Last updated: August 13th, 2025
Are you one of many Australians affected by higher interest rates and high inflation? With income growth that’s well short of the rising cost of living, you might feel that we’re definitely in the midst of a widespread downturn in the economy.
While there are no conclusive diagnostic criteria for determining when Australia’s economy is in recession, there are guiding indicators.
Let’s explore what a recession means – and how Australia’s economy will perform in 2025.
| Key Takeaways: |
|---|
| Australia emerged from a ‘per capita’ recession in March 2025, after seven straight quarters of declines. But Q1 data released in June puts per capita GDP into negative again. |
| Globally, advanced economies continue to face recession as they fight to curb inflation and deal with tariffs — which poses additional risk to Australia. |
| Forecasts from the RBA indicate unemployment will remain low, and our GDP growth will remain positive. |
What Does A ‘Technical’ Recession Mean?
If a country’s economy experiences weak or negative growth for six consecutive months, some economists would call it a technical recession.
Above: Economic growth has cooled sharply after the RBA hit the brakes.
The sustained drop in economic growth is measured by the change in gross domestic product (GDP) produced by a country, adjusted for inflation (also known as real GDP).
Important!
Negative growth over two quarters is NOT the definitive yardstick of an economy’s health.
Reduced production is an important indicator — but many global economists also take into account factors including:
- Employment levels.
- Wage growth.
- Manufacturing outputs.
- Retail sales.
- Consumer sentiment.
In Australia, a prolonged decline in GDP combined with a substantial increase in unemployment is generally agreed to signal a recession.
Above: The economy contracts and recovers as part of a normal business cycle. The central bank will adopt a loose monetary policy to prevent a significant decline in economic growth.
This occurs when the business cycle contracts from a peak of economic activity and high prices, leading to less consumer demand and businesses trimming their staff levels.
(Related: What Happens In A Recession?)
Will High Interest Rates Lead To A Recession?
A number of countries experienced recession or were on the brink due to the slow economic recovery from the COVID-19 pandemic.
Many central banks committed to raising interest rates to stifle inflation - and policy easing only commenced in mid-2024.
(Related: Interest Rate Forecast: When Will RBA Cut Rates?)
Or in Australia’s case, in February 2025, when the Reserve Bank of Australia (RBA) reduced the cash rate to 4.10% after it sat at 4.35% for more than 12 months.
The RBA provided further relief in May 2025, cutting rates by 0.25% for a second time, bringing the policy rate to 3.85%.
But August brought another rate cut, with the RBA slashing the rate to 3.6%, the lowest since mid-2023.
Markets are convinced the Reserve will have the cash rate at 3.35 per cent by December, its lowest point since early 2023.
A debate continues in many countries about whether central banks left rates too high for too long, and whether they’re now cutting deep enough or quickly enough.
Important!
Efforts to cool demand also contribute to a flattening of economic growth. The trick is getting the balance right, to avoid entrenched economic weakness.
For instance:
- The US had a recession scare in August 2024, when unemployment spiked, triggering the first rate cut in four years in September 2024, with two more cuts following. The Federal Reserve has kept rates on hold at 4.25%-4.50% so far in 2025 due to uncertainty with president Trump’s tariffs. US GDP was negative (-0.5%) for the first time in three years in Q1, 2025.
- The UK’s GDP grew in early 2024, bringing the country out of a recession in late 2023 — but then slowed again. Inflation slowed to 2%, but the UK's economy experienced zero growth between July-September 2024. The Bank of England cut rates four times - bringing its rate to 4.25%. Its CPI has climbed up to 3.6%, yet a further cut is expected in August due to growth worries.
- Revised stats released in July 2025 revealed that Germany suffered a technical recession last year. Its economy has barely grown since and annual growth was negative for two consecutive years. The European Central Bank (ECB) was one of the first to cut rates in mid-2024 and made its eighth cut in June 2025 in light of tariff concerns. Germany’s GDP contracted by 0.1% in Q2 2025.
Most central banks remain cautious as they strive to keep a lid on inflation, especially given the increased geopolitical unrest and policy uncertainty.
Did you Know?
In July, the International Monetary Fund (IMF) projected global growth at a below-average 3.0% in 2025 with downside risks from tariffs, elevated uncertainty and geopolitical tensions.
The IMF highlighted how growth could be weakened by higher tariff rates, disrupted global supply chains and increased risk aversion, which could “reignite volatility in financial markets.”
Trump’s tumultuous leadership style continues to lift risks - with reinstated and expanded tariffs announced on 31st July - expected to slow growth everywhere. Including reducing US annual GDP by 0.36%.
(Related: Best Cryptocurrency Exchanges In Australia.)
Unemployment data also looks weak in the US. Jobs are being created at the slowest rate in decades, outside of recessions.
Moody’s Analytics chief economist Mark Zandi said on 4th August that increasing tariffs and restrictive immigration had led the US economy to “the precipice of recession.”
Jobless figures are also higher in the UK, rising to a four-year high of 4.7% in July.
It follows on the heels of disappointing monthly GDP data (with falls in both April and May).
Combined with a decline in the annual rate of pay growth, it “opens the door for an interest rate cut in August,” according to Yael Selfin, chief economist at KPMG UK.
Here in Australia, a prolonged downturn in the US will play into the RBA’s decision-making - it adds further uncertainty to our growth prospects domestically.
Above: Number of times the word "uncertain" appears in RBA's statement on monetary policy. Clearly, the situation has become more uncertain.
The RBA’s outlook from May looked at multiple scenarios, one of which points to recession in Australia’s future.
- Its base case is for continued modest GDP growth, a slight loosening of the labour market and a slightly lower inflation rate.
- Its ‘Trade War’ scenario, in which permanently large tariffs are implemented, would see negative growth and 6% unemployment.
May’s outlook put GDP growth at 1.9% by year-end.
But new forecasts will be released in August, coinciding with the RBA’s decision on the cash rate.
Compared to many major economies, Australia didn’t raise rates as high. Our cash rate ended 2024 at 4.35%, which was its peak.
Important!
Speaking on the RBA’s decision to cut rates in February 2025, Governor Michele Bullock conceded the central bank may have moved too slowly to squash inflation back in 2022.
In the wake of the RBA defying market expectations with a rate hold in July, a number of economists questioned the wisdom of a delay.
AMP’s chief economist Shane Oliver said it could mean growth takes longer to pick up to normal levels, “with a risk that inflation could slip below target necessitating more aggressive RBA rate cuts down the track.”
Harry Murphy Cruise from Oxford Economics Australia said global uncertainty warranted a cut rather than more caution.
How Does Global Instability Impact Australia's Economy?
A contraction in economic activity domestically is heavily contingent on how our major trading partners fare — particularly the US and China.
- China’s property sector woes continue, and its projected GDP growth in 2025 is 4.5-4.8% (compared to a 5% growth rate in 2024). The Chinese government unveiled a plan to drive domestic demand in March, and in May, but these haven’t been viewed as an effective rebuff to the threat of tariffs.
- The US economy's GDP growth rate was -0.5% in Q1 2025, compared to 2.4% growth in Q4 2024. Advanced data for Q2 shows a rebound of 3.0% growth. But labour market troubles and the latest tariff rollout pose issues. The Fed has interest rates on hold at 4.25-4.5%, and projects GDP growth between 1.1-2.1%.
Recession fears have re-ignited in the world’s largest economy.
Weak job growth and renewed tariffs have increased the recession threat in the US.
- Goldman Sachs put the chances of a US recession in 2025 at 30% on 30th July, with an expectation the effective tariff rate would rise to nearly 20% in 2026.
- Harvard professor and former chief economist at The World Bank Carmen Reinhart said the tariff policy meant recession risks were “higher than average.”
Inflation had cooled somewhat in the US, but price growth has been picking up steam again.
Its CPI recorded an annual rise of 2.7% in June 2025.
Month-on-month, US CPI declined by 0.1% in March, before rising by 0.2% in April, 0.1% in May and 0.3% in June.
Important!
The Fed’s preferred inflation measure, Personal Consumption Expenditures Price Index (PCE), had eased to as low as 2.2% in April. It’s now at 2.6% (The Fed’s target is 2%).
Stagflation concerns make the Federal Reserve’s job tricky. Do they try to stimulate growth, or try to keep a lid on spending?
AMP’s head of investment strategy, Dr Shane Oliver, said despite the risks of tariffs, our biggest export partner, China, should still grow enough support Australian exports.
Chinese Purchasing Managers' Indexes (PMI) - surveys of purchasing managers at businesses - have been subdued.
Both its manufacturing and non-manufacturing PMIs fell in July, hitting 3-month and 8-month lows, respectively.
AMPe: Chinese PMIs show factory activity is deteriorating due to weaker exports and flagging domestic demand.
The performance of the US and Chinese economies also acts as a lever for the value of the Australian dollar.
- As the greenback strengthens, the AUD becomes less attractive to investors.
- The AUD is considered a proxy of the Chinese economy because such a huge share of our exports go to China.
When the AUD’s purchasing power is reduced, it can further weaken economic conditions.
What Is Australia's Current Rate Of Economic Growth?
Australian National Accounts figures released by the Australian Bureau of Statistics (ABS) for the March quarter of 2025 show that real GDP rose 0.2% for the quarter and 1.3% over the year.
Quarterly changes in the GDP throughout 2024 and 2025 have been in the positive territory.
| Dec 2023 -Mar 2024 | Mar 2024 - Jun 2025 | Jun 2024 - Sep 2024 | Sep 2024 - Dec 2024 | Dec 2024 - Mar 2025 | Annual Mar 2024 - Mar 2025 | |
|---|---|---|---|---|---|---|
| GDP | 0.1 | 0.2 | 0.3 | 0.6 | 0.2 | 1.3 |
| GDP Per Capita | -0.4 | -0.2 | -0.1 | 0.1 | -0.2 | -0.4 |
However, when we look at the GDP per capita, which better reflects economic output in relation to our nation’s population — it was clearly in the negative for most of last year.
Many commentators had considered Australia to be in a ‘per capita’ recession.
- A record seven consecutive quarters of negative per capita GDP growth ended with the release of the December quarter results.
- But we’re back into negative territory again with -0.2% GDP per capita in Q1 25. That’s the ninth fall in 11 quarters.
Above: Analysis from MacroBusiness highlights that it’s not the most severe decline in per capita GDP in Australia’s history, but it has lasted the longest.
Latest forecast from the RBA has our economy growing at a rate of 1.7% by December 2025 - a downgrade from the 2.1% May figure.
The IMF’s projections (from July) are in the same ballpark.
It thinks Australia’s real GDP growth for 2025 will be 1.8%.
Deputy governor of the RBA board, Andrew Hauser, warned in late July that although tariff impacts on the global economy and Australia hadn’t been as bad as feared - “It’s coming, it just hasn’t come yet.”
He compared the situation to Brexit, where the negative impacts on UK’s economy - including significantly curtailed growth - emerged long-term.
What Is A ‘Per Capita’ Recession?
The average GDP per Australian resident was on the decline between mid-2023 and the end of 2024.
Negative real GDP per capita was again recorded in the first quarter of 2025.
That means each individual's living standards are getting worse.
GDP per capita is a useful measure because overall GDP doesn’t tell the full story.
It doesn’t account for how population growth - like Australia’s recent immigration surge - affects the distribution of national income across households and communities.
So, while economic growth at the national level isn’t going backwards (yet), times are tough for many families.
How Migration Can Fuel Negative Growth.
ABS data on overseas migration into Australia for the 2022-23 financial year shows a net gain of 518,000 people.
There was a 73% increase in migrant arrivals from the year prior.
Important!
A sharp rise in net overseas migration kept the Australian economy from experiencing a ‘technical recession’, defined as two consecutive quarters of negative aggregate GDP growth.
ABS figures released in September 2024 show the net overseas migration in the 12 months to March 2024 was 509,800 people.
More recent figures show migration has eased. For the 2023-24 financial year, net overseas migration was 446,000, with a 10% decrease in migrant arrivals from a year earlier.
Population growth is a double-edged sword.
It can be critical for filling skill shortages that boost economic activity, but it also increases demand, which puts pressure on the price of housing and other goods and services.
Evidence Of Australia’s ‘Per Capita’ Recession.
There are clear signs of this ‘hidden’ recession, most notably in the way many Aussies tightened household spending.
Confidence is still is pessimistic territory — but recovering — according to the Westpac-Melbourne Institute Index of Consumer Sentiment.
In July 2025, consumer sentiment showed Aussies trust interest rates will move lower, and feel more positive about their family finances.
The wage price index saw an increase in 2024, but it didn’t compensate for inflation’s dampening of Aussies’ purchasing power.
You’ll have noticed that more of your pay-cheque is needed to cover essential items like rent, mortgage repayments, groceries, utilities, bills, insurance, healthcare, and fuel.
Prices have moved to a high level with no hope of them being wound back.
Important!
National Accounts data shows that discretionary spending, splurges on non-essentials, is showing signs of recovery. It grew by 0.3% in the December 2024 quarter, buoyed by retail sales around Christmas.
Above: Australians are finding it easier to save as disposable incomes increase.
Is Australia’s Quality Of Life In Decline?
Research from market research firm Roy Morgan shows that 28.4% of Australians with home loans were at risk of ‘mortgage stress’ in the three months to June 2025.
The recent rate cuts in February and May 2025 will have provided some breathing room for many households.
But increasing house prices means mortgage stress is being driven by massive loans and the costs of servicing them.
It’s becoming a major health issue, too.
People are struggling to pay for healthy food and healthcare, and many people are highly stressed and yet forced to work more to earn more.
Important!
The Australian Unity Wellbeing Index (AUWI) report by Deakin University — which has run for 24 years — found that people’s satisfaction with life in Australia reached a record low in 2024.
People in low income households were more likely to be experiencing lower wellbeing or facing mental distress.
Everyone at the margins is being squeezed.
Australian businesses, especially consumer-facing ones, are also feeling the brunt of inflation and global uncertainty.
NAB’s quarterly business survey for Q2 2025 showed business conditions confidence were below average and forward looking indicators remain soft.
The top factor affecting confidence was wage costs, followed by margins. The survey found:
- Labour cost growth increased 0.1 to 1.0%.
- Forward orders remained negative at -2 index points.
- Profitability remained negative at -4 index points.
Is Australia Going Into A Recession?
Pessimism about a recession is high among Australians.
The Dye & Durham Australian Market Pulse survey, released in October 2024, which involved more than 1,600 people, found 57% believe Australia was in recession or would enter a recession within a year.
The prediction for 2025 is for below trend but still positive economic growth and the continuation of RBA's rate-cutting cycle that started in February 2025.
A strong rise in unemployment — typically associated with a recession — is not foreseen.
Key forecasts from the RBA out to December 2025 include:
- GDP growth of 1.7% (revised down from 2.1%).
- Unemployment rate of 4.3% (It’s currently 4.3%).
- CPI inflation of 3.0% and trimmed mean of 2.6%.
Domestic demand is picking up: retail sales saw an annual rise of 4.2% between June 2024 and June 2025.
Critics like Judo Bank’s Chief Economic Advisor, Warren Hogan, have argued that raising interest rates would’ve been more effective than cost-of-living subsidies in fighting inflation and managing the economy.
Hogan said in May 2025 that the economy had entered a recovery phase, with improving consumer spend.
But he said the positive economic story was coupled with inflation risk as the challenges of government spending haven’t gone away.
Of course, if disruptions to trade significantly affect global growth or the US does slide into recession — the ripple effects on stock markets and demand for our exports would impact growth in Australia too.
How Did Australia Fare In Past Recessions?
Recessions vary in severity and duration. How sharply growth slides and for how long depends on the impetus for the decline and how policy-makers respond.
Since then, Australia has seen one of the longest stretches of economic growth in modern history.
Australia’s strong population growth, supported through migration, has been an important reason for the nation’s continued growth throughout various ups and downs in global conditions.
Global Financial Crisis Put A Handbrake On Economic Growth.
Many economies worldwide went into recession during the Global Financial Crisis (GFC).
Growth slowed in Australia, unemployment reached 5.75%, the Aussie dollar lost value, and equity prices declined sharply to reduce the wealth of Australian households by nearly 10% by March 2009.
Covid Pandemic Strained The Australian Economy.
More recently, the COVID-19 pandemic triggered one of the worst ever global recessions, as lockdowns and travel bans stymied growth and led to significant job losses in most advanced economies.
Important!
Australia’s economy entered a recession for the first time in 29 years in the first half of 2020, due to restrictions put in place to contain the Coronavirus pandemic.
However, the economy rebounded in the third quarter of 2020, with GDP increasing by 3.3% as restrictions eased and government stimulus funding had an impact on people’s spending.
The rebound effect post-COVID is one of the reasons cited for rising inflation, which has gripped the Australian economy (and numerous other economies globally) ever since.
(Related: AUD To Euro Forecast: More Surprises Ahead?)
What Happens If Australia Goes Into A Recession?
The word recession seems synonymous with ‘bad times,’ but at best, it’s an approximation of economic health.
When the economy stalls and starts to move backwards, we expect business profits to shrink and lots of people start losing their jobs.
However, while our GDP growth and unemployment numbers may not indicate a significant and lasting reduction in economic activity — it’s clear that for many Aussies, living standards are in decline and there’s no immediate sign of relief.
Jody
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