Australia’s economy has navigated potential tariff crises in 2025, but experts warn it could face serious risks if complacency sets in. According to Harry Murphy Cruise, an economist at Oxford Economics Australia, the resilience of both domestic and global economies amidst trade disruptions has been a defining characteristic of the year. As forecasters were surprised by the strength of Australian consumers and the uptick in inflation in the latter half of 2025, lingering trade and geopolitical tensions could similarly take them by surprise.
As the year progressed, investors and corporations seemed to overlook these risks, as evidenced by record-high equity prices and low-risk premiums. While Murphy Cruise does not view an outright trade war as a primary concern, he cautions that tariffs remain a significant threat. Recent comments from former U.S. President Donald Trump concerning European countries—if the U.S. is blocked from purchasing Greenland—illustrate a resurgence in geopolitical tensions.
“The risk is that more tariffs and geopolitical tensions could snowball,” Murphy Cruise stated, emphasizing the need for vigilance. Economic optimism has been buoyed by AI advancements, which have contributed to bullish market trends on Wall Street and the Australian Securities Exchange (ASX). Nevertheless, Murphy Cruise warns that the current euphoria may be fleeting, potentially leading to a painful market correction.
Entering 2026, Australia’s economy is positioned well, according to Murphy Cruise, although he notes a risk that the situation may be “too good.” He points out that the Reserve Bank of Australia may need to intervene with interest rate hikes to temper demand. A report released by Oxford Economics Australia predicts that underlying inflation will decrease to 2.8 percent by the end of 2025, which aligns with the Reserve Bank’s target range of two to three percent.
Recent forecasts from the Reserve Bank suggest that the trimmed mean inflation rate is on track for 2.7 percent by December 2026. However, these predictions were last updated in November, before inflation peaked at 3.3 percent in recent monthly figures. Murphy Cruise also anticipates that the unemployment rate could rise to 4.6 percent by mid-2026, up from the current rate of 4.3 percent.
Despite market expectations for at least one rate hike in 2026, Murphy Cruise believes that a decline in the labor market could effectively act like a 25 basis points increase in the cash rate, negating the necessity for the Reserve Bank to raise borrowing costs. Recent surveys indicating declining consumer confidence suggest that the inflation resurgence may be short-lived.
Adding to the discourse, Shane Oliver, chief economist at AMP, has noted that current market expectations regarding rate hikes appear overly aggressive. “Economic data released so far this year has been mixed,” he observed, highlighting stronger building approvals and household spending alongside weaker consumer confidence and job openings. The impending release of December quarter inflation data at the end of the month will be crucial for shaping expectations in the coming months.
As Australia heads into 2026, the interplay between domestic economic resilience and external risks will be critical. Analysts and policymakers alike will need to remain alert to the potential for renewed trade tensions and their implications for the broader economy.
