Australian GDP recovery on track despite ‘sticky’ inflation, high interest rates

Australia can look forward to a gradual recovery in Gross Domestic Product (GDP) this year after a historically laggard 2024 – one of the country’s slowest GDP growth rate periods in more than three decades, analysis from Vanguard reveals.

The investment firm predicts a 2.0% increase in GDP this year coming off the back of the slowest growth rate in 32 years, reaching just 1.5% over the 2023-24 financial year, according to Australian Bureau of Statistics data. As well, Vanguard takes a hopeful view on core inflation, predicting it will fall within the Reserve Bank of Australia’s (RBA’s) target band by the second half of 2025.

Vanguard senior economist Dr Grant Feng predicts 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.

The GDP bump will come in spite of the “overhang of sticky inflation and elevated interest rates”, Vanguard believes.

While monetary tightening by the RBA has stemmed private demand, public sector demand remains “robust”, according to Feng, and will likely accelerate in the lead up to this year’s election, slated for May.

Stagnant labour productivity growth has also kept inflation sticky, leaving the economy “still operating near its capacity despite softening demand”.

This productivity growth challenge is unlikely to change in 2025, as the non-market sector growth continues to outpace the more high productivity market sector.

“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.

The firm nevertheless takes an optimistic view on core inflation, anticipating a fall to 2.5% this year – well within Reserve Bank’s target band.

With inflation in check, Vanguard predicts the RBA will move to lower the cash rate to 3.5%, down from the current 4.35%, by year’s end – though this will most likely occur after the second quarter of this year.

Meanwhile the possibility of a US tariff hike would likely have “limited direct impact on Australia”, only “partially offsetting the effects of increased policy stimulus in China”.