The 2025 Economic Outlook for Australia and New Zealand: Stability Amidst Uncertainty

The 2025 Economic Outlook for Australia and New Zealand: Stability Amidst Uncertainty

Australia and New Zealand enter 2025 with economic trajectories that balance low potential growth with stable inflation. Inflation has fallen in line with central bank targets, but GDP growth is forecast at just 1.8% for Australia and 1.7% for New Zealand, Goldman Sachs says both figures are below consensus expectations. These economies are under pressure from US and Chinese trade policies, structural adjustments in China, and declining domestic demand. Both countries' central banks stand ready to reduce interest rates further to help recovery. But it will all depend on how these interact with the domestic dynamics on one hand and the global dynamics on the other hand. The paper examines the core elements in the economic landscape.

Global Trade Dynamics: Challenges and Adjustments

Trade relationships and global policies are sharpening the economic conditions of the two countries. Now that the U.S. elections are behind, the administration of President Trump is ready to invoke tariffs on Chinese imports, elevating rates by 20%, and hence escalating international trade tensions. According to Goldman Sachs, this is estimated to reduce both Australia's and New Zealand's GDP growth by 20 bps and 15 bps, respectively.

Australia’s direct exposure to the U.S. is still relatively limited, with exports accounting for only 1.3% of GDP, while the indirect effect through China is substantial. China, having moved from an infrastructure-driven economy towards a consumption-based one, it slowly stops consuming Australian commodities such as iron ore. For New Zealand, the trade conflict is more intense, given the country's trade surplus with the U.S. and heightened reliance on dairy products in China.

Despite these challenges, both economies experience modest positive effects from China's domestic stimulus policies, directed at stimulating household consumption. These policies partly alleviate some of the shocks faced by New Zealand's dairy and tourism sectors and partly mitigate the impacts on Australian mining exports. However, the overall effects are negative, which underlines the case for diversification and strategic adaptation.

Fragile Recovery in Domestic Consumption

Private consumption for both countries is forecasted to bounce back in 2025, however the path is cautious and still uneven. Household expenditure for Australia is expected to grow at 2% y-o-y basis through tax cuts, falling inflation, and an 8% jump in house prices. In New Zealand, household spending will likely grow by 2.4% due to a 9% rise in house prices and reduced mortgage rates.

Years of high inflation and interest rates have suppressed real disposable incomes, especially for younger and middle-aged households, who drive discretionary spending. Tax relief and housing market recoveries will play critical roles in lifting consumer confidence. Housing wealth is expected to be a significant driver, with rising prices improving sentiment and encouraging spending. However, the pace of recovery remains subdued compared to pre-pandemic levels, reflecting the broader challenges of restoring real income growth.

Labor Market Trends and Productivity Gaps

Labor markets in Australia and New Zealand represent deeper economic trends, such as the increasing unemployment both economies are experiencing. By mid-year 2025, the unemployment rate in Australia is expected to surge to 4.6% from 4.1%, while New Zealand is likely to reach 5.5%, according to Goldman Sachs. Those would be consistent with weaker growth below potential GDP and weakening labor demand.

Wage growth has slowed substantially, falling from peaks of almost 6% in 2023 to around 3% per annum in both economies. In Australia, labor supply growth induced by higher migration and participation rates has increased the size of the workforce by 10% above pre-pandemic levels. While this supports job creation in government-related sectors, it has also contributed to relatively sluggish productivity growth.

In New Zealand, slower wage recovery and weaker private-sector job creation are further dampening labor market dynamics. These trends underscore structural challenges, such as matching workforce skills with emerging economic opportunities.

Inflation Moderation and Monetary Policy

Inflation is trending in both countries toward stabilization, supporting monetary easing in the coming period. Australia’s core inflation is projected to stabilize at 2.7% by the end of 2024, within the Reserve Bank of Australia’s target range of 2–3%. In New Zealand, inflation is expected to decline but stabilize at 1.8% by the end of 2025, which is within the Reserve Bank of New Zealand’s target range of 1–3%.

The RBA is to start cutting interest rates in February 2025, targeting a terminal rate of 3.25% by year-end. The RBNZ is also likely to cut its policy rate to 3.0% by mid-2025. These policies are expected to boost private demand and offset weak economic momentum. However, geopolitical risks, especially on trade and fiscal policy adjustments, are likely to affect the speed and impact of these interventions.

Diverging Fiscal Policies and Growth Impacts

Australia and New Zealand are adopting opposing fiscal strategies. In Australia, expansive fiscal policies such as the National Disability Insurance Scheme continue to drive growth in public-sector employment and consumption. Meanwhile, the fiscal impulse—the contribution of public spending to GDP growth—is set to ease to 0.6% in 2025.

In contrast, New Zealand is taking a much more cautious fiscal position. With the election of a National-led government, public spending is contracting. The fiscal impulse is likely to increase slightly to 0.2 percentage points in 2025, through targeted tax cuts intended to address cost-of-living pressures.

Key Risks and Strategic Opportunities

• U.S. tariffs and global trade uncertainties create significant downside risks. While both countries maintain strong trade ties with China, diversification is essential for mitigating these challenges.
• Australia’s focus on renewable energy presents long-term growth opportunities. Investments in critical minerals and clean energy infrastructure can offset external vulnerabilities.
• Sustained housing price growth will be pivotal for improving consumer confidence and stimulating domestic demand.
• While the pivot to consumption in China is a challenge for exporters of resources, it also presents opportunities in sectors such as dairy and tourism, especially for New Zealand.

Conclusion

The economic outlook for 2025 is a fragile balance of stabilizing inflation, subdued growth, and changing global dynamics for Australia and New Zealand. With avenues for recovery through monetary easing and fiscal adjustments, external and domestic risks must be navigated with care. Policymakers and investors must focus on trade diversification, renewable energy, and housing market support to build resilience.

The success of these strategies will define the economic narratives of both nations in 2025, providing important information for adaptive policymaking and investment approaches.

Discover the Lean Advantage: Offshore Insight Onshore Impact

Lean Research enhances your investment strategy by delegating the detailed grunt work to our offshore analysts, freeing your onshore teams to focus on high-value tasks. With our dedicated full-time members embedded in your operations, we ensure that every piece of analysis not only meets but exceeds your standards. Experience the ease of expanding into new markets and asset classes while driving better investment returns, all in a cost-efficient manner. Lean Research is your partner in redefining asset management efficiency.