Australia’s economic momentum continues across the first half of 2025, albeit at a slower pace than anticipated. In this month’s economic update, Trilogy Funds unpacks the key drivers behind the softer-than-expected GDP growth, the Reserve Bank of Australia’s latest rate cut and the evolving outlook for housing, construction and global trade.
GDP comes in below forecasts
Australia’s economy grew 0.2% quarter-on-quarter in Q1 2025. While this fell short of the 0.4% market forecast, it marked the 14th consecutive quarter of expansion.
As we anticipated in our March update, flooding in Far North Queensland and ex-tropical cyclone Alfred in Southeast Queensland and Northern New South Wales had a noticeably detrimental effect on the economy. Weather disruptions impacted mining, tourism and shipping – the latter causing exports to weaken over the quarter, particularly for coal and liquified natural gas.
Other factors also contributed to below forecast growth. Aggregate household consumption rose a modest 0.4% quarter-on-quarter, concentrated primarily on non-discretionary goods and services. Per capita household consumption, however, actually declined. This means that while the whole population might be consuming a little more, individual consumers on average are consuming less. On the one hand, this indicates that consumers, on average, may be leading slightly lower standards of living. On the other, it means less demand for goods and services is being generated per person – which has the potential to put pressure on businesses and the broader economy.
The household savings rate also jumped from 3.9% in Q4 to 5.2% in Q1, further suggesting a cautious quarter amongst consumers.
GDP is expected to pick up in Q2, with growth of 0.5% expected quarter-on-quarter.
Interest rates
In May, the Reserve Bank of Australia (RBA) cut the official cash rate 25 basis points to 3.85%, citing a weakening outlook for growth, employment and inflation.
The rising savings rate and weak household consumption as outlined above, as well as modest growth in private investment all indicate that the cash rate remains restrictive. Alongside weaker-than-expected GDP growth that is already trending under long-term averages, markets are now pricing in a greater than 80% chance of a rate cut at the RBA’s July meeting, and a 70% chance at the meeting after in August.
The outlook from the ‘big four’ banks for the rest of the year diverges from the fairly consistent set of forecasts earlier in the year. NAB now expects cuts of 25 basis points in July, August and November. Westpac also forecasts a July and August cut, with a third occurring at either the September, November or December meeting. ANZ revised its forecast, no longer expecting a cut in July (although acknowledging markets are pricing this in), believing a cut will occur in August. Commonwealth Bank has adopted a broader stance, forecasting two more 25 basis point cuts in this easing cycle (while noting the risk of a third), with the cash rate bottoming out at 3.35%.
Housing and construction
The Cotality (formerly CoreLogic) Home Value Index rose by 0.5% month-on-month in May 2025. This was the largest monthly increase since August 2024, and the fourth consecutive month of growth. The May figure beat the forecast of 0.3%, and is largely due to the RBA cutting rates, bringing borrowing costs to a two-year low.
Private house approvals rose 3.1% month-on-month to a seven-month high of 9,349 units in April 2025. The April data marks the steepest monthly increase in more than a year, rebounding from a 1.9% decline in March. New South Wales and Queensland (both 7.3%), followed by Victoria (0.9%) led the way, while approvals declined in South Australia (-1.2%) and Western Australia (-0.6).
A strong month for residential approvals was unable to prop up the broader construction sector, with total building permit approvals falling 5.7% month-on-month to an eight-month low of 14,633 units in April 2025. This was still an improvement on the prior month (-7.1%).
Total construction work done in Q1 was flat at $74.43 billion, remaining largely in line with Q4 2024. This, however, fell short of forecasts of a 0.5% rise in work undertaken. Forecasts suggest work done will increase over the rest of the year and into 2026, before trending around 1.0% in 2027.
Overseas
Uncertainty and volatility abroad continue to weigh on the Australian economy.
A ceasefire between Israel and Iran was brokered by the United States after almost two weeks of conflict. If this ceasefire fails to hold, an ongoing war in the Middle East is likely to negatively impact Australia.
After Israel launched a pre-emptive strike on Iran on 13 June, Brent Crude Oil rose from just over USD$69 per barrel to over USD$75 per barrel. Prices have since moderated to around USD$68 per barrel, but a prolonged clash in the Middle East would see fuel prices in Australia rise and, potentially, broader inflationary pressures.
Given the ceasefire, the conflict is unlikely to factor into the RBA’s monetary policy decisions. However, a drawn out or escalating war may warrant action from the RBA.
United States President Donald Trump’s tariffs remain front of mind for Australia and, likely, all of America’s trading partners. In our March update, we noted that the initial 25% tariffs on Australian steel and aluminium were likely to reduce US demand. On 4 June 2025, these tariffs doubled to 50% – which will further negatively impact demand and will likely flow through to Australia’s trade balance, potentially putting downward pressure on the Australian dollar.
However, the effect of this tariff may be countered via an unlikely source – America’s love of beef. Since Trump’s ‘reciprocal tariffs’ were instituted, Australia’s beef exports to the United States are up over 30% in 2025, with Australia on pace to reach its quota limit of 450,000 tonnes for the first time. This is because drought in the United States has driven US production to its lowest point since the 1950s, driving cattle prices to record highs. As such, even with the 10% tariff, Australia’s beef prices are extremely competitive.
The feeling on the ground
Despite mixed conditions and uncertainty, consumers and businesses are becoming slightly less pessimistic.
Australia’s Westpac – Melbourne Institute Consumer Sentiment Index rose 0.5% month-on-month. While this is less than the May increase of 2.2%, it marks the fourth increase of 2025. Lingering global uncertainty was reflected in the June reading, but so too was the RBA’s May rate cut, along with inflation that continues to moderate. The monthly consumer price index indicator increased 2.1% across the year to May, which was lower than the 2.4% figure of the prior two months and below the 2.3% forecast.
The NAB Business Confidence Index rose to 2 in May 2025, the first positive reading since January 2025. Despite this increase, business conditions remain challenging and will need to improve to ensure the Index continues to stay positive.
Conditions remain mixed, with uncertainty abroad met with green shoots emerging at home. As always, Trilogy Funds will continue to explore attractive risk-adjusted opportunities as they arise.
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