Structural issues threaten Australia’s economic outlook: Deloitte

In its latest Deloitte Access Economics Business Outlook, Deloitte has forecasted that the RBA will cut interest rates by 75 basis points across 2025 followed by a further 75 in 2026.

“After a sluggish 2024, Australia’s economy looks as though it may be past the low point for this economic cycle, with the combination of a strong labour market, falling inflation, tax cuts, emerging real wage gains and imminent interest rate cuts contributing to a better-than-expected outlook in 2025,” Deloitte Access Economics partner and report co-author Cathryn Lee said.

“However, ‘better-than-expected’ is not the same as ‘good’, as has been revealed by escalating business insolvencies, considerable mortgage stress and a deep per capita recession.”

While wages are beginning to tick upward, Deloitte predicted that workers will not recover their pre-pandemic purchasing power before 2030.

Furthermore, Australia’s economy faces numerous structural issues, according to Deloitte.

“Significant structural challenges weigh on Australia’s economic outlook. A lack of comprehensive economic reform, geopolitical risks, an uninspired policy discourse, and the unaffordability of decent housing suggests there is an opportunity to do better,” Stephen Smith, Deloitte Access Economics partner and report lead author, said.

Industries reliant on discretionary consumer spending, such as hospitality and retail, have been stifled by sluggish household spending. However, public sector growth has helped to plug the gap left by falling business investment, with government spending predicted to reach its highest share of the economy since 1986, excluding the pandemic.

Australia’s housing crisis is also likely to persist for at least another decade as dwelling construction remains below target, the report said. Deloitte predicted that fewer than 1 million homes will be constructed over the next five years, falling short of the National Housing Accord target of 1.2 million dwellings.

Middling productivity performance is also set to weigh down Australia’s economic growth. Economic output per hour worked has remained stagnant over the past decade and has declined since 2020.

The report also said economic conditions point to interest rate cuts this year. Underlying inflation has moved towards the RBA’s target range of 2 to 3 per cent, economic growth has slowed to its lowest rate since the 1990s and Australia has been in a per-capita recession for over a year, it noted.

However, Australia’s resilient labour market, robust government spending and the falling dollar may delay rate cut decisions.

“The outlook for 2025 could be seen as a kind of economic Rorschach test – the interpretation depends on an individual’s perspective, something that will become increasingly obvious as we move towards the first Reserve Bank meeting of the year in February and onwards towards the federal election,” Smith said.