Australia's economy rebounded in the December quarter, recording its fastest growth in two years, driven by improved household spending and stronger exports. GDP expanded by 0.6 percent for the quarter and 1.3 percent over the year. Another positive development is that GDP per capita has stopped contracting, rising marginally by 0.1 percent after seven consecutive quarters of decline.

This gradual strengthening in growth aligns with market expectations as some economic pressures begin to ease. Monetary policy has entered a cycle of rate cuts, which is expected to drive a gradual recovery in household spending and business investment. Furthermore, real wage gains, driven by low unemployment, moderating inflation and tax cuts, further strengthen the economic outlook.

While the economy remains in a weaker position, there are signs that the worst may be over. Cost-of-living pressures continue to weigh on households; however, their overall impact on spending and the economy has diminished.

Risks stemming from global trade tensions grew over Q1. The announcement of significant changes to US trading policies and the imposition of tariffs on most countries have generated considerable uncertainty and volatility in the global landscape. While the direct impacts of new trade tariffs on Australian exports are likely to be minimal, risks surrounding a global economic downturn and the performance of major economies such as China are heightened and could create significant headwinds for Australia.

The response to tariff announcements has been mixed, with some countries looking to negotiate new trade agreements with the US, while others look to divert their exports away from the US to limit their exposure to the volatility. China has adopted the later approach, activity seeking new markets to fill the gap and flooding global markets with excess supply. This is seeing international goods prices fall and should support some easing in goods inflation in the Australian economy.

These dynamics will likely see the Reserve Bank of Australia (RBA) lend more support to the Australian economy in the near-term, which could bring forward the next rate cut to the first half of the year.

Despite the potential for some upside, the risks are heavily skewed to the downside. Reduced confidence due to increased uncertainty and volatility will mean investments are approached with more caution. The suddenness and scale of new announcements have already resulted in businesses holding off with their investments until certainty increases and risks can be better understood. While these disruptions to the global economy are unlikely to generate a recession in Australia, growth is expected to be held back by uncertainty and shocks to external demand.