Australia's economic fortunes this year are tied to China, the US and global trade relations. (ABC News: Jarrod Fankhauser)
In short:
Leading economists say 2025 offers no quick fixes to the economic problems of the past year, but expect an easing of interest rates and inflation that have made life more difficult for millions of people.
The sluggish economy of our biggest trading partner, China, has the potential to weigh down Australia's economy.
What's next?
US president-elect Donald Trump will be inaugurated for a second term later in January, with the full extent of his promised tariffs a key factor for the economic outlook.
Leading economists described 2024 as a year of great divergence, where how you fared in the economy depended on your housing situation.
Interest rates and inflation sapped millions of renters and people paying off mortgages, while boosting the fortunes of largely older people with assets, booming share portfolios and paid-off housing.
2025 will mark a change, according to Challenger chief economist Jonathan Kearns, but not a quick one.
"I think it's going to be a slow grind out of the situation that we're in."
"GDP growth will slowly pick up as the effects of high inflation dissipate, and consumers will have a bit more confidence in spending once we start getting some interest rate cuts," he predicts.
Jonathan Kearns, chief economist of investment manager Challenger, says there are areas of strength in the economy. (ABC News: John Gunn)
But he expects growth in gross domestic product (GDP) — the value of all the goods and services created in a certain time — to recover in 2025, but only slowly.
It's part of a complex forecast for the economy in the coming year.
ABC News spoke to leading economists, whose views impact the allocation of billions of dollars, about what they see happening.
Interest rates to fall, but not quickly or soon
AMP deputy chief economist Diana Mousina says if we take statements of the Reserve Bank as sacred texts, we would need to see inflation well under control before it starts to cut interest rates.
After conflict in the Middle East, Ukraine and beyond, AMP deputy chief economist Diana Mousina hopes for the easing of tensions: "I think it could be a bit of a quieter geopolitical year." (ABC News: John Gunn)
But most of the market, and the analysts that cover the field in intense detail, see the central bank cutting rates, most likely beginning at its May board meeting.
"Our view is that we're going to get a faster slowing in the Australian economic backdrop that will really push the Reserve Bank to start cutting interest rates in early 2025."
Independent economist Nicki Hutley would be "proactive" and cut rates from February, she says, while at the same time not expecting the RBA to take her advice on that.
Economist Nicki Hutley expect divergent economic out comes to persist in 2025 until consumer demand strengthens. (ABC News: John Gunn)
"I think it would be very unusual if we weren't to see lower rates in the first half of (2025), if not the first quarter," she says.
But she has a warning for stretched borrowers expecting relief from large repayments on variable mortgages.
"We can't expect massive cuts in rates — the neutral rate of interest, the cash rate, is just over 3 per cent around most people's estimates.
"So yes, we might see a couple of rate cuts, two or even three, but we shouldn't expect to see very, very sharp or substantial rate cuts through that period."
Inflation to slow 'into the band' as price rises ease
The reason we can expect cuts is economists predict inflation, the rate of price increases, will slow to be within the central bank's "target band" of between 2 to 3 per cent annually.
The monthly and quarterly inflation numbers have come to dominate our news, political and economic cycles. The latest "read" had prices rising at at 2.8 per cent annually, the lowest pace of growth since inflation took off in mid-2021.
But the 'trimmed mean' measure of underlying inflation that the RBA most closely watches rose in October to 3.5 per cent annually.
Rates and inflation create a ‘winner-takes-all’ economy
Photo shows Office workers cross the street in Sydney
"I think underlying inflation, which is obviously what the Reserve is concerned about, will come back into the band," tips Ms Hutley.
George Tharenou, chief economist of UBS Australia, sees both headline and trimmed mean inflation continuing to "moderate".
He expects federal government energy bill subsidies to continue beyond their planned end.
"That's going to help keep the headline inflation rate basically around where it is, just under 3 per cent year-on-year."
Unemployment to rise, as economic growth slows
The strong labour market was the surprise of 2024. So what will 2025 hold?
"I think we're still going to see the unemployment rate drift up a little bit higher," Dr Kearns forecasts.
The Reserve Bank has said it needs to see unemployment higher as a pre-condition for cutting rates, and forecasts it at 4.3 per cent in 2025.
That guess might be under, in the long run.
"Historically, we've actually seen that the unemployment rate doesn't actually peak until well after the cash rate starts being cut, so we could still see the unemployment rate drifting up in the second half of next year."
How low can the Aussie dollar go?
Photo shows Australian money
Ms Hutley agrees that joblessness will rise this year, and predicts wage growth has "definitely" peaked.
"We know the public sector can't just keep adding and adding (jobs) and that'll take pressure off the labour market," she says.
Mr Theranou expects unemployment to rise in 2025, but not to deteriorate into a major issue.
"Simply because the growth rate of the economy is below trend or potential, and so companies are facing a difficult operating environment, profitability growth is quite modest."
China's sluggish economy to impact ours
Australia relies heavily on the economy of our largest trading partner, China.
It has struggled all year, with bank collapses, a slumping construction sector, limp consumer demand and stimulus packages that haven't fired up the economy.
Ms Hutley suspects we're "not going to see a lot of change", with the massive spending injections — which boosted demand for our exports such as iron ore — a thing of the past.
"The government there seems to be quite reticent to go back to its old manual of 'Let's do massive infrastructure spends!', which Australia used to benefit from."
Ms Mousina disagrees, tipping more stimulus announcements as the government tries to fire up a faltering economy.
"People often forget that the Chinese economy is still growing by about 5 per cent year on year," she says, with the economy about five to six times larger than it was a decade ago.
"The demand that you need to see for things like our commodities doesn't need to be of the same magnitude that they were 10 years ago to create the same type of upside."
Trump 'volatility' as president-elect floats Trade War II
This month brings the inauguration of incoming US president Donald Trump, for a second term.
He's pledged the mass deportations of migrant workers and a huge reduction in government regulation of different industries.
For the economy, the biggest impact will likely be from tariffs imposed on goods from foreign countries, including steep taxes on Mexico, Canada and China.
Markets at the mercy of Trump
Photo shows Donald Trump points to the crowd while standing on stage surrounded by United States flags.
For China? Much more.
"We don't have a lot of trade with the US, and so we'll be less directly affected," says Jonathan Kearns.
But China is our biggest trading partner.
"To the extent that China is negatively affected by a trade war with the US — that will spill over to Australia."
AMP's Diana Mousina expects that the way Donald Trump uses the share market "as sort of a barometer for his performance" could be a protective factor, meaning it's unlikely he'll follow through on his more outlandish tariff promises.
'Nothing to sing and dance about' as 2025 grinds on
Aside from the "volatility" Mr Kearns sees the incoming US president bringing, the Challenger chief economist believes 2025 could be a quieter year.
"We're all waiting to see whether productivity growth can pick up," he adds.
Mr Tharenou described 2024 as a "winner-takes-all" economy and expects some continuation of that this year.
"This divergence of trends is probably going to persist," he says, with unusual elements like the resilience of house prices leading to a split in the economy.
George Tharenou, UBS chief economist in Australia and NZ, says 2024 has led to a "winner-takes-all" economy. (ABC News: John Gunn)
Nicki Hutley sees "more of the same" in the economic year ahead.
Tax cuts will help households, "sluggish" growth rates should lift and a "modicum of real wages growth" will make life easier as people get on top of inflation, she adds.
"Improvement overall, but very modest improvement and nothing to sing and dance about."