagnant labour productivity growth, which has left the economy still operating near its capacity despite softening demand," Feng said.

However, Feng added that market sectors may face ongoing challenges in 2025 due to low business investment.

"On the other hand, the non-market sector - comprising health care and social assistance, education and training, and public administration and safety - is expanding at a faster pace than the market sector, which shifts employment towards lower-productivity sectors and affects overall productivity performance," he said.

"Given the ongoing government support for non-market sectors and lukewarm business investment, we see limited upside for labour productivity growth in 2025. This will ensure the labour market remains tight and could put upward pressure on unit labour costs."