What The Latest Economic Forecast Means For Small Businesses

According to the latest economic forecast, the Australian business landscape is set to change significantly in 2025. Some key indicators, such as growth, inflation, and interest rates, are changing in ways that may impact small businesses around the country. 

Any changes in economic trends may have a massive impact on small and medium-sized enterprises (SMEs), like consumer demand, cost pressures, and financing conditions. 

Understanding how these changes affect each market sector can help business owners looking to stay resilient. 

Let’s explore how changes and trends may affect small businesses, and the strategies SMEs can use to adapt.

Current Economic Outlook For Australia

Some predictions suggest that 2025 will bring both challenges and opportunities for Australian businesses. Here’s what the latest reports suggest.

Growth Projections

Following slower growth in 2024, Australia’s economy is expected to improve, with stronger-than-expected growth. Deloitte forecasts GDP growth of 1.6% in 2025, increasing to 2.3% in 2026 and 2.7% in 2027. 

This gradual recovery in economic growth will be driven by stronger domestic demand, easing inflation, and potential rate cuts by the Reserve Bank of Australia (RBA).

While stronger growth is not expected, a steady upward trend may provide a more stable environment for SMEs to operate.

Inflation Trends

Inflation has been a significant concern and a cause for slow economic activities over the past few years. However, the latest economic forecast shows signs that price pressures are easing. 

According to the Reserve Bank of Australia (RBA), inflation is expected to return to the 2-3% inflation targets by the second half of 2025. Lower inflationary pressures and better financial conditions mean that SMEs can experience reduced cost pressures on goods, materials, and wages. 

These trimmed mean inflation rates may help stabilise operational expenses and price increases. However, depending on global inflation and other trends in global economic growth, some sectors may still face challenges.

Interest Rate Outlook

Elevated interest rates have been a major monetary policy issue affecting small businesses. High borrowing costs can make it potentially more expensive and risky to get loans and access capital for growth. 

However, a recent economic forecast predicts that the central bank might start cutting interest rates by the second quarter of 2025, reducing the interest rate by the end of the year. 

It could make financing more affordable for SMEs looking to expand, search the labour market to hire staff or invest in new technology to optimise and streamline operations.

The Implications Of The Economic Outlook For Small Businesses

With the changes in economic conditions, small businesses may want to assess how changes in consumer behaviour, financing conditions, and costs could impact their operations.

Consumer Spending

As inflation slows and interest rates decrease, the decrease in the consumer price index could encourage consumer confidence and increase spending. 

Lower borrowing costs might leave households with more disposable income, potentially leading to an increase in overall spending. It presents an opportunity for SMEs in retail, hospitality, and service industries to attract more customers and increase revenues.

However, SMEs’ expectations may wish to remain subdued and continue monitoring consumer sentiment. Global uncertainties, unexpected economic downturns, or geopolitical tensions from other countries could quickly shift behaviour.

Financing Conditions

The latest economic forecast shows a potential reduction in interest rates that might ease financing conditions. The ease in conditions may make it more attractive for businesses to take out loans for expansion, equipment upgrades, or hiring. 

However, while the cost of borrowing might get cheaper, lenders may remain cautious about extending credit, specifically to businesses with weaker financials and no collateral. 

SMEs looking to take out loans may achieve this by improving their credit profiles, maintaining strong financial records, and considering alternative funding sources such as grants or private investment.

Cost Pressures

Inflation is predicted to stabilise in 2025. This stabilisation means that input costs like raw materials and energy can be expected to decline and become more predictable. 

However, SMEs may wish to prepare for other financial challenges. The economic forecast shows that wage pressures and human capital trends may remain broadly unchanged and high as the labour market remains subdued with lower supply and high demand.

Global supply-side disruptions due to geopolitical issues with major trading partners could continue to affect the pricing of imported goods. This may create challenges for businesses that rely on imports.

SMEs can potentially reduce these costs through better supplier negotiations, process operational efficiencies, and switching to local sourcing.

Strategies For SMEs To Navigate The Economic Landscape

To grow in this changing economy, small businesses may use strategies like financial planning, cost management, and market adaptation.

Financial Planning

With the potential headline inflation rate decreasing and interest rates tilted to the downside, SMEs may consider adjusting some of their financial strategies:

• Lock in lower rates: Businesses with existing variable-rate loans can explore refinancing options to convert to a fixed-rate loan or one with a lower interest rate.
• Build cash reserves: A financial safety net in 2025 can help businesses weather unexpected economic turbulences or additional downside risks to the economic forecast this year.
• Explore funding opportunities: Small businesses can consider government grants, business loans, and investment opportunities as alternatives to traditional funding.

Cost Management

Managing expenses effectively is key to maintaining profitability and avoiding high debt. SMEs can take several steps to keep costs under control while maintaining productivity growth:

• Negotiate with suppliers: Businesses can revisit prior contracts to secure better pricing and payment terms.
• Optimise inventory management: Small businesses can consider avoiding overstocking or understocking to reduce risk and maximise profit.
• Invest in efficiency: Technologies like automation and cloud-based solutions can reduce operational costs and improve productivity.

Market Adaptation

Small businesses that adapt quickly to changing market conditions can gain a competitive advantage. Strategies to consider typically include:

• Diversifying revenue streams: Exploring new products, services, or customer segments can provide stability.
• Pushing digital presence: SMEs can strengthen their online marketing and e-commerce platforms to potentially reach more customers.
• Strengthening customer relationships: Personalising services and maintaining high-quality customer interactions can build brand loyalty and drive repeat business.

Conclusion

Australia’s economic forecast for 2025 presents both opportunities and challenges for small businesses. Some changes are more drastic, while other metrics stay broadly consistent.

While GDP growth is forecasted to improve and inflation pressures are expected to decline, businesses may want to consider staying agile in response to shifting financing conditions and cost structures. 

By focusing on smart financial planning, effective cost management, and adaptive market strategies, SMEs can prepare themselves for success in a changing economy. Staying informed and proactive may help small businesses achieve long-term resilience and growth.