Core inflation within target range
Headline CPI was stable at 2.4% p.a. in March quarter while trimmed mean inflation (TMI) dropped within RBA’s target band for the first time since December 2021.
TMI (which strips out the energy subsidies) fell to 2.9% from 3.3%, while the Producer Price Index (for industrial prices) was stable at 3.7%.
The quarterly growth in CPI was driven by higher operating costs of education, which are being passed on as increased school fees, and rising electricity prices due to lower rebates compared to the previous quarter. The RBA forecasts that headline CPI will rise again in late 2025 when household energy subsidies expire.
2024 the weakest year since 1991 recession
Australia's economy continued to slow across 2024. Real GDP grew by 1.3% p.a. at year end, spending most of the year at or below 1.0%.
This was well below the 2.3% long-run average, and now marks the longest period of sustained low growth since the recession of 1991.
Economic conditions are currently weaker than during both the early 2000s US/EU recession and the GFC.
Forecasters expect an uptick in growth in 2025, but the spectre of US tariffs and global trade war poses significant downside risks to the outlook.
Investment growth to decelerate in 2024-25
Private business investment stagnated throughout 2024, with negligible growth of 0.3% p.a. at year end.
This was largely driven by a sharp decline in mining investment over the last 18 months, which has fallen into contraction.
However, the non-mining sector also saw a significant drop – investment growth rates fell from 9.2% at the end of 2023 to just 1.8% by late 2024.
This reflects overall economic weakness as businesses scaled back investment plans due to lower growth and less favourable market conditions.
Manufacturing recession
Australian manufacturing entered into recession in the back half of 2024, with output contracting at a 1.7% p.a.
Apart from petrochemicals, every branch of manufacturing ended the year in recession. Metals were especially weak, posting a 6.4% p.a. decline.
Many allied industrials suffered the same fate in 2024, with wholesale trade, mining and construction all posting material output falls over the year.
By contrast, the strongest industries are in the non-market sectors of education, public administration and health, which all saw significant growth in the year.
This reflects the ongoing reliance on government spending to prop up the economy, which primarily flows to non-market sectors but not to industrials.
Annual Wage Review impact on wages
The Annual Wage Review (AWR), currently underway at the Fair Work Commission, has in recent years been a major contributor to overall wage rises in Australia.
High increases in the last three AWRs have severed the link between minimum and overall wages. Since 2022, award wages have risen by 13.2%, compared to 10.4% for EBAs and 10.6% for market-based wages.
With awards covering a quarter of the workforce, these high AWR decisions have forced overall wages growth higher than labour market conditions warrant.
The 2025 AWR decision is due in early June. Ai Group has argued on behalf of employers for a 2.6% increase, the ACTU 4.5% on behalf of unions.
Income and company taxes drive rising burden
Australia’s tax-to-GDP ratio reached 30.0% in 2024-25. This was the first time the tax burden has crossed the 30% threshold in over two decades.
All the growth has been due to increases in personal income and company taxes, which in GDP terms have risen by 1.2% and 1.3% over the last decade. All other forms of taxation have remained stable.
Company and personal income tax fall on productive activities. As their burden rises, the tax system becomes more biased against investment and employment generation. This points to the need for tax reform to rebalance the composition toward broader-based taxes.
