In our March economic update, we outline how the Australian economy has begun to pick up, and examine the uncertainty caused by United States President Donald Trump’s tariffs as they take effect on Australian steel and aluminium.
The economy is picking up steam
The Australian economy grew by 0.6% quarter-on-quarter to December 2024, doubling the prior quarter’s growth, coming in higher than forecasts and marking the 13th consecutive quarter of expansion. In the year to the December 2024 quarter, GDP grew by 1.3%, also outperforming market forecasts of 1.2% and marking the strongest expansion since December 2023.
GDP per capita increased 0.1% in the December 2024 quarter, ending seven consecutive quarters of decline – the longest stretch on record.
While unemployment increased from 4.0 to 4.1% in January, participation increased. The number of employed people in Australia increased by 44,000, below the 60,000 increase in December but well ahead of the 20,000 market estimate.
Inflation, as measured by the change in the monthly consumer price index (CPI), was 2.5% for the year to January 2025. This was unchanged from the prior month but lower than the forecast of 2.6%. Inflation is forecast to continue to trend lower over the remainder of 2025 and into 2026.
The Westpac Consumer Confidence Index increased by 4% in March, compared to 0.1% in February, further supporting the notion that the economy has begun to pick up.
Will a disaster-ridden month in Queensland impact the economy?
The affected area of early-February flooding in Far North Queensland accounts for 4% of Australia’s agricultural production. The flooding may marginally increase inflation, particularly as banana and sugar prices increased due to strained supply.
In Southeast Queensland and Northern New South Wales, ex-tropical cyclone Alfred caused widespread flooding and destruction. The impacted area accounts for about 15% of the Australian economy, with some estimates indicating that every day of disruption costs the economy upwards of $1 billion.
Ultimately, the long-term economic impact will depend on the speed and effectiveness of recovery efforts, which may serve as a source of stimulus.
Interest rates
The fervour around interest rates has slowed with the Reserve Bank of Australia (RBA) kicking off an easing cycle last month. Each of the big four banks immediately passed on this cut to their variable rate customers. While this is welcome relief for mortgage holders, term deposit investors and those with a substantial allocation to cash may need to look elsewhere for higher yields.
As mentioned in our previous economic update, it is likely the RBA will maintain a conservative approach to lowering the cash rate over the remainder of 2025, keeping its eye on both inflationary signals and movement in the value of the Australian dollar.
Construction activity slowed, but the outlook is good
The value of construction work completed in Q4 2024 rose 0.5% on the prior quarter to $73.94 billion, half of the 1.0% estimate and well below the 2% increase from the prior quarter. It was, however, the third successive quarter in which work increased. Trading Economics forecasts this figure to trend around 0.3% in 2026 and pick up to 1.0% in 2027.
Building permit approvals hit a 25-month high in January, increasing 6.3% month-on-month to 16,579 units, significantly outperforming market estimates of 0.5% growth. This is off the back of a more modest increase of 1.7% in December 2024.
The residential market bounces back
Australia’s CoreLogic Home Value Index rose 0.3% in February, ending a three-month downturn. Melbourne ended ten consecutive months of falling home values, sharing the mantle for the strongest growth of all capital cities with Hobart at 0.4%. Brisbane, Perth and Adelaide, which have previously been the strongest growth markets, recorded more modest gains of 0.2% to 0.3%.
How will global developments impact Australia?
United States President Donald Trump’s sweeping 25% tariffs on iron and aluminium took effect on Wednesday 12 March 2025, in a move that is set to cause pain to America’s trading partners. For Australia, exports of these materials to the United States will likely become more expensive, almost certainly reducing demand. Given America is one of Australia’s largest trade partners, this may negatively impact our trade balance and subsequently stall growth, while putting downward pressure on the Australian dollar.
Prime Minister Albanese has vowed to keep seeking an exemption to these tariffs but has stated he won’t be pursuing retaliatory trade measures. This is not the case for some of America’s largest trade partners, with Canada, Mexico and China all outlining retaliatory measures.
A bigger concern for our economy is the flow-on effect of an escalating trade war between the United States and China. China’s exports to the United States topped USD$501 billion in 2023, with iron and steel accounting for USD$13.2 billion and aluminium USD$3.8 billion.
China’s economic growth is currently trending well below its long-term average, with GDP growth at 5% in 2024, and is forecast for another 5% growth in 2025. A poorer China would likely reduce demand for Australian exports. This is a concern as China currently accounts for 41% of all Australian exports.
A decrease in Chinese demand could also lead to lower commodity prices globally. Commodities form a significant amount of Australia’s exports to China, with iron ore accounting for approximately two-thirds of total exports in 2023, while coal formed an additional 10% and natural gas around 6%.
Trump has remained tight-lipped about a potential recession, but did note that ‘bringing wealth back to America…it takes a little time.’ Recession fears are not unwarranted, as these tariffs look set to increase inflation, with consumers bearing the brunt of higher prices. Many Americans would look to reduce spending, leading to lower growth and higher unemployment.
A recession in the USA, coupled with an economic slowdown in China, would require Australia to adjust to the changing economic fortunes of two of our largest trading partners.
That said, the reasons for economic optimism remains. Productivity has kicked up a gear, inflation continues to moderate, the workforce is strong and an interest rate easing cycle is now underway. Throughout 2025, Trilogy Funds will continue capitalising on new investment opportunities as they arise.
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