Will Australia Go Into A Recession In 2025?

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If you’re 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.
Globally, advanced economies continue to face recession as they fight to curb inflation — which poses additional risk to Australia.
Revised 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).

Reduced production is an important indicator — but many global economists also take into account factors including:

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: Interest Rate Forecast: When Will RBA Cut Rates?)

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. 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.

Questions arose about whether central banks had left rates too high for too long.

For instance:

Most central banks remain cautious as they strive to keep a lid on inflation, especially given the increased geopolitical unrest and policy uncertainty.

In January, the International Monetary Fund (IMF) projects global growth at a below-average 3.3% in 2025, highlighting how countries may struggle to find a trade-off between inflation and stimulating activity:

But President Trump has taken us on a wild ride since then, with changeable policy messaging, sweeping tariffs and job cuts that have spooked share markets.

In February 2025, the Bank of England halved its growth forecast for 2025, revising an earlier estimate of 1.5% growth rate to just 0.75%. Inflationary pressure from wages, energy costs and the impact of US tariffs are of concern.

Here in Australia, the RBA’s outlook from February 2025 anticipates “limited effects on domestic growth and inflation from recent announcements related to international trade.” However, it depends on how the trade war plays out, especially its impact on China.

Our GDP growth is expected to lift and reach 2.4% by year-end.

Compared to many major economies, Australia didn’t raise rates as high. Our cash rate ended 2024 at 4.35%, which was its peak.

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.

Recession fears have re-ignited in the world’s largest economy.

Moody's Analytics chief economist Mark Zandi said the US economy came into 2025 performing exceptionally, but uncertainty created by Trump’s approach had slowed growth and elevated recession risk just three months later.

Inflation is back on the rise in the US, with an annual rise of 2.8% recorded in February 2025.

The US Personal Consumption Expenditures Price Index (PCE) for January showed a 2.5% annual rise in prices paid by consumers, compared to 2.2% six months prior in August 2024. PCE is the Fed’s preferred inflation gauge.

AMP’s head of investment strategy, Dr Shane Oliver, said Trump’s policies posed new risks to global business conditions that could determine whether Australia slides into recession.

He pointed to global Purchasing Managers' Indexes (PMI) — surveys of purchasing managers at businesses — as a key warning indicator.

Once such PMI in the US, the ISM manufacturing survey released in February, found a marginal expansion of activity but highlighted a number of indicators of weakening demand, including:

The performance of the US and Chinese economies also acts as a lever for the value of the Australian dollar.

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 December quarter of 2024 show that real GDP rose 0.6% for the quarter and 1.3% over the year.

Quarterly changes in the GDP throughout 2023 and 2024 have been in the positive territory.

	Sept 23 - Dec 23	Dec 23 -March 24	March 24 - June 24	Jun 24 - Sep 24	Sep 24 - Dec 24	Annual Dec 23- Dec 24)
GDP	0.1	0.2	0.2	0.3	0.6	1.0
GDP Per Capita	-0.4	-0.4	-0.2	-0.2	0.1	-0.7

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 in March.

Oxford Economics head of macroeconomic forecasting, Sean Langcake, told The Australian newspaper the data meant the “low point” of our economic cycle had passed — and growth would be spurred by a rate-cutting cycle, real wage gains and continued low unemployment.

But he warned that GDP growth was still too reliant on government spending and migration.

What Is A ‘Per Capita’ Recession?

The average GDP per Australian resident was on the decline between mid-2023 and the end of 2024. That means each individual's living standards were getting worse.

GDP per capita is a helpful measure because the overall GDP doesn’t account for how increased population — such as Australia’s recent uptick in immigration — influences how evenly national income is spread across households or 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.

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. 

But confidence is increasing according to the Westpac-Melbourne Institute Index of Consumer Sentiment. In March 2025, consumer sentiment lifted to a three-year high, with consumers no longer fearing the RBA will hike rates.

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.

Above: Australians are still struggling to save.

Is Australia’s Quality Of Life In Decline?

With wages not keeping pace with inflation, less disposable income and less ability to tuck away savings, life has become much harder for many Aussies.

Research from market research firm Roy Morgan shows that 28.9% of Australians were at risk of ‘mortgage stress’ in the three months to January 2025.

Of course, it’s thought that the recent rate cut will have provided some breathing room for many households.

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.

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.

NAB’s monthly survey  of businesses in February 2025 showed confidence was in the negative territory and below average. 

Margins are still under pressure despite easing conditions. The survey found:

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:

Domestic demand looked to be cooling earlier in 2024, but retail sales saw an annual rise of 3.8% between January 2024 and January 2025.

Naysayers like Judo Bank's Chief Economic Advisor Warren Hogan have flagged that raising rates would be more effective than government cost-of-living subsidies as a means to deal with inflation and manage the economy.

Of course, if the US did slide into recession, it could hamper global growth — the ripple effects on stock markets and demand for our exports would impact growth in Australia too.

Independent economist Saul Eslake said a further significant weakening of China’s economy, our biggest export market, would impact GDP.

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.

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