Statement on Monetary Policy – November 2025Box B: Annual Forecast Review

In this year’s review, we compare actual outcomes with the forecasts from the November 2024 Statement and look at how the forecasts evolved through the year. We also assess how the judgements that underpin the forecasts have fared and how the risks around the outlook have evolved. The key takeaways are:

• In the November 2024 Statement, we forecast that by late 2025 GDP growth would gradually recover to around potential and the labour market would continue to ease at a gradual pace. We judged that the economy and the labour market would return to balance by late 2025, such that underlying inflation would continue easing to just below 3 per cent by late 2025.
• This has played out largely as expected. GDP growth has recovered to be close to potential, although the pick-up was less pronounced than we had anticipated. The increase in the unemployment rate over the year was very close to expectations, though both the participation rate and employment-to-population ratio did not continue to increase as expected. Underlying inflation was also very close to expectations, while headline inflation was a bit lower than expected, mostly reflecting the unanticipated extension of government electricity rebates to households. The forecast misses for GDP growth, the unemployment rate and underlying inflation were small – around the 10th percentile of absolute forecast errors since 1990 and less than the 20th percentile compared with the period between 2010–2019.
• We currently assess that there is slightly more capacity pressure in the economy than we had anticipated in the November 2024 Statement. This points to slightly higher inflationary pressure in the period ahead than we had expected (see Chapter 3: Outlook).
• Surprises in the key forecast conditioning assumptions (e.g. the cash rate and population growth) over the year were small; a decomposition of the forecast errors in the RBA’s macroeconomic model MARTIN suggests that these surprises explain little of the forecast misses on activity and inflation.

GDP growth was weaker than expected.

The pick-up in GDP growth over the year was less pronounced than we had expected. In November 2024, growth in GDP was expected to pick up to 2.3 per cent over the year to the June quarter 2025 as private demand recovered, with growth in public demand continuing to support activity (Graph B.1). However, growth over the year was 1.8 per cent. This downside forecast miss was relatively modest compared with the RBA’s historical forecast errors for growth one-year ahead (the median absolute error from 1990–2025 was 0.8 percentage points) but larger than that of the median of market economists’ expectations in November 2024.

Weaker-than-expected GDP growth reflected downside forecast misses on public demand and exports, partially offset by stronger-than-anticipated growth in private demand. The RBA’s forecasts for public demand are typically based on federal and state government projections. However, actual outcomes can be different from these projections because policy priorities may change and changing economic conditions can affect spending volumes and timing. Over the past year, public demand did not grow as quickly as expected, largely reflecting a downside surprise on public investment. While the public investment data can be volatile and subject to revision, our latest forecasts have taken some signal from the public investment forecast misses over the first half of 2025 (see Chapter 3: Outlook).

Growth in exports has been weaker than expected over the past two years. Education exports were weaker than forecast as the number of overseas students studying in Australia did not increase in line with expectations. Resource exports (which make up over half of total exports) have also been weaker than forecast over recent years, with much of the miss concentrated in coal exports (Graph B.2). This likely reflects an overestimation of supply capacity, but we are also exploring whether overseas demand has been weaker than anticipated.

The terms of trade have evolved broadly as expected and trading partner growth has been more resilient than anticipated, despite volatility in the global geopolitical environment. Following the announcement of higher tariffs in some economies and associated elevated policy uncertainty from early 2025, the global economy has been more resilient than expected, though the full effects of the higher tariffs on activity and inflation are yet to be seen.

The increase in the unemployment rate was very close to expectations, though we assess there is slightly more capacity pressure in the broader economy than we had anticipated.

The unemployment rate increased by 0.2 percentage points to 4.3 per cent over the year to the September quarter, which was very close to expectations. In November 2024, we forecast that the unemployment rate would increase gradually to 4.4 per cent in the September quarter 2025 and then peak soon after at 4.5 per cent, consistent with the signal from leading indicators such as the vacancy rate and hiring intentions, as well as below-trend GDP growth (Graph B.3).

The easing in the labour market also occurred through margins of adjustment other than the unemployment rate. In November 2024, we forecast the participation rate to increase further, reflecting solid employment opportunities in the non-market sector, cost-of-living pressures, and continued structural increases in participation of female and older workers (Graph B.3). However, the participation rate has trended slightly lower. This may have reflected an easing in both labour demand (it being somewhat harder to become employed when the labour market is less tight) and labour supply (as some easing in cost-of-living pressures reduced the incentive to enter or remain in the labour force) (see Chapter 2: Economic Conditions). We are looking to deepen our understanding of the relative importance of labour supply and labour demand on current labour market conditions. Employment growth was forecast to ease as population growth slowed from very strong growth rates over the previous couple of years and as growth in non-market sector employment slowed. However, employment growth slowed by a bit more than expected over the year; this likely reflected non-market employment growth slowing by more than anticipated, although we do not have complete sectoral data for the whole year as yet.

More generally, we assess that there is slightly more capacity pressure in the economy than we had expected in November 2024. Capacity pressure is an important determinant of inflation. In November 2024, we had forecast that the gradual easing in labour market conditions would ease a little further and that supply and demand in the labour market and the economy would be in balance by the end of 2025. Our current assessment is that conditions in the labour market, and the economy more broadly, are a little tighter at this point than we had expected (see Chapter 2: Economic Conditions). This points to slightly higher inflationary pressure in the period ahead than we had expected one year ago. There is considerable uncertainty around this assessment, and staff have adjusted their assessment of capacity pressure throughout the year (see judgements section below).

Inflation was largely as expected.

Headline inflation was a bit lower than expected over the year, largely reflecting the extension of government electricity rebates to households. Headline inflation – which is the measure that the RBA targets – was 3.2 per cent over the year to the September quarter, compared with expectations of 3.4 per cent in the November 2024 Statement (Graph B.4). This downside miss was smaller than the RBA’s average forecast error for headline inflation over the year ahead (the median absolute error from 1990–2025 was 0.9 percentage points). At the time of the November 2024 Statement, government energy rebates were scheduled to be removed in the second half of 2025, which would have increased energy costs for households and pushed overall inflation materially higher. However, in March this year the Australian Government announced that the federal electricity rebates would be extended until the end of 2025. The cessation of electricity rebates is now scheduled for later this year (see Chapter 3: Outlook).

Underlying inflation was very close to expectations. The trimmed mean measure was 3.0 per cent over the year to the September quarter, compared with expectations of 2.9 per cent in the November 2024 Statement (Graph B.4). The staff construct the forecast for underlying inflation using a suite of inflation models and then overlay it with informed judgement. A key input that feeds into the forecasts is the assessment of capacity pressures in the economy and the labour market, and how that will evolve over the forecast period. As noted above, the staff assess there is currently slightly more capacity pressure in the economy than we had forecast a year ago. However, our judgement around the degree of spare capacity has evolved throughout the year and is discussed below.

The staff’s judgements have generally aligned with outcomes.

All economic forecasts reflect a substantial amount of expert judgement. This includes decisions about which models to use, how much weight to assign to each, how to incorporate information that models cannot capture and how much signal to take from recent data. Since May 2024, we have explicitly identified the key judgements and their contribution to the forecasts in the Outlook chapter of the Statement. This ensures clarity and accountability in how our forecasts are formed.

In November 2024, we judged that consumption would recover largely in line with income growth over the year ahead; this followed a period in which the response of consumption to developments in incomes had been weaker than expected, and there was significant uncertainty about whether this would persist. This judgement largely panned out over the year, with consumption growth evolving broadly as expected. However, this was due in large part to a very strong consumption outcome in the June quarter 2025, with growth tracking below expectations in the prior three quarters. Understanding the momentum in consumption has been made more challenging due to one-off factors such as the household electricity rebates and weather events, changes in households’ response to sales periods and large revisions to historical data. As a result, we are cautious in taking too much signal from the accuracy of our November forecast prediction (particularly given the longer run upward biases in our consumption forecasts) and are continuing to invest resources in improving both our nowcasts for consumption as well as the consumption models.

In the February, May and August forecasts, we applied some modest downward judgement to the inflation profile to reflect the possibility that there was a bit more capacity in the labour market and the economy than previously assessed. The downward judgement was initially motivated by weaker-than-expected wage and inflation data for the December quarter 2024 as well as some other data that suggested the economy might not be as tight as previously thought. However, the signal from data in recent months, including the strong inflation outcome in the September quarter and increase in capacity utilisation measures, has led us to remove this downward judgement (see Chapter 3: Outlook for further detail on this judgement).

An alternative explanation for the lower-than-expected inflation from December quarter 2024 was that margins in the market sector may have been temporarily compressed in response to weak demand. Input cost growth remained elevated over the year (in particular, unit labour cost growth), and our inflation forecasts in November 2024 assumed that these would be partly passed through to final prices. However, many firms in the market sector faced subdued growth in demand over the past year, which may have limited the extent to which higher input costs could be passed through to final prices. Starting in December quarter 2024, there were signs that margins in some parts of the economy were coming under pressure. We saw clear evidence of this in the housing construction sector. Between late 2024 and the first half of this year, developers offered discounts and incentives in response to weak housing demand, which saw new dwelling cost inflation – which is around 7 per cent of the CPI basket – ease sharply. The pick-up in new dwelling inflation in the September quarter reflected an unwinding of these discounts and an increase in base prices as housing demand has started to pick up. Some liaison contacts in other parts of the economy, such as retail, also reported pressure on margins earlier in the year though it is difficult to find conclusive evidence of changes in margins in the data. Nevertheless, given the possibility that firms may look to further unwind any margin compression that did occur now that private demand growth has picked up, this will be a key analytical priority in the period ahead.

Over the year, we adjusted our judgement around potential growth as well as the inflationary impact from weak productivity. The RBA’s GDP growth forecasts were upwardly biased over the past decade. This was partly because of an implicit assumption that productivity growth was temporarily weak and would gradually return to its higher historical growth rates, but this has not eventuated. As a result, our assessment of the sustainable rate of growth that the economy would return to when in balance was too high. This was one of the factors informing the decision to lower the assumption for medium-term trend labour productivity growth earlier this year.¹ We will continue to monitor our judgement that lower productivity growth may be less inflationary than previously assumed as households and businesses have already adjusted to the persistence.

The risks to the global outlook have evolved substantially over the year.

In each forecast round, staff consider plausible ways in which the economy could evolve differently from the central forecast. This analysis is often augmented with quantitative scenarios using the RBA’s macroeconomic models to explore the likely transmission to domestic inflation and employment if these alternative scenarios came to pass. Over the past year, the scenarios have explored the global economic outlook, the strength and persistence of the recovery in private demand, and the two-sided risks around our judgement about spare capacity. These risks remain relevant for the current set of forecasts.

The onset of higher US tariffs and greater policy uncertainty has shifted the risks around the global environment. In November 2024, we assessed that there were two-sided risks to the global economy given both the potential boost to global activity from fiscal policy and the effects of a possible intensification of regional conflicts on global trade. However, the risks to the global economic outlook became much more skewed to the downside following the announcement of materially higher US tariffs earlier this year. In the May Statement, we presented alternative scenarios that were tied to different tariff configurations and explored the possible transmission to economic activity from the heightened levels of policy uncertainty. We also considered the risks of inflationary pressures from a protracted ‘trade war’ given the potential for large supply chain disruptions. While the risk of a ‘trade war’ scenario has since diminished, it remains too early to know the full effects of the higher tariffs on activity and inflation. This is because the effects of tariff policy changes on the global economy are expected to be most pronounced in the second half of this year, noting that the implementation of higher tariffs was delayed from April to August.

Endnote

1 See RBA (2025), ‘Chapter 4: In Depth – Drivers and Implications of Lower Productivity Growth’, Statement on Monetary Policy, August.