Australia's Economic Downturn - What You Need to Know
Australia may be heading towards an economic downturn. In this article, we will delve into what you need to know regarding Australia’s economic downturn.
Get ready for the unusual economic climate of 2025 from Australia. Despite historically low unemployment, and slow wage growth, the Reserve Bank of Australia (RBA) is also cutting rates. A kind of weird Economy.
Inflation is Moderating and Upside Risks – RBA cautious
On 18th February 2025, the Reserve Bank Board of the RBA, Australia’s Central Bank, announced an interest rate cut. The Reserve Board decided to cut the cash rate by 25 basis points to 4.10%.
According to RBA’s Monetary Policy Statement, “Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. In the December quarter underlying inflation was 3.2 per cent, which suggests inflationary pressures are easing a little more quickly than expected.”
There is moderate growth in private demand and a decrease in wage pressures. Considering these factors, the board is more assured that inflation is steadily moving towards the midpoint of the 2-3% target range.
There are upside risks, which remain and are still a concern. Recent labour market data have been unexpectedly strong – tighter than what RBA had thought earlier.
The central forecast for underlying inflation has been slightly increased over 2026. This forecast is based on the cash rate path implied by financial markets.
Though the policy decisions that are made today recognize the positive progress on inflation, the board is still cautious about future policy easing.
Australian Economy GDP Data
On 4th December 2025, the Australian Bureau of Statistics released its National Accounts data for the September quarter.
For the twelfth straight quarter, the Gross Domestic Product (GDP) increased by 0.3%. The main drivers of GDP growth are Government spending and public capital investment. Nominal GDP grew by 0.4%. Gross Value Added (GVA) increased by 0.3% in the quarter.
Australia grew at 0.8% (Year-on-Year), which is the lowest annual growth rate since the December quarter of 2020. Nominal GDP(YoY) is 3.5%.
Terms of Trade fell by -2.5%, for the third consecutive quarter. The contribution of Domestic demand to GDP is 0.6%. After three-quarters of the fall, the Public investment increased by 6.3%.
There is a Bleaker Growth – as GDP is slowing down, which is visible (See graph 1). GDP per capita decreased by (-) 0.3% in the September quarter and -1.5% (YoY). Adding to the fuel, Household consumption remains weak and remained unchanged at 0.0% (See graph 2 below).
Australia’s Economic Downturn – What You Need to Know (My Perspective)
Inflation, in January 2025, stood at 2.5% (Year-on-Year). This is in the lower range of RBA’s inflation target range of 2-3%. The latest unemployment data shows that it has increased to 4.1% in January 2025.
Historically, when one sees when the inflation was below 2.5% and unemployment was around 4%, then one has to go all the way back to March 1970 – (when inflation was 2.1% and unemployment was 1.6% – according to official data). This sounds more bizarre, as in 55 years no one has ever witnessed a low unemployment and inflation.
The weirder thing is while strong unemployment and inflation are at historical levels the RBA is opting for a rate cut.
Annual Core inflation has slowed down in the last quarter of 2024. It has come down from 3.6% in the third quarter to 3.2% in the fourth quarter. However, higher unit labour costs, and low productivity growth may increase it further in the coming months. This will be more challenging for the policymakers.
Things are not looking good, as the wage growth, is much faster than inflation and unemployment. Many economists (including economists in RBA) claimed that unemployment would inevitably lead to wage growth and inflation.
However, things are now turning completely upside down, wage growth is much faster than inflation. The wage price index increased by 3.2% much higher than the Inflation rate (2.5% in January 2025).
Wages are growing approximately 1% faster than overall prices. During such times, normally any central bank would freak out and increase interest rates to bring things under control.
Surprisingly, the RBA has opted for an interest rate cut still no one was shocked. However, this will be definitely surprising for economists (esp. Conservative economists).
A decline in business profits due to an increase in operating costs, declining real incomes due to heavy taxation, and a surge in Real Estate market pricing are some of the major challenges, which policymakers need to handle with care.
In simple, Australia needs structural reforms to avoid an economic downturn.
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