2025 economic and RBA outlook

From Challenger Chief Economist Dr Jonathan Kearns

GDP forecasts for longer horizons tend not to move around much. Typically there is little change in what we know about economic growth a year or more into the future. Through 2023 forecasts for average GDP growth in 2024 remained very stable. But then over 2024, as data releases informed on realised conditions and provided a clue to near term prospects, forecasts for GDP growth in 2024 in the US were consistently revised substantially higher but for Japan consistently revised lower. The US economy surprised this year with its resilience to high rates and inflation. In contrast, economic growth in Australia and the EU has transpired pretty much as expected at the start of the year.

Forecasts for GDP growth in 2025 have again been stable this year, although late in the year forecasters have anticipated a slightly stronger US economy as some of its recent growth persists. Forecasts for European growth have been revised down a little.

In contrast to GDP, inflation forecasts for 2024 were revised higher in 2023 for Japan and Australia, but have been quite stable this year for all four economies. After being surprised by the strength of inflation in earlier years, this year the decline in inflation has finally transpired largely as expected.

Forecasts for inflation in 2025 have been pretty stable, with the exception of Japan where inflation forecasts have been revised higher to around the central bank’s target of 2%. Finally, Japan has, at least for now, escaped its low inflation trap.

This week, the Treasurer announced two new appointments to the RBA monetary policy board, after the RBA reform legislation finally passed on the last day parliament sat. The RBA will now have separate monetary policy and governance boards. The monetary policy board will have six external members joining the RBA Governor and Deputy Governor, and the Treasury Secretary. This continues the old board structure which is an anomaly internationally having a majority of external members. The Bank of Japan (BoJ) is the only other major central bank with a majority of external members.

The new appointments slightly increase the share of external members with an economics degree. However, fewer RBA external members have economic qualifications than at the central banks of England, Norway and New Zealand. Of course other skills can be useful on the policy committee,  but the norm at these other central banks is having members with the economic training that enables them to challenge the central bank insiders, contributing to good policy outcomes.

Fewer external members at the BoJ have economic degrees, but most have long careers in related disciplines and external members work full-time at the BoJ. In contrast, the expectation for RBA external members is that they devote on average only one day per week to their RBA responsibilities. With the RBA external members effectively having greater responsibility under the new board structure, given the scale and importance of their role, they really should be devoting more than one day per week to plotting the path for interest rates. It will be important to watch the dynamics of the new monetary policy board and the role of external members in determining the timing in 2025 of the first cut in rates.

This is the last Macro Musing for the year. Graph of the Week will return in mid January. Best wishes to everyone for the break.