2025 Economic Outlook: Key Factors for Small Businesses

Australia’s economy faces a slow recovery in 2025 as inflation remains above the Reserve Bank’s target, delaying potential interest rate cuts until mid-year.

Cost-of-living pressures persist, with stagnant discretionary spending despite tax cuts and subsidies. Government spending continues to drive economic growth, which sits at its slowest since 2020.

Globally, trade tensions from President-elect Trump’s proposed tariffs could impact Australia’s largest trading partner, China, potentially affecting exports and regional stability. Small businesses should prepare for ongoing challenges in managing costs, financing, and navigating global uncertainties.

Interest rates

At the last Reserve Bank Board (RBA) meeting, RBA governor Michele Bullock recognised the easing of headline inflation from 5.4% to 2.8% over the year to September 2024 but suggested that the economy still has some way to go before inflation is sustainably within the 2% to 3% target range. The RBA appears wary of volatility and wants to see inflation sustainably trending down before making any move. Commbank is predicting a February 2025 rate cut, ANZ and Westpac May 2025, and NAB June 2025.

Cost of living pressures

The National Accounts released in early December took economists by surprise with living standards growing by a mere 0.2% in the September quarter – the expectation was much higher. Discretionary spending only increased by 0.1%.

The personal income tax cuts that came into effect from 1 July 2024 helped households, as did energy subsidies, but the impact is still working its way through the system. At the same time, mortgage costs continue to rise as past increases continue to impact.

Through the year, Australia’s economy grew 0.8%, the lowest rate since the COVID-19 affected December quarter 2020. Economic activity in the Australian economy right now is heavily dependent on Government spending.

Slow and steady is the expectation for 2025.

The ‘Trump effect’

President-elect Trump will recite his oath of office on 20 January 2025. The Trump administration will hold the presidency, Senate and the House.

For Australia, the question is the likely impact of some of President-elect Trump’s stated policy objectives including the imposition of tariffs. On social media, Trump has said:

“…as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.”
“…we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America.” This in response to claims that China is responsible for massive amounts of drugs, in particular Fentanyl being sent into the US.

The issue for Australia is the secondary impact of a trade war. China is Australia's largest two-way trading partner, accounting for 26% of our goods and services trade with the world in 2023. A slowdown in the Chinese economy impacts Australia and the region generally.

An immediate impact of the idea of a trade war has been the decline of the AUD/USD, currently sitting at around 63c.

In 2025, small businesses must navigate a complex landscape shaped by economic uncertainty, inflationary pressures, and global trade dynamics. Proactive planning, efficient cost management, and a focus on resilience will be essential for maintaining growth and stability. By staying informed on domestic and global developments, small business owners can better position themselves to adapt and thrive in an evolving economic environment.