Off the back of a challenging 2024, conditions are set to begin easing in 2025, albeit slowly.

The key themes impacting markets

On a global scale, it seems we have come to exist in a landscape characterised by groundbreaking, far-reaching events. These tectonic shifts were in full force throughout 2024 and may persist into 2025. But how do they impact Australia?

Ongoing conflict across the Middle East, as well as the war between Russia and Ukraine, may continue to add volatility to energy markets. The Australian Government’s Energy Bill Relief Fund 2024-25 resulted in an easing of cost of living pressures in 2024, as well as a short-term reduction to monthly reported inflation.

In the United States, Donald Trump’s election victory has the world watching on to see how he rolls out his agenda post his inauguration on 20 January 2025. Trump has promised a raft of tariffs which would likely hit China the hardest.

The United States accounts for 4.3% of Australia’s annual exports, enough to have local political leaders engaging in the narrative. However, 41% of Australian exports are to China. It’s possible that the bigger risk to Australia is the potential for Trump’s tariffs to have a measurable impact on the Chinese economy, as a Chinese slow-down would have significant flow-on effects to Australia. Presently, despite tracking below the long-term average, China’s annual GDP growth rate was 4.6% for the year to the September 2024 quarter and is forecast to increase to 5.0% in Q4 2024.

Australia’s fourth largest trading partner, South Korea, has seen the declaration of martial law by President Yoon Suk Yeol send the country’s government into disarray. At this stage, the impeachment of President Yoon does not look likely to cause any material disruptions to trade.

Back home, a federal election will be held on or before 17 May 2025. Both Labor and the Coalition are campaigning on several key issues, including cost of living, housing, energy and economic management. It is currently shaping as though the Albanese Government will call the election for the final six weeks of this window. This would avoid interference with the early-March state election in Western Australia, as well as provide the Reserve Bank of Australia (RBA) the longest possible timeframe to cut rates.

Inflation trends

Australia’s consumer price index (CPI) indicator increased 2.3% over the 12 months to December 2024, a slight increase on the two prior periods of 2.1%. Trimmed mean inflation, Australia’s underlying inflation and the RBA’s preferred measure, is expected to remain 3.5% for a second consecutive quarter in Q4 2024. Trading Economics forecasts this will trend around 2.9% by the end of 2025, before reaching 2.3% in 2026 – well within the RBA’s 2% – 3% target band.

Global supply chain disruptions, energy price volatility, wage growth and other factors have led to shifting expectations of the timing of our return to the RBA’s target inflation band. In 2025, it is likely that improvements in supply chain resilience and ongoing fiscal policy could help stabilise inflation.

Broadly, Australia’s inflation figures lag slightly behind our key trading partners.

Across the Tasman, New Zealand’s Q3 2024 underlying inflation was 2.7% over the prior 12 months. Off the back of the pandemic, this peaked at 7.4% in Q4 2022, which compares to Australia’s peak of 6.8% in the same quarter.

In the United States, underlying inflation for the year to December 2024 was 3.2%, which has made significant headway after peaking at 6.6% in September 2022. The US Federal Reserve, as well as the Reserve Bank of New Zealand, implemented more aggressive monetary policy than Australia to curb inflation. This is discussed further below.

China, however, has an anomalous inflation rate that has contrasted the COVID-led spike seen across other countries. Largely, the impact COVID had globally was the disruption of supply chains, which drove up prices. The impact in China, however, was largely demand, rather than supply led.

Throughout the pandemic, China’s inflation dropped due to particularly stringent lockdowns and a zero-COVID policy, leading to lower demand for goods and services and ultimately causing deflation in some sectors. Managing a relatively stable supply chain, fiscal policy to support the economy and cautious consumer behaviour contributed to underlying inflation that bottomed out at -0.3% in January 2021.

China’s inflation was 0.40% across the year to December 2024. For context, inflation in China has tended to not fluctuate to the extent of countries like Australia, New Zealand and the United States. Between 2008 and 2024, China’s underlying inflation averaged 1.19%, with a high of 2.5% in June 2011 and a low of -1.6% in August 2009.

Interest rates

China’s low inflation has enabled low official interest rates. China’s one-year loan prime rate currently sits at 3.1%, a record low, following reductions in July and October 2024. This decision was spurred by Chinese leaders in December 2024 pledging to increase the 2025 budget deficit to 4% of GDP – the highest on record – to drive an economic revival.

The US Federal Reserve, like many of its counterparts across the globe, continues to deal with the fallout of their aggressive monetary policy to curb inflation. The United States’ interest rate hit a peak of 5.5% in July 2023. New Zealand’s official cash rate also peaked at 5.5%, but did so in May 2023, two months earlier than the United States. This is compared to Australia’s cash rate that peaked at 4.35% in November 2023, where it remains.

Both the United States and New Zealand have entered an easing cycle. The United States’ interest rate still sits above Australia’s cash rate, despite being reduced by 25 basis points to 4.50% at the December 2024 Federal Reserve Board meeting. New Zealand, on the other hand, reduced their official cash rate by 50 basis points to 4.25% in late November 2024.

The RBA enters the second year of its reduced meeting schedule in 2025, convening eight times compared to its 11 meetings in 2024. The first meeting of the year is set for 17 – 18 February 2025.

After being the last of the big four banks to hold onto the possibility of a rate cut in late 2024, Commonwealth Bank now forecasts a cut to the cash rate will occur off the back of the first 2025 meeting, but acknowledges that stronger than expected job data puts this forecast in doubt. On 10 January 2025, ANZ revised its forecast, moving away from May and instead joining CommBank with a February prediction.

NAB and Westpac expect the cash rate to drop 25 basis points to 4.1% in the third meeting of the year, which is set for 19 – 20 May 2025. It’s not out of the question that all four forecasts shift again, as was the case throughout 2024.

The RBA has stated time and again that ‘returning inflation to target within a reasonable timeframe remains the Board’s priority’, which has been the key barrier to a cut to the cash rate. And while inflation continues to trend in the right direction, the struggling Australian dollar could now throw a spanner into the works.

On 1 January 2025, the Australian dollar dipped below 62 US cents for the first time since October 2022. Analysts pointed to a New Year’s Eve sell-off of the Chinese Yuan as the primary driver of this decline. However, constant pressure on the Yuan and a lack of confidence in the outlook for China’s economy, as well as the strong performance of the US dollar are all contributing to a sustained dip to the Australian dollar.

Typically, the value of a country’s currency tends to rise in value when central banks raise interest rates and fall when interest rates are lowered. If a weak Australian dollar were to persist, it might cause the RBA to reevaluate whether they do, in fact, lower the cash rate sooner rather than later.

However, the RBA may weigh the risks and decide to begin the easing cycle in the first half of the year in an attempt to fuel investment and consumer spending to help negate Australia’s slow economy.

It is also worthwhile highlighting that a global tariff war could have a significant impact on currencies, which would have potential flow on effects to inflation and interest rates.

Property trends

The commercial sector is poised to begin a gradual cyclical recovery in 2025, albeit differing across sectors:

• Retail property is experiencing a revival, particularly luxury retail. Neighbourhood and convenience retail centres that blend daily needs retail, essential services and entertainment are expected to trade well in 2025.
• Industrial property is a split sector. Specialised industrial facilities like cold storage and data centres are poised to perform strongly, driven by global demand. Traditional warehouses and distribution centres are seeing rents moderate as vacancy rates rise slightly, albeit from historic lows, but are expected to outperform.
• The office sector is set to continue to experience high vacancy rates across capital city CBDs. Repurposing office space, particularly in secondary and fringe markets, has begun to rise to prominence and looks set to continue.
• Alternative assets such as childcare centres, medical facilities and service stations are expected to continue to benefit from private investor demand attracted to long leases and smaller asset values.

Turning to the residential sector, Australian home values rose by 4.9% across 2024, adding approximately $38,000 to the median home price value. Three capital cities experienced a decline in value over the year – Melbourne (-3.0%), Hobart (-0.6%) and the ACT (-0.4%). This was contrasted by surging growth in mid-sized capital cities, with Perth home values increasing 19.1%, Adelaide by 13.1% and Brisbane by 11.2%.

Growth, however, weakened across the second half of the year, with the Australia CoreLogic Dwelling Prices month-on-month index declining by 0.1% in December 2024, the first negative movement in almost two years. This decline is not anticipated to be sustained, with a 0.3% increase forecast across the opening quarter of 2025.

Despite the challenges of 2024, Trilogy Funds celebrated a year of achievements and milestones. As conditions begin to ease in 2025, we look to continue capitalising on new investment opportunities as they arise.

This article is issued by Trilogy Funds Management Limited ABN 59 080 383 679 AFSL 261425 (Trilogy Funds) and does not take into account your objectives, personal circumstances or needs, nor is it an offer of securities. Investments in Trilogy Funds’ products are only available through the relevant Product Disclosure Statement (PDS). The PDS and the Target Market Determination (TMD) issued by Trilogy Funds are available at www.trilogyfunds.com.au. All investments, including those with Trilogy Funds, involve risk which can lead to no or lower than expected returns, or a loss of part or all of your capital. See PDS and TMD for details. Investments with Trilogy Funds are not bank deposits and are not government guaranteed. Past performance is not a reliable indicator of future performance.