Australian economy to improve in 2025 and 2026 according to NAB Chief Executive Officer

GDP growth rate likely to improve in 2025 and 2026

National Australia Bank CEO Andrew Irvine is confident about the prospects for the Australian economy. Speaking at the release of the NAB’s 2024 half-year results last week, he expects the Australian economy to improve to around trend growth of 2.3 percent in 2025 and 2026. This is an improvement on the 1.7 percent below-trend GDP growth rate expected for 2024.

According to NAB, household consumption in the second half of 2023 was impacted by interest rates and cost of living pressures, weighing on real GDP growth which is expected to remain below-trend over the near-term. However, tax cuts later this year should provide some relief, he said.

Following 1.5 percent GDP growth over 2023, NAB sees economic growth in 2024 at 1.7 percent, before improving to around 2.25 percent in 2025. NAB considers that pressure has eased in the labour market and expects wage growth to slow from elevated rates in 2023. The unemployment rate is expected to drift higher peaking at around 4.5 percent by end of 2024, although most indicators of labour demand remain healthy suggesting employment will continue to grow. These labour market conditions are consistent with steady economic growth over the medium term with little likelihood of an economic recession.

Australian bond yields point to a steady economic outlook

The Australian 10-year bond yield currently sits at 4.5 percent, compared to the current 2-year and 3-year bond yields of 4.1 percent. This is a positive yield curve and historically is a reliable pointer to a steady future economic growth rate in the medium-term.

Furthermore, with the Australian 2-year bond market yield of 4.1 percent, when the Reserve Bank Official interest rate level is 4.35 percent, is also telling us that the general level of interest rates across the broader Australian economy has most likely peaked.

Experienced investors know that the bond market is considerably more liquid and deeper than the equity market and that big market movements are usually initiated by the bond market, not by the share market. Accordingly, these are reliable indicators that the economy is not headed for a recession anytime soon, and discerning investors know that over the long run, the share market should eventually follow the economy. Despite short term fluctuations, GDP has grown consistently throughout history and so economic growth isn’t about luck, it’s how the world works, which is why the share market has grown consistently over time.

Implications for investors

History shows that the share market rewards the optimistic and there is justified investor optimism based on current employment trends and interest rate policy settings, and the medium-term economic outlook. Furthermore, bankers don’t always talk publicly in an optimistic tone, however when they do, it often pays for investors to listen.

The RBA Board meeting and Official cash rate announcement on May 7 could have some bearing on the short-term direction of the share market, although the bond market has already spoken, and the bond market takes a medium to long-term view of the economy and markets more broadly.

This implies that investors taking a positive view of the share market today are likely to be rewarded with favourable future returns. The key is to hold a diversified portfolio of companies for the long-term with a focus not so much on the state of the business today but how well it is positioned for the future.