Lower inflation and potential interest rate cuts set the stage for stronger small-business growth this year, says Commonwealth Bank Chief Economist Stephen Halmarick.
As the Australian bank that considers itself ‘The Backer of Business Yakka’, Commonwealth Bank offers SMEs support, tools and knowledge to help them thrive.
With this in mind, Halmarick shared insights with Inside Small Business into what SMEs should expect in the year ahead, starting with a prediction of an economic growth rate of about 2 per cent this year – roughly double last year’s rate.
“Small businesses are really the lifeblood of the economy, and they should do quite well in a lower interest rate, stronger growth environment,” he explains.
“We expect inflation to continue to decelerate across most of the major economies in 2025, including here in Australia. Lower inflation allowed most other major central banks to reduce interest rates in 2024. We expect the Reserve Bank of Australia to join that trend this year, and we expect a rate cut as early as February. Falling interest rates will be good for domestic and global economic growth.”
However, Halmarick warns that while underlying conditions will be favourable, business owners should be cautious about external factors that could impact trading, especially in export markets, a reference to uncertain political environments in countries including the US, Germany and France, and military conflicts in Ukraine and the Middle East.
“We have some pretty big geopolitical developments around the world that could increase volatility and uncertainty, so that’s certainly worth keeping an eye on.”
Reserve Bank language bodes well for interest rates
The Reserve Bank’s December 2024 decision to hold the cash rate steady was in line with Halmarick’s expectations. That ended the first year since 2017 the bank had not moved the rate in either direction. But what stood out most for him was a change in the language and tone of the announcement.
“It is unusual to go through a year with no policy action from the Reserve Bank. What we saw from the bank in December was a real change in the bias of their language. Previously, it said it could not rule anything in or out, however, the bank removed that sentence from its December statement, and the Reserve Bank Governor went out of her way to point out that the bank is getting much more confident that inflation is heading towards the 2 to 3 per cent target range.
“She specifically mentioned that the GDP numbers have been softer than expected and that wage growth was softer. In our mind, that opened up the door to rate cuts this year, and we think that it could start as early as February and run throughout this year.”
He predicts a reduction of 100 basis points throughout 2025, which would see the cash rate reach 3.35 per cent before December 31.
Five key structural factors
Halmarick has considered what significant structural factors could dominate global markets this year. He settled on the “Five Ds” that he anticipates will influence global economic conditions.
Demography: The aging population is really important. “We can see from our data that older Australians are spending more and saving more. That’s going to have an impact on the economy.”
Debt: Many governments worldwide are building up debt. “They will have to borrow a lot of money over the next few years, not just here in Australia, but certainly globally.”
Decarbonisation: The move to net zero is very important for the planet. “That will cost a lot of money, but it will also create many opportunities and challenges for the economy.”
Decoupling: Decoupling from China is growing rapidly, particularly by the US, which is working towards reducing China’s role in the global supply chain.
Digital: Last but not least is the growing digitalisation of business – particularly the rise of artificial intelligence. “AI promises a big increase in productivity, which could lower inflation and interest rates over the medium term.”
Halmarick concludes that these five significant structural factors will influence the global economy and trading environment for this year and many more to come.
To learn more about how Commonwealth Bank supports small businesses, visit the bank’s website here.
