Uncertainty is the biggest threat to Australia’s growth this year

We have downgraded our forecasts for Australia due to the major disruptions to the global economy caused by changes to US trade policy. We now expect growth of 1.8% in 2025 (down from 2.1%), and 2.1% in 2026 (from 2.5%). Australia’s direct exposure to higher US trade barriers is low. But weaker growth in major trading partners will be a negative shock to external demand.

• More importantly, the ‘liberation day’ tariff announcements and subsequent changes to policy have generated enormous uncertainty and higher risk aversion. We expect a pullback in business investment and hiring, which will compound a sharp fall in consumer sentiment. Although strong, these headwinds won’t derail the economy entirely in 2025.

• The fall in external demand will be disinflationary in the near term. Oil prices have already fallen sharply, making for weaker headline inflation in 2025. Moreover, a likely glut of exports coming from neighbouring economies that are worst affected by tariffs should exacerbate the current weakness in goods inflation.

Chart 1: We expect GDP growth of 1.8% in 2025