Australia’s economy is likely to defy Donald Trump’s trade war and deliver improved performance across 2025, a leading economist says.

Speaking at Oxford Economics Australia’s recent Construction Conference held in Melbourne, Sean Langcake, Head of Maro Economic Forecasting at Oxford Economics Australia, said that there were reasons to be optimistic about the nation’s economic outlook in 2025.

“Australia is going to stare down global turbulence,” Langcake said.

“There are industries that are going to be affected by the trade wars and other things which are going on. But overall, we are fairly sanguine about how Australia as a country is going to fare.”

Langcake’s comments come as the United States has introduced tariffs of 25 percent on Australian steel and aluminium exports.

The comments also come as Australia’s economy has laboured over recent times under the weight of inflation and higher interest rates.

Overall, the nation’s gross domestic product (GDP) increased by just 1.3 percent across calendar 2024. Stripping out population increases, the economy actually contracted by 0.7 percent on a per capita basis.

Encouragingly, however, the economy picked up in December quarter, growing by 0.6 percent overall and by 0.1 percent on a per capita basis. This was the first quarter in which the economy had not contracted on a per capita basis for two years.

Speaking about the tariffs and trade wars, Langcake acknowledges that these will impact specific sectors.

In steel and aluminium, for example the United States takes around 33 percent and almost ten percent of our overall exports. Meanwhile, other sectors such as transport equipment and power generation equipment rely on the US for almost half of all exports.

Overall, however, the US accounts for only around four percent of Australia’s exports total exports. This means that the direct effect of the tariffs on our economy will be manageable.

Also manageable will be any indirect impact through means such as effects on China, which takes almost half of Australia’s exports.

According to Langcake, the effect upon Australia from any trade war damage to the Chinese economy will be limited by our status as a relatively low-cost producer for many of China’s imports.

(despite being Australia’s fourth largest trading partner, the US accounts for only a small portion of Australia’s exports)

Things getting better at home

Turning to the domestic economy, Langcake says that green shoots are emerging in consumer spending.

This is important as consumer spending accounts for just over half of the nation’s economy.

Following several years of difficult conditions, retail sales are now beginning to recover.

Two factors are supporting this.

First, energy bill relief measures have helped to leave more disposable incomes in consumer pockets.

Beyond that, consumer confidence is being supported by the ongoing resilience of the nation’s labour market. This has seen Australia’s unemployment rate (currently 4.1 percent as of January) remain around or below four percent since the end of COVID lockdowns.

Going forward, Langcake says that there are no apparent signs that this resilience will fade.

In particular, levels of youth unemployment and ‘underemployment’ (workers not getting as many hours as they desire) remain stable.

This is important as both youth unemployment and underemployment tend to rise ahead of broader layoffs. This occurs as younger workers tend to be concentrated in positions which are laid off earlier during downturns whilst employers prefer to reduce hours as an initial response to activity downturns rather than laying off workers completely.

Productivity still a challenge

Despite his optimistic outlook, Langcake cautions that Australia has struggled to maintain any strong growth in productivity outside of the capital-intensive mining boom period.

He points out that neither political party has yet announced any significant policies on productivity improvement as part of their election platform.

No further rate cuts for now

Finally, Langcake does not expect any further cuts to official interest rates until at least the second half of this year.

He notes February’s interest rate cut was unusual as it occurred at a time when unemployment was lower and services inflation was higher compared with what is usually the case when the Reserve Bank lowers its official interest rate target.