Easing risks in the Aus outlook

The uptrend in economic confidence stalled in early 2025 amid heightened trade uncertainty around the world. But progress in negotiations between major trading nations has made worst-case scenarios for the global economy less likely.

The probability of a serious global downturn remains low. The list of challenges is substantial and includes conflict, tariffs and fiscal sustainability. But in ANZ Research’s view, each is important for particular economies and markets, rather than meaningfully raising the risk of a global recession.

In Australia, March-quarter gross-domestic product growth missed expectations, and ANZ Research’s year-end forecast remains unchanged at 2.0 per cent. However, ANZ Research now expects a little more growth in 2026 — 2.4 per cent, compared to its May forecast of 2.2 per cent. For 2027, growth of 2.6 per cent is expected.

ANZ Research forecasts a quarter-average peak in the unemployment rate of 4.3 per cent in late 2025 and early 2026 (compared to a forecasted 4.4 per cent in May). An above-potential pace of growth over 2027 will put a little downward pressure on the unemployment rate in that year, taking it back below 4 per cent by the end of 2027.

On the monetary policy front, ANZ Research expects the Reserve Bank of Australia (RBA) to ease 25 basis points in both July and August 2025, taking the cash rate to 3.35 per cent.

If the RBA cuts further than expected, in the absence of a sharp deterioration in the global economy that spilt over domestically, household income dynamics and expected activity would suggest a risk of policy tightening in late 2026 or early 2027.

Back a little

Australia’s GDP rose 0.2 per cent, quarter on quarter, in the three months to March, to be 1.3 per cent higher over the year. In ANZ Research’s view, the economy is in better shape than that would suggest.

It is likely, however, global uncertainty and its impact on business and consumer confidence could hold growth back a little in the near term. The turmoil in markets in April following the US tariff announcements and retaliation by some trading partners appears to have had a negative impact on consumer confidence, which is yet to fully reverse.

ANZ Research thinks the main transmission mechanism into Australia of trade uncertainty and friction is through lower levels of business and consumer confidence, which in turn negatively impact household and business spending and investment decisions. That said, domestic fundamentals are expected to reassert themselves through 2025 in the household sector.

The current pace of growth in real per capita household disposable income suggests the previously evident uptrend in consumer sentiment should resume. The outlook for real household incomes will also be supported by RBA rate cuts and modest tax cuts in 2026 and 2027. That should also see a faster pace of consumption growth through the latter part of 2025 and into 2026.

The household sector’s income and balance sheet dynamics continue to improve. Yearly growth in real household income is solidly surpassing consumption, and in level terms, real household disposable income has already returned to its pre-pandemic trend.

Robust income growth and a strong balance sheet suggest softness in household spending reflects a cautious, not constrained, household sector, at least in aggregate. The household saving ratio rose to 5.2 per cent in the first quarter of 2025, and ANZ Research expects this to drift down over the forecast horizon.

The expected pick-up in consumption is unlikely to be smooth, with the recent spending data having come in a little on the soft side. Business investment is likely to remain weak in the near term.

In the business sector conditions have continued to soften and have caught up with the soft trend in economic growth. Despite that, forward orders remain off their lows and business confidence has moved sideways.

The softness in conditions is reflected in a decline in investment expectations in the Australian Bureau of Statistics’ capex survey, which points to very little growth in ‘traditional’ investment in 2025-26. Indeed, non-mining capex plans have seen no lift compared to 2024-25.

Despite that weak outlook, ongoing IT spend will likely produce some growth in investment overall. ANZ Research expects business investment to gain greater momentum in 2027 as business confidence is buoyed by the likely improvement in consumer spending growth.

The stabilisation of building costs and lower interest rates may lead to a lift in housing construction, which should be supported by the two extra rate cuts in prospect. Housing prices are also picking up.

The decline in public final demand in the first quarter of 2025 is unlikely to be the start of a new trend. ANZ Research expects public demand to run stronger than overall GDP growth, albeit with a slowing in growth over the forecast horizon.

Finally, ANZ Research expects net exports to subtract from growth over the forecast horizon. This reflects limited growth in exports (non-rural goods exports have stalled in recent years), combined with a pick-up in imports as private demand recovers.

Solid labour market

The updated ANZ Research unemployment forecast represents an improved labour market outlook. With forecast GDP growth only a little below potential over 2025 and around potential in 2026, combined with forward indicators of labour market demand pointing to only a small increase in the unemployment rate, a sharp deterioration in labour market conditions seems unlikely.

On the wages front, ANZ Research does not expect recent signs of an increase in public sector wages to feed through to the private sector, although they do suggest aggregate wage growth is unlikely to fall much from here.

The recent Fair Work Commission (FWC) decision to increase wages in a number of sectors, including childcare and healthcare support, will apply a small amount of upward pressure to wages growth, while the minimum wage increase has had no material impact on ANZ Research’s wages growth forecasts.

While lower global growth and slightly lower domestic growth add disinflationary risk, ANZ Research has kept its trimmed mean inflation forecasts at the top half of the target band through to 2027. That reflects the risk of (modest) supply-chain disruptions, as shipping costs have risen since early May. Global pricing models for some goods may also see an indirect inflationary tariff impact on Australia.

On the domestic side, leading indicators show disinflation broadly stalling. ANZ Research’s headline inflation forecasts remain near the top of the target band through 2026 due to the impact of the end of energy rebates.

Two cuts in 2025

Given recent data showing a weak six-month trend in retail sales, the most recent reads on consumer confidence showing the prior uptrend remains stalled and ongoing uncertainty around US trade policy as we approach the expiry of the tariff pause, ANZ Research now expects the RBA to cut the cash rate by 25 basis points at its July meeting.

That decision will likely reflect the RBA’s Monetary Policy Board concluding a 25-point reduction in the cash rate in July is the path of least regret, rather than waiting for the August Statement of Monetary Policy (SMP) and a full forecast update. The latter has been the RBA’s approach to the prior two rate cuts and the November 2023 tightening.

ANZ Research expect a follow-up rate cut in August 2025, which would see the cash rate at 3.35 per cent.

Adelaide Timbrell is a Senior Economist & Adam Boyton is Head of Australian Economics at ANZ

This is an edited version of the ANZ Research report “Australia macro forecast update: global risks easing”, published June 26 2025.