Key considerations for business owners as they plan for 2025

It’s that time again. At the end of each year, economists dust off their crystal balls and take a look at what lies ahead for businesses and the economy. As always, it’s important to focus on the biggest forces affecting the outlook. For the year ahead, these are likely to be:

• The ongoing effects of high inflation and high interest rates on the cost of living and the cost of doing business.

• The Megatrends affecting business over the next few decades:

  • AI and technology

  • Climate change and the energy transition

  • The ageing population

  • Geopolitics

  • Rising inequality

• The planned policies of the second Trump Administration, and their flow-on effects within the Australian economy.

• There’s also a Federal election to contend with!

 

Let’s get into a little more detail.

The RBA Board has signalled that it won’t reduce interest rates until it’s confident that inflation (as measured by the trimmed mean CPI) is tracking back to 2.5%. That’s likely to require two quarterly trimmed mean CPI readings of 0.7% or less. Which means interest rate relief may not start before May 2025, in the absence of a weaker labour market.

That said, it’s still likely that Australian interest rates will ease somewhat over 2025 (perhaps by around 0.75% to 1%). As inflation has moderated more quickly overseas, global central banks have begun to reduce interest rates. With unemployment remaining quite low, this means the prospects of an economic soft landing remain favourable. Expect a slowdown, but not a recession.

However, slower inflation does not mean that prices have fallen, merely that prices are rising at a slower pace from a much higher level. As such, the cost of doing business and cost of living remain much higher than before COVID.

 

The Trump Administration policies could complicate things.

Donald Trump’s presidential re-election adds uncertainty to the outlook for 2025. His proposed policies include:

• A major tariff agenda (10-20% tariffs on all countries’ goods and 60% on Chinese goods)

• A promised major crackdown on illegal immigration

• Company tax cuts and income tax cut extensions

• A blitz on government inefficiency

• Making America the cryptocurrency capital of the world

The first Trump Administration was characterised by many policy changes being announced on Twitter/X. We have already seen social media used to promise 25% tariffs on Canada and Mexico, and an extra 10% on China from day one of the new administration.

The proposed tariffs and migration actions – if fully introduced – are likely to be inflationary for the US and will restrain the ability of the US central bank to reduce interest rates as significantly. By boosting the US dollar and lowering the Australian dollar, there will be some flow-on inflationary impact to Australia. A lot depends on how China and other countries react to the imposition of tariffs –retaliatory tariffs around the world (a trade war) would more broadly raise inflation and slow growth as global trade is reduced.

 

Key takeaways for business owners.

We’re entering a more uncertain time for business with the likelihood of significant US tariffs on many countries, and very high tariffs on Australia’s major trading partner, China. A global trade war, should it transpire, would not be good for economic growth or business. It could be expected to be accompanied by lower commodity prices and a lower $AUD.

On the positive side, inflation is slowly moderating and Australian businesses and consumers may see some mild interest rate relief beginning in Q2 2025. This will benefit the housing sector and help ease some cost of living pressure on those with mortgages. Businesses will continue to experience both the opportunity and challenge of the longer-term Megatrends.

Of course, there’s the Australian Federal election to be held by late May, to throw into the mix. That seems likely to be a very closely run race, something that wasn’t expected six months ago. This creates additional uncertainty, especially in relation to energy policy with the opposition proposing nuclear power.

As always, business owners can deal with uncertainty by remaining very focused on running their business well, carefully managing expenses, serving their customers well, and looking for ways to improve productivity.

 

Author: Ivan Colhoun  Consulting Economist for Bank of Sydney Bachelor of Economics (Hons) Ivan is a highly experienced chief economist and keynote speaker on the Australian economy and financial markets. His career has included leadership roles within financial and professional service organisations, as well as the Reserve Bank of Australia.