Australia Economic Outlook

Outlook Q2 2025

Australia’s economy lost steam in the March quarter, with GDP rising just 0.2%, well below expectations and a sharp drop from the 0.6% growth seen at the end of 2024. The slowdown was driven by a significant decline in public sector demand, marking its first negative contribution to growth since mid-2018.

While inflation continues to ease, the Reserve Bank is expected to remain focused on supporting the economy through further rate cuts amid persistent private sector weakness and rising geopolitical risks.

Australian overview

The March quarter revealed vulnerabilities in Australia’s growth model, as public sector support waned and private activity failed to fill the gap.

GDP growth slowed to 0.2%

missing market expectations of 0.4%, with public demand subtracting from growth for the first time in nearly seven years.
Private sector contributions remained weak

with household consumption and investment offering limited support.
Headline inflation fell to 2.1% in May

the lowest since October 2024, while trimmed mean inflation eased to 2.4%, reinforcing expectations of further monetary easing.
The labour market remains resilient

but job growth is expected to slow as non-market sectors like aged care and health begin to plateau.

Global landscape

Global growth is under pressure as trade uncertainty, inflation risks, and fiscal fragilities converge, creating a volatile and complex policy environment.

The Global Composite Purchasing Managers’ Index (PMI)

recovered to 51.7 in June after hitting a 17-month low in April, driven by a rebound in manufacturing activity. However, this momentum is expected to fade as US tariffs take effect.
Global trade volumes surged 6.6%

year-on-year in March, boosted by front-loaded activity ahead of tariffs, but fell sharply by 1.4% in April, highlighting the volatility in global demand.
US imports hit a record $344.6 billion in March

driven by pharmaceutical goods and gold stockpiling, before plunging 19.9% in April – the largest monthly fall since 1969.
The Global Supply Chain Pressure Index eased

to 0.00 in June, suggesting short-term relief, but medium-term uncertainty remains high due to unresolved trade negotiations.
Bond markets have reacted strongly

with steepening yield curves and rising long-term yields reflecting concerns over inflation, fiscal sustainability, and increased defence spending.
Pause in tariffs

Despite these risks, a 90-day pause in US tariffs and signs of de-escalation with China offer a potential upside, though investor sentiment remains fragile amid record-high trade and policy uncertainty indices.

Summary forecast

* Values at end of period
# Actual values
^ Forecast values

KPMG forecasts of key macroeconomic indicators

Indicator	2024 (actual)	2025 (forecast)	2026 (forecast)
Real GDP (average annual growth)	1.0%	1.6%	2.1%
Real GDP (year-ended growth)	1.3%	1.8%	2.0%
RBA cash rate	4.35%	3.10%	2.85%
Headline CPI	2.4%	2.6%	2.5%
Core CPI	3.3%	2.7%	2.7%
AUD/USD*	0.65	0.65	0.66