Economic overview

Global economic growth is expected to increase in 2025 as lower interest rates support household disposable incomes and encourage spending. World Gross Domestic Product (GDP) growth is expected to be 3.1% in 2024 and 3.3% in 2025, a 0.1 percentage point revision down for 2024 and up for 2025 since the June 2024 Agricultural Commodities Report. The downgrade in 2024 reflects weaker growth in the United States with consumption under pressure from rising unemployment. In 2025, consumption and economic growth are expected to increase across most major economies, such as Japan, the European Union and southeast Asia, supported by lower inflation.

Interest rates across many major economies are expected to decline over the remainder of 2024 and into 2025, supporting private investment by reducing finance costs for households and businesses. Some central banks such as the European Central Bank and Bank of England have recently lowered interest rates following a period of significant monetary policy tightening from early-2022 to mid-2023 (Figure 1.1). Markets expect the US Federal Reserve to significantly lower interest rates over the remainder of 2024 and into 2025, with inflation continuing to fall and unemployment trending higher. This is likely to reduce the strength of the US dollar and in turn import prices for many economies, encouraging other central banks to lower interest rates and stimulate economic growth.

Figure 1.1 Central bank key interest rates, selected economies

Figure 1.2 Real GDP growth, selected economies
 

Risks to the global economic outlook for 2025 are relatively balanced: 

• Considerable uncertainty concerning ongoing conflicts in the Middle East and Ukraine remains. The potential for protracted and escalating conflict represents a downside risk to the global outlook – including for energy and goods supply chains. However, global trade flows have remained relatively resilient to date, mitigating downside risks.
• Uncertainty exists around the future of US government policy in light of the upcoming 2024 US Presidential Election, the results of which have the potential to have wide ranging impacts for inflation, geopolitics, future trade policy and exchange rates.

Household consumption in China expected to remain weak

China’s GDP growth is expected to slow further in 2025 (Figure 1.2), driven by weak housing demand, a shrinking population and subdued household consumption. Chinese government policy in the post-pandemic period has focused on manufacturing and managing corporate and local government debt rather than stimulating household spending. Sustained falls in house prices have reduced household wealth and undermined consumer confidence. However, demand for Australia’s agricultural exports has remained strong in part supported by the removal of trade restrictions for some commodities such as wine, barley and beef.

Australian economic growth is expected to increase modestly in 2024–25 due to improved disposable income levels and household spending. GDP growth is expected to be 1.9% in 2024–25, above the 1.4% growth estimated for 2023–24, but well below the 10-year pre-pandemic average annual growth of 2.6%.

Household spending is expected to benefit from wages growth outpacing inflation in 2024–25 and income tax cuts (Figure 1.3). The declining volume of food consumption per capita over 2023–24 (Figure 1.4) reflected high inflation and interest rates (Figure 1.1) weighing on household budgets. Inflation averaged 4.2% over 2023–24 but is expected to ease to 3.0% over 2024–25 with lower housing and energy prices. The improved outlook for aggregate consumption in 2024–25 is expected to be partially offset by some households looking to replenish savings, as well as the impact of increased unemployment. Unemployment and underutilisation in the labour market have increased in 2024 as demand for workers has moderated and strong population growth has boosted labour supply.

Figure 1.3 Quarterly Australian inflation and wage growth

Figure 1.4 Quarterly Australian retail trade per capita, chain volume

The Australian dollar is expected to average US67 cents in 2024–25, slightly higher compared to the US66 cents in 2023–24, but 5% below the previous 5-year average. The Australian dollar has been weighed down since early-2022 due to relatively weak risk sentiment in financial markets and a strong US economy encouraging investors to buy US dollar denominated assets. However, Australia’s exchange rate on a trade-weighted basis has been more stable over this period (Figure 1.5) due to relatively strong export prices and a weak Chinese Renminbi and Japanese Yen.

Over the remainder of 2024–25, counteracting economic forces are keeping expectations for the Australian dollar relatively balanced:

• Market pricing and central bank commentary suggests interest rates will decline in the United States earlier than in Australia, improving the relative yield of Australian dollar denominated assets, such as government bonds. This typically increases demand for Australian dollars and leads to an appreciation against the US dollar.
• The outlook for Australia’s terms of trade and its effect on the Australian dollar in 2024–25 is expected to be relatively unfavourable with subdued Chinese demand leading to lower prices for major commodity exports such as iron ore.

A low Australian dollar compared to major currencies over a sustained period supports the competitiveness in international markets of Australia's agricultural exports contracted in Australian dollars. For most agricultural exports, which are contracted in US dollars, a weak Australian dollar supports the Australian dollar value of these contracts.

Figure 1.5 Quarterly average Australian dollar exchange rates

Most input costs are expected to decline for agricultural businesses in 2024–25 but remain elevated compared to pre-pandemic levels (Figure 1.6).

Global energy prices are expected to fall in 2024–25 reflecting weaker demand from the United States and China. However, any further escalation of global geopolitical conflicts has the potential to significantly disrupt oil and natural gas (a critical input to fertiliser) supplies and increase imported input prices for Australian agricultural businesses.

Finance costs have increased significantly for businesses in Australia since 2021–22. Debt is an important source of funding for ongoing working capital and new investments for many Australian agricultural businesses. Higher interest rates (Figure 1.6) have increased the level of income required to service debt, with interest payments increasing from an estimated 3% of farm expenditure in 2021–22 to 12% in 2023–24.

Labour pressures for Australian agricultural businesses have eased over 2024 with a weak economy and increased overseas worker arrivals. The number of temporary migrants working in agriculture is now above pre-pandemic levels reflecting the return of seasonal backpackers and continued strength of the Pacific Australia Labour Mobility Scheme (PALM). Labour market tightness remains for some skilled occupations – exacerbated by housing shortages in regional areas – however job advertisements have continued to decline over 2024 (Figure 1.6).

Figure 1.6 Selected agricultural input indicators, Australia

Global freight prices have increased in 2024 due to an unexpectedly strong northern hemisphere peak season and continued attacks on container ships in the Red Sea; this has led to container ships taking longer transit times to avoid the region (Figure 1.7). Container freight prices are expected to decline over the remainder of 2024–25 with lower global demand and greater shipping capacity.

In Australia, handling and marketing costs for agricultural businesses are estimated to increase to account for 10% of aggregate farm expenditure in 2024–25 (Figure 1.8). This reflects an increasing volume of agricultural production and elevated road transport and labour costs.

Figure 1.7 Weekly average global container freight price indicator

Figure 1.8 Aggregate annual handling and marketing cost, Australian farm businesses