The Federal Election and its related campaigns delivered the requisite promises, plans and slogans, and a second term in Government for the Australian Labor Party. Productivity was a key theme in Labor’s campaigning, so in this month’s economic update, we explore how a focus on productivity may take shape over the coming three years. Meanwhile, United States President Donald Trump’s tariffs remain a challenge, particularly for the Reserve Bank of Australia as the interest rate easing cycle continues.
Australian Labor Party secures second term
At the Federal Election held on Saturday 3 May, Anthony Albanese and the Australian Labor Party secured a second term in power. With inflation moderating, Labor has shifted focus towards productivity growth over the next three years.
Australia’s core inflation increased 2.9% year-on-year in the first quarter of 2025. This is a reduction from 3.3% in Q4 2024 and is well below the COVID-19-induced peak of 6.8% in Q4 2022. It is also the lowest reading since Q4 2021. Most importantly, core inflation has now returned to the Reserve Bank of Australia’s (RBA) 2% to 3% target band and is forecast to move more sustainably within this range over coming quarters.
Productivity growth on the other hand has been stagnant to negative since late 2023, and without improvement risks fostering inflationary problems down the track. Over the course of 2024, GDP per hour worked, a key measure of labour productivity, fell by 1.2%. At the same time, GDP per capita fell by 0.7%, meaning on average, each person in the economy was producing a lower value of goods and services towards the end of 2024, than in 2023. Put simply, we were, on average, less productive.
More broadly, Australia’s full year GDP growth was 1.3% in 2024, marking the second lowest annual growth rate since 1991. While low, Australia’s GDP growth in 2024 was in line with other developed nations such as the United Kingdom (1.5%), Euro Area (1.2%) and Japan (1.2%). It was, however, significantly below Canada (2.4%) and the United States (2.0%).
While GDP growth is important and commands a lot of bandwidth in the media, especially from politicians, high GDP growth is not critical. As a developed nation and with the risk of inflation a continuous undertone, solid growth in GDP per capita is more important for living standards and strong productivity growth is more important for a growing economy to avoid unacceptable levels of inflation.
Throughout the election campaign, Labor made a number of promises which could increase productivity if successfully delivered, including additional housing, tax cuts and a critical mineral reserve.
Housing
Labor has budgeted $10 billion in grants and zero interest loans to spearhead the construction of 100,000 new homes for first time buyers. These houses will be delivered over an eight-year timeframe, with the first due for completion in 2027. In addition to alleviating the ongoing housing crisis, this focus on housing supply and affordability, is intended to enhance labour mobility and reduce commuting times, thus stimulating productivity growth.
In other housing news, private house approvals fell 4.5% month-on-month in March to a 13-month low of 8,804 units, while total dwelling approvals fell 8.8% to 15,220. This is not a promising sign as far as solving the housing crisis goes, but continued falls in approvals has a restrictive impact on supply, buoying housing values and potentially increasing the viability of development projects.
Tax cuts
In the March budget, Labor outlined tax cuts costing $17 billion to reduce the 16% tax rate for income between $18,201 and $45,000 to 15% in FY27 and then 14% in FY28. These cuts are likely to increase the labour participation rate in the medium term, which should be positive for productivity growth.
Critical minerals
In April, Prime Minister Anthony Albanese unveiled a $1.2 billion Critical Minerals Strategic Reserve aimed at bolstering Australia’s economic resilience and national security. The initiative will establish stockpiles of vital resources such as lithium, nickel and rare earth elements – all essential to the production of batteries, electric vehicles, and renewable energy technologies.
Beyond its domestic benefits, the Reserve could also serve as a strategic asset in ongoing negotiations with the United States for tariff exemptions, as highlighted in our previous update.
China currently dominates the global rare earth market, controlling over 80% of supply and processing more than 95% of the world’s rare earth ore. This concentration of power has raised concerns in the United States, particularly following export restrictions during the Trump-era trade tensions. In response, the US has been actively seeking to diversify its supply chains – a shift that presents a significant opportunity for Australia.
By securing a reliable domestic supply of critical minerals, Australia can ensure the smooth operation of its high-tech and clean energy sectors – industries that are central to future economic growth. This supply chain stability reduces production disruptions, lowers input costs and fosters investment in advanced manufacturing and innovation. Moreover, positioning Australia as a dependable supplier to global partners like the US could attract foreign investment, generate highly skilled employment and strengthen the nation’s role in global value chains, all of which are key drivers of long-term productivity gains.
Tariffs remain front of mind
Donald Trump marked 100 days in office at the end of April and sweeping ‘reciprocal’ tariffs have defined a tumultuous start to the United States President’s second term from an Australian perspective. Sidetracked by a Federal Election, there has been little news to follow in terms of an exemption for Australia since the introduction of these tariffs. However, the United Kingdom and even China have negotiated trade deals with the US, leaving the door open for Australia to do the same.
The Westpac-Melbourne Institute Consumer Sentiment Index rose 2.2% month-on-month to 92.1 in May. This rebound comes after a 6.0% drop in April off the back of President Trump’s ‘Liberation Day’ and has been buoyed by a rebound in financial markets and definitive Federal Election result.
Is the RBA still expected to cut rates aggressively?
Global markets were shaken by Trump’s tariff announcements, prompting speculation about a sharper policy response from the RBA. Some analysts began pricing in a 50 basis point cut at the May meeting. However, the 90-day pause on the tariffs helped ease market anxiety, at least for the time being. Ultimately, the RBA cut the official cash rate by 25 basis points at their 19 – 20 May meeting to 3.85%.
Across the rest of 2025, Australia’s increasing house prices may also play a role in the RBA potentially deciding to reduce rates at a slower pace than initially hoped. In April, the CoreLogic Home Value Index rose 0.3% month-on-month, marking the third consecutive monthly increase. The Home Value Index is forecast to trend around 0.4% month-on-month in 2026 and 0.8% month-on-month in 2027.
If the RBA were to rapidly lower rates, this would reduce borrowing costs and potentially lead to a home buying spree. As demand substantially outstrips supply, this would likely lead to higher house prices.
The ‘big four’ banks’ rate cut forecasts diverge for the remainder of 2025. Commonwealth Bank, ahead of the May meeting, outlined that they expect cuts of 75 basis points across the rest of the year. This is a view also shared by Westpac and ANZ. NAB’s forecast strays from the others, forecasting the cash rate to hit 2.85% by the end of 2025, 100 basis points lower than it currently sits.
Challenges remain within the Australian economy. However, the Unites States’ willingness to negotiate trade deals and an ongoing interest rate easing cycle place Australia in a reasonably strong position for the remainder of 2025 and beyond, particularly relative to other nations around the world. As always, Trilogy Funds will continue to explore attractive risk-adjusted opportunities as they arise.
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