Looking ahead to 2025, there’s a lot happening in the economy that could impact your business – some good, some not so much. Whether it’s rising costs, interest rates, or global shifts, it’s a lot to keep track of. But don’t worry, we’ve broken down the key trends that matter most for SMEs like yours.
Key takeaways for SMEs:
- Monitor the big trends, especially inflation, interest rates, and international politics, and be ready to pivot if necessary.
- While relief isn’t immediate, some rate cuts could begin in mid-2025, so plan accordingly.
- Keep an eye on slower population growth in Australia and adjust your workforce and market strategies as needed.
- Any changes in U.S. tariffs could affect costs, especially for SMEs importing goods.
CreditorWatch’s Chief Economist Ivan Colhoun said: “Today’s data were a little softer than expected – I had expected a little more flow through of the 1 July tax cuts into consumption, which will probably be in greater evidence in Q4 – but add little new to our understanding of the economy (see detail below).
“With unemployment remaining low, the RBA will continue to focus on waiting for inflation to more clearly moderate and any interest rate relief will be delayed, probably until Q2 2025.
“Nevertheless, as in other countries, moderating inflation as 2025 progresses in keeping with this slow growth will allow some modest interest rate relief in Australia, which will help support growth and keep unemployment low, though slower population growth will be an offsetting drag.
Ivan Colhoun
The accounts also reveal that productivity continues to broadly trend sideways, which is a different story to the US where productivity continues to rise, and is part of the story keeping inflation in Australia a little above target.
“Private consumption growth has been very slow as consumers tighten expenditure on discretionary spending, due to the accumulated pressures from the higher cost of living and higher interest rates”, Ivan continues.
There wasn’t much evidence that the 1 July income tax cuts have boosted consumer spending in the quarter (private consumption +0% q/q and 0.4% y/y). That will among the slowest periods for growth outside of recession, but the data is affected by electricity subsidies which switch some spending out of the private sector into public spending. The rise in the savings rate reflects some of the tax cuts being saved no doubt, while the sharp improvement in consumer confidence in recent months and retail sales suggests some better consumption readings immediately ahead. The RBA is forecasting stronger consumption growth to boost overall economic growth over the next twelve months.
“The income tax cuts will help in the near term, though later interest rate cuts (Q2 2025) and slower population and foreign student numbers will be an important drag as will the continuing higher price level. Continued relatively slow growth in consumer spending is my pick until we get some interest rate relief beginning in Q2 2025.”
“I rarely get excited about quarterly GDP figures. That’s because the figures are very dated (we are now two thirds of the way through Q4) and usually only confirm what we know from the myriads of other more timely and more frequent indicators we analyse each month. The data also don’t say much about the future (e.g. that slower population growth will be a headwind for the economy going forward). However, as a base for analysis, and especially for updated productivity estimates, it’s a good discipline to update the baseline from which forecasts and views are formed.”
For any business, forecasting the future can feel like trying to predict the weather – full of uncertainty and moving pieces. However, understanding the key forces shaping the economy can help SMEs navigate what lies ahead. As we look to 2025, here are the big trends and challenges you should keep an eye on:
- Cost Pressures: Keeping the Squeeze on SMEs: Australian consumers and businesses are still feeling the impact of high living costs, expensive business operations, and relatively high interest rates. While the Reserve Bank of Australia (RBA) has aimed for a 2.5% inflation target, it’s important to remember that prices aren’t falling – they’re just rising slower than before. For SMEs, this means continuing to manage tight margins and staying nimble as costs stay elevated.
- The Megatrends Shaping the Future: Think long-term: technology, climate change, the energy shift, and even demographic changes like an aging population are all on the horizon. For SMEs, these megatrends could present unique challenges and opportunities depending on your industry. Whether it’s adopting new technologies like AI or responding to changes in government policies on climate or inequality, these forces will impact your business in ways both big and small.
- Trump’s Agenda: Extra Uncertainty: While the impact of U.S. politics might feel far away, it’s likely to affect global economic conditions. Donald Trump’s proposed tariffs and immigration policies could increase costs and slow economic growth. For SMEs involved in international trade or with global supply chains, this could mean higher prices and some added complexity in navigating your overseas operations.
- Lingering COVID Effects: Not Gone, But Fading : Though the pandemic’s worst effects are behind us, some ripple effects still linger. For SMEs, slower population growth, especially due to tighter immigration and international student caps, may affect your workforce and market demand. If your business depends on population growth for sales or staffing, keep an eye on these shifts.
- Inflation and Interest Rates: Slow Progress, Little Relief: While many countries are seeing inflation ease and interest rates drop, Australia’s inflation remains stubbornly high. This means that the RBA is unlikely to reduce interest rates significantly in the short term. For SMEs, this could mean higher borrowing costs for a bit longer. However, there’s a silver lining: businesses can expect small interest rate cuts from May 2025, which could provide some breathing room as the year progresses.
- The 2025 Election: More Spending on the Horizon: The federal election in May 2025 will bring additional political and economic uncertainty. Markets are expecting more government spending, which could temporarily boost the economy. But, there are also promises from opposition parties to invest in nuclear energy, which could open up new opportunities and challenges, depending on your sector.
How Does This Affect Your Business?
For SMEs, it’s clear that 2025 will be a year of navigating economic pressure, uncertainty, and ongoing shifts. The good news is that tax cuts, particularly those from July 2024, are starting to make an impact, helping boost cash flow in the short term. However, with slow progress on reducing inflation and global uncertainties, it’s likely to be a bumpy road. One early warning sign for businesses is the increase in trade payment defaults, which often indicate financial strain and potential insolvencies. If you’re dealing with larger businesses or suppliers, it’s wise to stay vigilant about any signs of trouble, as these payment issues could impact your cash flow or supply chain.
Here’s a look at how key sectors are performing and what to expect:
Manufacturing
The manufacturing sector has faced significant headwinds both locally and globally over the past 12-18 months. Weak demand, particularly in housing and durable goods, alongside the aftereffects of the pandemic, has led to declining profitability, lower forward orders, and an increase in insolvencies and trade payment defaults. Additionally, competition from imports is rising as global supply chains stabilize. On top of this, uncertainty surrounding global tariffs, especially under President Trump’s policies, continues to add pressure. However, manufacturing linked to technology is proving to be a bright spot, helping to mitigate even worse outcomes.
Financial and Insurance Services
Despite the ongoing cost-of-living crisis, the financial and insurance services sector has shown resilience. Rising asset prices, particularly in housing, have helped households reduce debt, minimizing losses for financial institutions. While many are struggling financially, the strong property market has allowed some to sell assets at a profit, preventing widespread distress in the sector. Business conditions are still solid, though forward orders have softened slightly. Trade payment defaults have increased but not sharply, signaling broader economic weakness without a full-blown crisis.
Transport, warehousing, and logistics
The transport and logistics sector, which saw a surge in demand during the pandemic, has cooled down as global trade slows. Forward orders and business conditions have dipped into negative territory, with increased insolvencies and payment defaults, partly due to challenges in the manufacturing sector. Shipping costs, influenced by geopolitical factors like the Middle East conflict, have remained volatile but not as extreme as during the pandemic. President Trump’s tariff policies continue to add uncertainty, likely disrupting global trade flows and further impacting the sector.
Wholesale Trade
Wholesale trade is closely tied to the fortunes of manufacturing, and the sector is feeling the strain from the same challenges: inventory fluctuations and tariffs. While profits remain positive, forward orders are in significant negative territory, reflecting weaker demand from manufacturing and retail.
The sector is also facing pressures from rising living costs and tight economic conditions. No interest rate relief is expected until mid-2025, so businesses will have to weather this storm. Despite the challenges, the overall outlook remains stable, with hopes for a soft landing if inflation continues to moderate.
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From inflation pressures to workforce adjustments, here’s what you need to know to keep your business on track. DB Brand Account, Featured, News Dynamic Business
