‘Worst is probably behind’ the Australian economy, AMP says

While Australian consumer sentiment remained in slightly negative territory in February, trends indicate that confidence is likely to grow this year following a trough.

“Overall, today’s surveys on both consumers and businesses show that the worst is probably behind for the Australian economy. With confidence starting to increase from the trough, growth will also pick up from here, albeit from a very low base,” said AMP economist My Bui.

Pessimists still outweighed optimists in February, according to data from the Westpac-Melbourne Institute. Consumer confidence was at 92.2 in February, marking the third year in a row that the index has remained below the neutral level of 100, the longest period of negative readings since the 1990s.

Forward-looking surveys including future household finances, economic conditions or “time to buy a major household item” are all trending upwards, pointing towards a boost in consumer spending throughout 2025.

“While recent improvements in sentiment have been driven by prospects of rate cuts, better disposable income thanks to tax cuts/fiscal support, and lower inflation, consumers remain relatively cautious around household finances,” said Bui.

“We believe that household consumption in 2025 will likely get a boost from a low base in 2023-24. Consumers can also turn more positive as the RBA starts cutting rates and inflation pressures continue to stabilise.”

Business conditions have also appeared to stabilise at slightly positive levels, after easing throughout 2024.

“Cost pressures remain elevated for businesses and are not being fully passed onto consumers, which may be weighing on profitability and therefore overall business conditions.” said NAB Chief Economist Alan Oster.

“Conditions weakened in the first read of the year,” Oster added. “This was driven by weaker trading and profitability conditions, while employment conditions marginally improved. Of note, retail conditions pulled back after strong gains in December.”

NAB price surveys found that labour cost growth increased slightly to 1.8 per cent quarter-on-quarter, while input cost growth eased to 1.1 per cent and final product prices remained unchanged at 0.8 per cent.

“Overall, labour costs have been stickier, and while they have consistently trended down, the progress has been slower than the other two (input & output prices) surveys,” said My Bui regarding cost pressures businesses are facing.

House price expectations have also been trending downwards since mid-last year. However, Bui predicted that the house price downswing will be short-lived due to incoming RBA rate cuts.

According to Bui, cautiously optimistic consumer and business statistics should not get in the way of the RBA cutting rates in February, although “they might suggest a gradual approach to easing throughout 2025.”