With 2024 fast approaching its conclusion we thought it best to have a really good deep dive into where the Australian economy sits and therefore where the opportunities and risks are for 2025.

It’s pretty clear that things are soft to say the least but there are signs the household is stirring. Government spending is remaining elevated, inflation is moderating but growth is poor. 

So let’s dig into the data that matters

 

The Consumer

Retail sales saw a solid lift in October 2024, growing by 0.6% month on month (MoM) and 3.4% year on year (YoY)—the strongest annual growth since May 2023 and that is before we see the full picture of Black Friday sales which are on track for a record print with estimates as high as $7.2 billion for the period.

This improvement indicates that consumers are starting to spend some of the Stage 3 tax cuts introduced in mid-2024. 

We should point out that a significant portion of the Stage 3 tax relief appears to be going into savings rather than immediate consumption. Household deposits surged by 8.3% YoY reinforcing the notion that Australians are prioritising financial security over spending. This has been reinforced by the latest GDP figures – more on that later

However what’s also telling heading into the end of the year is consumer sentiment has rebounded although modestly. We will say it’s not a high bar as consumer sentiment was at levels not seen since the pandemic. But it is picking up and that must be seen as a positive.

Wage growth appears to be slowing, a weaker signal despite continued strength in employment figures. All this creates a mixed picture of the consumer for 2025. We expect a gradual recovery in spending as rate cuts are likely in 2025, the full effect of the Stage 3 tax cuts hit full levels ($23 billion to be exact which is about 0.8% of GDP) and the Federal Government gives out more handouts with an election at hand. 

This is likely to support consumption over the full year however it’s not going to create an immediate boom. We will be monitoring consumer staples and discretionary sectors for signs of movement in the early part of the second quarter.

 

The Private Side of credit

Private credit growth continues to surprise on the upside, something that is likely to keep the RBA up at night. October’s 0.6% MoM increase was above expectations and that led to YoY growth being up a staggering 6.1%—the fastest rate since May 2023 and this after 13 rates over the previous year. This growth is mainly down to housing and overall credit growth picking up significantly. 

However, credit growth appears to be nearing its peak, likely to plateau around 6.5% y/y in the coming months. Several factors signal moderation ahead:

1. Business Investment: Surveys show a downgrade in capital expenditure intentions.
2. Home Loans: Demand is likely to stabilise as dwelling price growth flattens. But the RBA cutting rates may change the trajectory later in the year
3. Personal Credit: Slowing household borrowing suggests cautious consumption and a switch back to savings which manifested in Household deposits growing by 1.3% MoM in October seeing the annual growth in savings to 8.3%strongest pace since mid-2022. 

 

Housing Market Shows Signs of Cooling

Dwelling prices are clearly losing momentum. November prices edged up just 0.1% MoM—the weakest monthly gain since January 2023—while annual growth moderated to 5.5%, the slowest since September 2023. 

The number of dwelling sales also weakened sharply, though some of this reflects temporary reporting distortions. Any sort of recovery is projected only after the RBA begins cutting rates, which again is likely to be in the latter half of 2025. This cooling trend aligns with broader economic signals of moderation in housing demand.

This is a problem for the Bank and REIT sectors. The multiples in these two sectors are at historically high levels. The fundamentals backing banks in particular are starting to look shaky as loan growth is stagnant and house prices are falling in 2025. Will the bank lead recovery continue next year? That is our question for the market.

 

The Economy and all the rest

GDP – is faltering there is no doubt about that now. Figures to the end of September showed, Australia’s real GDP expanded by just 0.3% QoQ and 0.8% YoY well below the consensus 0.4% and 1.1% expected. This is a materially disappointing outcome and has triggered a new cyclical low, not seen (excluding the pandemic) since December 1991. The questions from the GDP figures are vast and need to be unpacked.

Any recovery in subsequent forward quarters is expected to be modest. As we discussed earlier, households and businesses are grappling with structurally higher cost bases, the need for increased savings and a peak in credit – this cannot be fully offset by potential easing of monetary policy. 

The RBA has a  forecast 1.5% YoY for the final quarter of 2024. Achieving this would require a significant 0.8% QoQ expansion, which seems increasingly unlikely given current economic dynamics and even if we take into consideration the Black Friday sales. 

A miss on this target could force the RBA to revise down its short-term growth outlook.

 

Key Drivers Behind Weak Economic Performance on the Headline.

1. Household Sector Strains:
   The household sector remains weak, with aggregate spending declining slightly in Q3. Rising costs and weak income growth are pressuring budgets, curbing consumption, and keeping the sector in a vulnerable state. Contributed 0.0% in the quarter.
2. Business Investment Slows:
   Business investment softened further, reflecting heightened caution amid economic uncertainty and higher operating costs and tight labour markets in areas of need. All saw 0.0% contribution in the quarter
3. Surprising Uptick in Dwelling Investment:
   Dwelling investment provided an unexpected positive contribution, rebounding slightly from a weak base. However, this increase is unlikely to represent a sustained trend given broader headwinds in the housing market.
4. Public Sector Reliance:
   Countercyclical public demand was the sole driver of growth, accounting for all the economic expansion in Q3 and the past year. Think about that – the only reason Australia didn’t have a negative quarter was from government spending. While this has supported the labour market and provided a buffer to broader weakness, over-reliance on public spending raises major sustainability concerns.

 

Per Capita recession and Productivity Woes

• GDP Per Capita Declines: The headline GDP numbers mask a persistent decline in per capita growth. Q3 marked the seventh consecutive quarter of contraction, leaving GDP per capita 2.2% below its Q2 2022 level, that is a horrible story.
• Productivity Drag: Productivity remains a significant weak spot, further undermining economic resilience. Falling terms of trade have compounded this issue, leading to a marked drop in living standards. Real net national disposable income per capita has declined in five of the last six quarters, echoing the negative income shock seen during past terms-of-trade retracements.
• Compensation Pressures: Weak productivity has translated into falling compensation for employees, which in turn is easing unit labour cost pressures. However, this decline in compensation is exacerbating household financial challenges, limiting their ability to support growth through spending.

 

Where does this leave the RBA?

The RBA faces a complex balancing act. Weak economic growth underscores the need for interest rate cuts to support demand. However, persistently high inflation keeps the central bank in a cautious stance, limiting its room to manoeuvre.

Additionally, the labour market remains tight, partly due to public sector demand, which inadvertently keeps inflationary pressures elevated. This dynamic complicates the RBA’s ability to deliver meaningful monetary easing in the near term.

So where does this leave markets for 2025?

 

Structural Growth Concerns

The Australian economy remains heavily reliant on two unsustainable drivers:

1. Public Sector Spending: While critical in the current environment, excessive dependence on government expenditure highlights a lack of private sector dynamism.
2. Population Growth: Expanding population numbers are bolstering headline GDP but masking underlying weaknesses in per capita terms.

 

Without addressing these structural imbalances, along with improving productivity, achieving robust and sustainable economic growth will remain elusive.

We are therefore mindful of sectors that have run ahead. The ASX 200 has just printed 4 record all-time highs in the past 8 trading days. Momentum indicators are running hot and overbought signals are flashing.

Couple this with the economy falling into the end of the year. 2025 is likely to be a story or two – a recalibration in the first half – followed by a recharge in the second half. With geopolitics thrown in and other issues. 

Volatility is likely to be back with a vengeance in 2025.

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