Economists expect 2025 to be a better year than 2024, with most forecasting a gradual recovery over the next 12 months. Signs of improvement are already evident.

The ANZ-Roy Morgan Australian Consumer Confidence jumped 3.6 points in the first week of 2025. Consumers’ view of financial conditions over the next 12 months jumped 5.7 points while the “time to buy a major household item” subindex bounced 7.2 points

ANZ economist Madeline Dunk now expects the upward momentum in this index to continue through 2025, as tax cuts, rising real wages and eventually rate cuts support household disposable incomes.

However, Morgan Stanley’s economists expect consumers to remain cautious and increase their spending modestly in 2025. Instead, they believe government spending will continue to drive economic growth, particularly in the lead-up to the Federal election, scheduled before May 2025.

According to the Reserve Bank of Australia (RBA), the economy grew by a paltry 0.8% in the year to September 2024, the slowest rate since the early 1990s (if the COVID-19 downturn is excluded).

The unemployment rate held at a historically low 4.1% for the third month in a row and most observers believe changes to the student visa policy will slow overseas migration from its current strong pace.

NAB economists conclude: “Overall, our outlook is still very much for a soft landing, with the slowing in population growth offset by an improvement at the individual level as pressures on the household sector ease.

“That said, business investment growth is slowing and there are only tepid signs of a recovery in dwelling investment. Alongside consumption, both of these components will need to see some improvement for the private sector to gain momentum.”

The RBA’s stance

As was generally expected, the RBA left the cash rate unchanged at 4.35% in December, cautioning that underlying inflation was still too high. But it said it was gaining confidence that inflation was moving sustainably towards its target range of 2% to 3%, prompting many economists to predict the first cuts to start around May.

However, the November Consumer Price Index inflation figures, released in January, have changed the picture, implying that inflation is no longer the great concern it was 18 months ago.

They showed that inflation rose 2.3% over the year to November, marginally up from the 2.1% recorded in October. More importantly, the RBA’s “trimmed mean” measure of underlying inflation, which removes the most extreme price changes, fell from 3.5% to 3.2%.

Bond market investors suggested there was now a 70% chance of a pre-election February rate cut, up from 61% before the figures were released.

In addition, several economists, including those at ANZ and Macquarie Bank, brought their rate cut predictions forward from May to February. Commonwealth Bank economists were already forecasting a February cut before the figures were released.

If these economists are right, it will be the RBA’s first cut in over four years.

At the time of writing, Westpac and NAB were still forecasting a May interest rate cut.

The Trump effect

This year, all eyes are on President Donald Trump’s second term in office.

“Some of his policy agenda is very much the same as his first term, but it won’t turn out completely the same. A lot has changed since then. There will be similarities, but there will also be differences,” says Westpac chief economist Luci Ellis.

She notes that some of Trump’s proposed tariffs will go through. That means that prices in the United States may rise and that some countries on which tariffs are imposed will be exporting less to the US, but she says there will also be other responses and reactions

“It’s quite likely that China will reconfigure its own production so that Chinese companies are doing more production elsewhere, such as Mexico, to avoid tariffs,” she says, noting that businesses will try to avoid higher costs by changing where they produce their goods and by redirecting their exports to countries that aren’t imposing tariffs.

“For example, Australia and other countries that aren’t imposing tariffs might see a greater range of Chinese products or lower prices of Chinese manufactured goods because some Chinese producers will be seeking markets other than the US.”

Macquarie Group’s chief economist, Ric Deverell, adds that if Trump does impose large tariffs on China, China will probably move to stimulate its domestic economy, which might be good for Australia. “So, net-net, I think it will drive volatility, but I don’t see it having a really big impact over 2025,” he says.

For his part, Tariffs aside, Oster warns that generally, a rise in tariffs will probably mean slower economic growth and higher inflation than would otherwise have been the case – and that interest rates won’t come down quite as quickly.

The bottom line

As we move further into 2025, small to medium-sized enterprises to continue to suffer resource shortages, reduced customer spending and continued inflation, all of which strain limited resources. Businesses can be proactive by being prepared for challenges, such as cyber-attacks or high fees on international transfers, and planning for resource allocations or lower-fee alternatives, such as government programs or lower-fee facilities offered by non-bank lenders.

Dean Firth, head of Macquarie Business Banking, says: “I think 2025 will continue to present challenges, anchored to the cost of living, the cost of goods and services, the cost of labour and the overall cost of doing business” he says.

“In this challenging environment, you need to focus on the things you can control.”

Financial facilities to help business growth

If you’re planning to grow your business in the current economic climate, there are many challenges that present potential obstacles to success. With cash flow pressures set to ease in the immediate term, it’s a good time to explore your options – and there are several funding options designed to help businesses remain stable and grow, even in challenging economic conditions.

Grow your business with ScotPac

ScotPac has been helping Australian businesses survive and thrive with fast and flexible finance solutions for decades. Our commercial funding options include:

All our facilities are designed with the needs of Australian business owners top of mind. Plus, they’re all completely customisable, so you can benefit from a tailored funding solution that suits your business’s needs.

To find out more about our Invoice Finance, Trade Finance, Asset Finance or Business Loan solutions or to discuss your goals for your business, get in touch with ScotPac’s lending specialists today.