Statement on Monetary Policy – August 20253. Outlook

3.1 Key judgements

A key assumption underpinning the current set of forecasts is that tariff policies remain largely unchanged from where they are currently. The other important judgements that have been considered and debated throughout the forecast process are discussed below.

Key judgement #1 – Australia’s trading partner growth will slow modestly in 2025, then pick up in the second half of 2026 as the direct effects of higher tariffs and elevated uncertainty are expected to wane.

The forecast for GDP growth in Australia’s major trading partners (MTP) is little changed from the baseline forecast in the May Statement. Consensus forecasts suggest that the slowing in overall major trading partner growth is expected to be relatively modest and short lived as the direct effects of higher tariffs dissipate and policy stimulus supports demand. We explore the downside risks to the global outlook in Key risk #1.

A key judgement underpinning our global outlook is that Chinese GDP growth will remain relatively resilient. Our forecast for 2025 is close to the Chinese authorities’ growth target of ‘around 5 per cent’. Growth in 2026 and 2027 is expected to be a little lower than in 2025, which is largely unchanged from our May forecast. We judge that Chinese authorities have largely ameliorated the impact of ongoing uncertainty effects on the Chinese economy by committing to the growth target and signalling a willingness to expand policy stimulus quickly if conditions deteriorate. Since May, Consensus forecasts for Chinese growth have been revised higher and are now similar to our projections, but there is a wide range that reflects different views on the impact of tariffs and the size and effectiveness of stimulus that may be used to offset this impact.

Key judgement #2 – Global trade developments will be mildly disinflationary for Australia.

Weaker growth in global demand from higher tariffs is expected to exert some downward pressure on global export prices and the prices of goods and services imported to Australia.¹ Growth in these prices is expected to remain weaker than at the start of the year when fewer trade barriers were in place. This is an unchanged assessment from the May Statement.

Our forecast is for weaker global export prices to only have a small effect on inflation in Australia. It is possible that an increased supply of imports to Australia – as trade is diverted away from higher tariff routes – exerts more downward pressure on import prices than forecast; however, our analysis of Australian imports exposed to US and China trade suggests that this is unlikely to be material (see Box A: How are Global Trading Patterns Adjusting to Changes in Trade Policy, and What Does It Mean for Australia?). Working in the other direction, the trade conflict could result in substantive supply chain issues, which could raise prices for some imports. Exchange rate movements will be a key determinant of how developments in global prices flow through to domestic prices.

We are yet to see clear evidence of the effect of global trade developments on prices and will continue to monitor developments closely.

Key judgement #3 – The economy will be close to full employment over the forecast period, though our models and some indicators point to a risk that some tightness in labour market conditions remains.

There is considerable uncertainty around our assessment of capacity pressures in the economy and this assessment becomes more uncertain when the economy is close to balance, as it is now. Recent quarterly prints of trimmed mean inflation are consistent with inflation tracking close to the midpoint of the 2–3 per cent range, which can suggest the labour market is close to full employment. However, there are some mixed signals from labour market indicators. The rate of job-switching – despite stabilising recently – has declined notably from its peak in 2022, which might indicate less upward pressure on wages growth and inflation than other indicators. By contrast, firms continue to report difficulties finding staff, the ratio of job vacancies to unemployed people remains elevated, the unemployment rate remains below model estimates of full employment and growth in unit labour costs has been high.

Our central forecasts for wages growth and inflation continue to incorporate some downward judgement to reflect the possibility that the economy and labour market are closer to balance than our models suggest. If there is some tightness in the labour market over the forecast period, this will be more inflationary than currently forecast (see Key risk #3). We will continue to refine our assessment of full employment as more data become available.

Key judgement #4 – The downward revision to the productivity outlook lowers potential output growth but does not have any implications for the inflation outlook.

Lowering our estimate of trend productivity growth lowers our estimate of the supply capacity of the economy over the next couple of years (see Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth). We have revised down our forecast for aggregate demand (GDP growth) in line with the downward revision to productivity growth. This is because we think households and businesses have already (implicitly) adjusted to persistently lower growth in productivity, incomes and revenues, and so plans for future consumption and investment are lower than we had assumed in our previous forecasts.

As we have revised down our forecasts for aggregate supply capacity and demand by the same magnitude, our assessment is that there is minimal effect on the inflation outlook – this is a key judgement. If productivity growth is lower than households and businesses implicitly expect, because they have not yet revised down their expectations for income growth, then demand could grow more quickly than our revised view of supply and create additional inflationary pressure. Conversely, if they expect slower growth of productivity and incomes than actually occurs (e.g. they implicitly take more signal from the weak productivity outcomes over recent years), spending could be weaker than expected over the forecast period, dampening inflationary pressure relative to what is forecast.

3.2 The global outlook

Major trading partner growth is expected to slow over the second half of 2025 and into 2026 as higher tariffs and uncertainty weigh on activity.

The outlook is little changed relative to the baseline forecast in the May Statement. Year-average MTP GDP growth is forecast to be 3.3 per cent in 2025, slowing modestly to 3.1 per cent in 2026; growth picks back up to 3.3 per cent in 2027, as the direct effects of higher tariffs wane and uncertainty is assumed to decline (Graph 3.1). While the likelihood of a severe ‘trade war’ scenario materialising appears to have diminished since the May Statement, the path of future trade policy remains unpredictable. It is plausible that global growth could be stronger than expected if the adverse effects on activity from higher tariffs are smaller than expected or if other policies are more stimulatory than currently forecast. However, we judge that the risks to global activity remain tilted to the downside (see Key risk #1).

Recent bilateral trade deals and the latest US administration announcements are for slightly higher tariff rates than those that underpin the forecasts. The US administration announced updated ‘reciprocal’ tariff rates of between 10 and 20 per cent for most of their trading partners, with significantly higher tariff rates remaining for India and China. Recently agreed separate trade deals include country-level tariff rates that are also higher than the 10–15 per cent currently assumed in our forecasts; however, some material reductions in the sectoral-level tariffs have also been announced. Consensus forecasters are yet to fully incorporate the estimated effect of these latest trade deals in their forecasts, but we judge that the change to MTP forecasts are likely to be small. Most Consensus forecasters assume that the US administration will set trade policy in a way that limits acutely adverse economic outcomes for the United States.

Consensus forecasters continue to expect quarterly growth in the United States to slow over the second half of 2025 as higher tariffs flow through to consumer prices and weigh on consumer spending. So far, the pass-through of higher tariffs to US inflation has been modest, but a range of survey data and recent liaison by the Federal Reserve suggests that businesses that are intending to pass on tariff costs expect to do so in the coming months.

Growth in many of Australia’s other trading partners is also expected to moderate over the remainder of 2025 and into 2026 as higher US tariffs weigh on external demand. Growth is expected to pick up thereafter as a mixture of stimulatory fiscal policy (in some east Asian and European economies) and expected easing in monetary policy (as indicated by market pricing) in some major advanced economies provides support. Inflation in most advanced economies (excluding the United States) is largely expected to return to central bank targets over the next year or so; these forecasts are little changed compared with the May Statement.

Growth in China is expected to remain relatively resilient, but to slow a little over 2026 before stabilising in 2027. The outlook for China’s GDP growth in 2025 has been upwardly revised a little to 4.9 per cent. This reflects a slightly better-than-expected outcome for growth in the June quarter, and a revised assessment that higher tariffs and trade policy uncertainty will weigh less on trade and manufacturing investment in the near term than previously expected. Growth over 2026 is expected to moderate, before stabilising in 2027. The outlook for the real estate sector remains poor and is expected to remain a drag on growth for longer than expected compared with the May Statement. As noted in Key judgement #1, we expect that Chinese fiscal policy will be expansionary as authorities look to mitigate the effects of higher tariffs on the economy. The forecasts retain the trade policy settings that were assumed in the May Statement – that is, an average US tariff rate of around 50 per cent on Chinese imports and an average Chinese tariff rate of 30 per cent on US imports.

3.3 The domestic outlook

Australian GDP growth is expected to be a bit stronger over 2025 than over 2024, but to stabilise at a lower rate than was forecast in May because of lower assumed productivity growth.

Year-ended GDP growth in Australia is expected to pick up a little over 2025 as the modest recovery in private demand is sustained and public demand continues to support growth (Graph 3.2). The modest recovery in household consumption growth that began in late 2024 is expected to be sustained over the forecast period, underpinned by the recovery in real household incomes that began in mid-2024. The assumed easing in the cash rate (as implied by financial market pricing) will also provide a boost to private demand, particularly for interest-sensitive components such as dwelling investment. While measures of policy uncertainty related to tariff developments have eased in recent months, they remain elevated and are still assumed to weigh a little on domestic spending decisions over the next year.

The forecast pick-up in year-ended GDP growth over 2025 is more gradual than was expected three months ago, mostly reflecting weaker-than-expected growth in public demand in the March quarter (Graph 3.3). Upward revisions to historical data for household consumption and dwelling investment suggest that the recovery underway in the private sector has been stronger than previously assessed. However, the expected pick-up in overall GDP growth over the remainder of the year is now expected to be less pronounced, primarily reflecting much weaker-than-expected growth in public demand in the March quarter of 2025 that is not expected to be offset in the rest of the year. Updated spending projections in government budgets released since May suggest that this recent period of weak public demand growth will be temporary; the outlook for quarterly growth in public demand beyond the March quarter of 2025 is broadly similar to the May forecasts.

Further out, GDP growth is expected to be lower than was previously anticipated, as a result of the downgrade to our productivity growth assumption. As detailed in Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth, and Key judgement #3, we have lowered our assumption for the rate of productivity growth that the economy returns to by the end of the forecast period. This lowers our estimate of growth in the economy’s supply capacity – or potential output growth – at that horizon. We have also lowered the forecast for GDP growth in the latter part of the forecast period by the same magnitude (around 0.3 percentage points).

How does lower productivity growth affect the forecasts?

A persistently lower rate of productivity growth will weigh on growth in output, incomes and demand as the economy cannot produce as much as previously expected for a given set of inputs. This will weigh on most types of activity in the economy. For example, households will consume less than otherwise because their incomes are growing at a slower rate, while lower growth in incomes will weigh on tax revenue and therefore public spending.

The size of the revision we have made across most of the components of growth is similar in size to the overall 0.3 percentage point revision to year-ended GDP growth, with a few exceptions. The revision to non-mining business investment is larger than the revision to GDP growth, as lower demand reduces the expected return on additional capital and therefore the incentive for firms to invest. The decline in growth in exports and mining investment is smaller than the decline in GDP growth as demand for exports is largely determined by global growth.

Productivity growth is a key driver of real wages growth in the long run; lower labour productivity growth weighs on growth in per capita income and wages. We have downwardly revised our forecast for the National Accounts’ measure of average earnings per hour (AENA) in line with the productivity downgrade. However, the Wage Price Index (WPI) is a narrower measure of labour costs that abstracts from some of the effects of productivity growth; as a result, the WPI forecast has been revised lower by around half of the downgrade to productivity growth.

The labour market is not expected to ease much further.

The forecast for the unemployment rate is unchanged from the baseline forecast in the May Statement (Graph 3.4). In quarterly terms, the unemployment rate is forecast to be little changed and to stabilise at around 4.3 per cent over 2026 and 2027, as GDP growth stabilises at around growth in potential output. Leading indicators such as job ads and vacancies suggest little change to the near-term outlook for the unemployment rate.

Employment growth is expected to ease over the forecast period from the very strong growth rates seen over recent years. Employment growth is forecast to slow to around the same pace as expected population growth, keeping the employment-to-population ratio fairly steady and close to record highs. This is largely consistent with the employment outlook in the May Statement. The forecast assumes a pick-up in market sector employment growth as private demand growth recovers, and a slowing in non-market sector employment growth from its very strong rates in recent years. Together, these suggest an expected slowing in flows of labour from the market sector into the non-market sector, particularly the health care industry.² The participation rate is expected to be broadly flat over the forecast period, though there is a possibility that it could continue to rise if the trend of increased participation by females continues.

Quarterly growth in nominal wages is expected to ease gradually over 2025 before stabilising.

The renewal of several large public sector agreements and announced administered decisions for several large awards are expected to support wages growth over the remainder of 2025, and may also contribute to increased quarterly volatility in the WPI. Overall wages growth is then expected to remain relatively steady over 2026 and 2027, consistent with the stability in labour market conditions. As has been the case since February, we have applied some downward judgement to the wages growth forecast to reflect the possibility that we are closer to full employment than our models would imply.

Nominal wages growth is expected to be slightly lower over the second half of the forecast period than was expected in the May Statement, reflecting the lower rate of trend labour productivity growth. Year-ended WPI growth is expected to stabilise at a little below 3 per cent by the September quarter of 2026 (Graph 3.5). The downgrade to trend productivity growth lowers the rate of long-term WPI growth that is consistent with the labour market being broadly balanced (see Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth).

Growth in unit labour costs (ULCs) is expected to ease from late 2025 (Graph 3.6). Growth in nominal ULCs – the measure of labour costs most relevant for firms’ cost of production and so for inflation outcomes – has been elevated in recent years due to weak productivity growth. Growth in ULCs is expected to ease to a pace consistent with inflation at target, in line with easing growth in nominal wages and a projected pick-up in productivity growth. Our downward revision to the rate of productivity growth at the end of the forecast period is not expected to affect ULCs growth, as output and labour costs are affected proportionately. ULCs are expected to reach a rate broadly consistent with inflation being sustainably at the midpoint of the target range by the second half of 2026, in line with expectations in the May Statement.

Underlying inflation in year-ended terms is expected to remain within 2–3 per cent over the forecast period, and to settle at around the midpoint of that range.

Underlying inflation is expected to be around – or a little above – 2½ per cent over much of the forecast period. The June quarter inflation data provided further confidence that there has been a broad-based easing in inflation over the past year, and the outlook remains largely unchanged relative to the May Statement. Trimmed mean inflation is expected to ease to around 2½ per cent in the September quarter, and then to remain close to this rate for the remainder of the forecast period (Graph 3.7). Similarly, in quarterly terms, trimmed mean inflation is expected to stay close to its rate in the June quarter, consistent with the forecast stability in labour market conditions. As has been the case since February, we have applied some downward judgement to the inflation forecast to reflect the possibility that we are closer to full employment than our models would imply. Inflation expectations are assumed to remain consistent with achieving the inflation target over the long term.

Headline inflation is expected to increase over the second half of 2025 to be above 3 per cent, before returning to the midpoint of the target range later in the forecast period (Graph 3.8). The outlook for headline inflation is broadly unchanged from the May Statement. Volatility in the forecasts is due to the unwinding of cost-of-living relief measures, such as electricity rebates. The extension of the Energy Bill Relief Fund is due to expire by the end of 2025, which will see year-ended inflation around 3 per cent through most of 2026. Headline inflation is forecast to converge towards underlying inflation once the effects of this have passed. Because headline inflation can be affected by large swings in the prices of individual items, we will continue to pay close attention to underlying measures as an indicator of momentum in consumer price inflation.³

Housing inflation is expected to pick up, to be slightly stronger than anticipated in the May Statement. New dwelling inflation is forecast to increase through 2025 and 2026 from current low rates, as dwelling investment increases alongside stronger demand for new housing. CPI rent inflation is expected to ease by a little less than expected in the May forecast, as near-term indicators of advertised rents suggest more strength in the rental market than previously assumed, which gradually passes through to the stock of rents as measured in the CPI.

The outlook for retail goods remains subject to considerable uncertainty due to international developments. We continue to judge that weaker global demand weighs a little on world export prices. This could result in slightly lower inflation for goods imported to Australia, which would have a small impact on domestic inflation over the forecast period, though exchange rate movements will also affect the domestic price of imported goods (see Key judgement #2).

3.4 Key risks to the outlook

Key risk #1 – Global growth may be weaker than forecast.

In the May Statement, the heightened level of global uncertainty and rapid pace at which international trade policies were evolving meant we thoroughly examined alternative scenarios around the path of future tariffs. Our ‘trade war’ and ‘trade peace’ scenarios are unchanged from the last Statement. While we assess that the risks of a ‘trade war’ scenario have diminished in recent months, we judge that the risks around the global outlook are still skewed to the downside. Possible adverse outcomes, abstracting from near-term trade policy negotiations, include:

• The effect of tariffs on global activity and inflation remains uncertain and global forecasts may downwardly adjust as the effects become apparent in the data in the second half of the year. For example, the forecasts embody a small negative impact on business investment in the United States due to elevated trade policy uncertainty, but there are a wide range of empirical estimates of the impact of uncertainty; it is also unclear how uncertainty will evolve going forward.
• It is possible the effects of higher tariffs on the global economy are longer lasting than assumed. As noted in section 3.2, MTP GDP growth is expected to pick up in the second half of 2026. However, businesses and households may delay spending decisions for much longer than currently assumed given the unpredictable nature of the global policy environment and heightened geopolitical concerns. Higher tariffs can also reduce productivity in affected economies via a misallocation of resources and less incentive to innovate, which would reduce supply capacity over the longer term.

Our judgement is that global trade policy developments will be modestly disinflationary for the global economy (and Australia). However, it is possible that there may be more inflationary pressures than we expect. For example, there may be a temporary surge in freight costs in the near term if exporters to the United States divert trade to other destinations. We will continue to refine our assessment as more information on possible trade diversion and the effects becomes available.

Key risk #2 – The period of subdued growth in domestic activity could be more persistent, or the recovery in activity could be stronger.

There is a risk that the ongoing recovery in domestic demand could be weaker than forecast, which would see a more pronounced easing in the labour market than currently anticipated. This could occur if households remain cautious and increase their saving rate further (as they have done over the past year) rather than spend more in response to the recovery in household incomes. Global policy uncertainty could also have a larger-than-expected effect on consumer spending and business investment, though there is little evidence of this to date. Growth in public demand could also turn out to be weaker than expected. There has been little change in public demand over the past six months; while state and federal budgets suggest this weakness is temporary, there may be a longer-than-expected delay in some public investment projects getting underway over the year ahead.

That said, the recovery we have forecast in GDP growth is relatively modest and could end up being stronger. Households have increased their rate of saving to around pre-pandemic averages and may become more confident to spend out of their higher incomes and wealth than we are anticipating. Furthermore, households and businesses might not adjust their behaviour in response to increased global uncertainty as has been assumed. Also, cost feasibility challenges in the construction sector – where potential developments are left on hold because construction costs are too high relative to selling prices – may turn out to be less binding than expected, leading to a more pronounced pick-up in dwelling investment in response to the assumed easing in monetary policy.

Key risk #3 – There may be more excess demand in the economy than judged.

Our forecasts are for inflationary pressures to remain relatively stable over the forecast period as the economy is judged to be close to balance. While the risk of weaker growth in domestic activity in Key risk #2 would dampen inflationary pressures, there are some plausible upside risks that might see inflation settle above the midpoint of the target range.

There may be more excess demand in the labour market than we have forecast. Since February, we have incorporated some downward judgement to our wages and inflation forecasts to reflect the possibility that labour market conditions are not as tight as we had assessed (see Key judgement #3). However, there is a risk that labour market conditions are tighter than implied by our forecasts, in which case inflation and wages growth would be higher than in our forecasts, all else equal. Alongside the signal from our suite of full-employment models, some other indicators continue to suggest that the labour market is still tight: the ratio of job vacancies to unemployed people remains somewhat elevated; an above-average share of firms report the availability of labour is a constraint; and growth in unit labour costs remains high. Further, while the rate of job-switching is currently low, it may pick up as market sector employment growth increases alongside a recovery in private demand.

The rate of growth in output prices across the broader economy may indicate more inflationary pressures than consumer price inflation. While measures of consumer price inflation have been within the 2–3 per cent range recently, broader measures of price growth throughout the economy have been notably higher, suggesting there are pockets of inflation in some parts of the economy. For example, after stripping out prices in the mining and agriculture industries, which are volatile, prices of domestically produced output increased by 4 per cent over the year to the March quarter (as measured by the price deflator for gross value added). Deviations between consumer and output prices can arise for several reasons, including due to the differing effects of exchange rate movements, the series capturing different sectors in the economy, component weights and the treatment of subsidies. Our baseline forecasts assume that growth in output prices will slow to be close to consumer price inflation; however, there is a risk that strength in output prices spills over into consumer prices, leading to inflation picking up to be closer to growth in output prices.

3.5 Detailed forecast information

Table 3.1 provides additional detail on forecasts of key macroeconomic. The forecast table from current and previous Statements can be viewed, and data from these tables downloaded, via the Statement on Monetary Policy – Forecast Archive.

Endnotes

See RBA (2025), ‘Chapter 1: In Depth – Global Economy and Financial Markets’, Statement on Monetary Policy, May. 1

See RBA (2025), ‘Box C: Health Care Employment and its Impact on Broader Labour Market Conditions’, Statement on Monetary Policy, February. 2

See RBA (2024), ‘Box C: Headline and Underlying Inflation’, Statement on Monetary Policy, August. 3