Australia Country Risk Report

Australia has been a strong performer in the past decades, with its GDP expanding by +2.9% on average in the 2000s and +2.6% on average in the 2010s. Thereafter, a strong post-pandemic recovery and favorable terms of trade had positioned Australia more favorably in the cyclical aspect compared to most advanced economies. Growth slowed down to +1% in 2024 and we expect a mild recovery to +1.6% in 2025 and +2.2% in 2026. After slowing down between 2022-2024, household consumption should improve in 2025 thanks to lower interest rates, though latent cost-of-living pressures (especially on housing) should continue to weigh. Additionally, the external sector is facing headwinds amidst policy and geopolitical uncertainties. As more than 30% of Australian exports go to China, this phenomenon could become even stronger as trade tensions between China and the US escalate. Likewise, China’s growth is converging to a slower path than before, which will also affect Australian exports and growth. Over the coming years, a more sustainable balance between supply and demand across the economy, including in labor and product markets, is expected to support the return to low and stable inflation as growth in domestic activity returns to trend.

Although the fiscal deficit increased significantly during the pandemic, increased tax revenues and the expiry of Covid-era support programs led to a steep consolidation of the fiscal balance in 2022. In 2023, high commodity prices and lower unemployment allowed the government to register a narrow deficit of -0.8% of GDP. Despite those two years of fiscal balance improvements, sources of fiscal pressure, such as falling global prices for Australia’s commodity exports, an aging population, climate change and the country’s heavy reliance on tax revenues, mean that the fiscal deficit widened to -2.7% in 2024 and is likely to reach -1.8% in 2025. Australia is likely to continue maintaining a moderate fiscal deficit, given rising defense costs, healthcare and welfare spending.

The Reserve Bank of Australia’s (RBA) rapid monetary policy tightening in 2022-2023 (+425bps to the policy rate) managed to slow down inflation substantially. After staying on hold through 2024, the RBA started its easing cycle by cutting the policy rate by -25bps twice during the first half of 2025. We forecast inflation to retreat to 2.2% in 2025 and 2.4% in 2026 (after 3.2% in 2024), allowing the RBA to deliver -75bps worth of further policy rate cuts.

Australia’s business environment is well-positioned in our assessment of 185 economies. The World Bank’s annual Worldwide Governance Indicators surveys suggest that the regulatory and legal frameworks are business-friendly and the level of corruption is low. Likewise, the Heritage Foundation’s 2024 annual Index of Economic Freedom surveys have put Australia 14th out of 184 economies in recent years and 4th in the Asia-Pacific region, reflecting very strong scores with regards to property rights, judicial effectiveness, government integrity, business freedom, trade freedom, investment freedom and financial freedom. However, Australia scores less favorably regarding the tax burden, attributed to a 45% income tax rate and a 28.7% of GDP tax burden. In our proprietary Environment Sustainability Index 2025, Australia ranks 51st out of 210 economies, down from 42nd in 2024. Underperformance is mainly visible in renewable electricity output, recycling rate and CO2 emissions per GDP.

The Labor party, led by prime minister Anthony Albanese, was renewed in government following the general election in May 2025. The party enjoys a comfortable majority, with the highest seat count ever achieved in the House of Representatives. Among the Labor party priorities shown during the campaign were a focus on the housing crisis with promises to commit AUD10bn to housing construction and a proposed campaign finance law. The amendments include limits on donations and campaign spending as well as a lowering of the disclosure threshold to AUD1000 from its current threshold of AUD16,9000. The intent of these reforms is to limit big money’s influence on Australian politics. The next elections will be held by September 2028.