Rate cuts expected but labor market challenges persist: report
The Commonwealth Bank and KPMG have released optimistic economic forecasts, citing anticipated rate cuts that could begin as early as next month.
These projections come after below-trend economic growth in 2024, with GDP expected to rebound to 2.2% by the end of 2025, compared to just 1.1% in 2024.
Gareth Aird, Commonwealth Bank’s head of Australian economics, emphasized the significant impact of restrictive monetary policy on the national economy, particularly through rising mortgage repayments that have reduced consumer spending. However, he highlighted positive signs as inflation eases.
“The economic slowdown has led to a decline in inflation across both headline and underlying measures, which strengthens the case for the Reserve Bank of Australia to begin normalizing the cash rate,” Aird said, according to MSN
He predicts a “modest easing cycle” by February 2025, contingent on fourth-quarter 2024 inflation data showing trimmed mean growth of 0.5%.
KPMG’s chief economist, Brendan Rynne, shared a similar growth outlook but expects most of the economic acceleration to occur in late 2025 when the RBA initiates rate cuts.
“We see these cuts starting mid-2025, though there is justification for an earlier move,” Rynne said.
After holding the cash rate steady at 4.35% for over a year, the RBA will meet on February 17–18. Market predictions show a 66% likelihood of a rate cut during this meeting. If the RBA holds rates in February, the next opportunity will be at its March 31–April 1 meeting, where markets are pricing in a 100% chance of a rate cut.
Despite the encouraging GDP forecasts, Australian employment conditions are expected to weaken. The unemployment rate, currently at 4%, is forecast to rise to 4.2% by KPMG and 4.3% by CBA.
Rynne highlighted recent labor data, noting an increase in part-time roles while full-time employment declined.
“This suggests that the labor market, long resilient, is beginning to show signs of fragility,” he said.
He also cautioned that the reliance on public sector jobs, supported by government spending, is not sustainable for long-term employment growth.
Gareth Aird echoed these concerns, stating that the unusually strong labor market of 2024 is likely to soften in 2025. “We don’t expect non-market employment growth to remain as robust as it was in 2024,” Aird said, adding that private sector job creation could recover slightly in 2026 as GDP growth improves.