Australia’s economy has demonstrated resilience in the face of potential tariff conflicts, but experts warn that complacency could lead to a significant correction. Despite navigating trade disruptions throughout 2025, the latest insights from Harry Murphy Cruise of Oxford Economics Australia suggest that renewed geopolitical tensions may pose unexpected risks.
The latter half of 2025 surprised analysts with the strength of the Australian consumer and a resurgence in inflation, a trend likely to continue as trade and geopolitical issues escalate. Murphy Cruise noted that many investors have been overlooking these risks, as evidenced by record-high equity prices and low-risk premiums. Though he does not foresee an outright trade war, he cautioned that tariffs remain a threat.
A recent example of rising tensions includes Donald Trump‘s comments regarding potential actions against European nations if the United States was barred from acquiring Greenland. Murphy Cruise emphasized the need for vigilance, stating, “The risk is more tariffs and geopolitical tensions could snowball.” He added, “Things have been good but we can’t just be complacent.”
The enthusiasm surrounding artificial intelligence (AI), which has driven market gains in both Wall Street and the Australian Securities Exchange (ASX), also presents a risk. Should this optimism diminish, the markets could be primed for a painful correction. Despite these uncertainties, Murphy Cruise described Australia’s economy as entering 2026 “in a good position.”
He pointed out that the Reserve Bank of Australia (RBA) may need to intervene with interest rate hikes to curb demand. According to Murphy Cruise’s report, underlying inflation is projected to ease to 2.8 percent by the end of 2025, falling within the RBA’s target range of 2 to 3 percent. The central bank’s previous forecasts indicated a trimmed mean inflation rate of 2.7 percent by December 2026, but these figures were last updated in November before inflation peaked at 3.3 percent.
Murphy Cruise predicts that the unemployment rate will rise to 4.6 percent by mid-2026, compared to the current rate of 4.3 percent. While money markets anticipate at least one rate hike in 2026, he argues that a deteriorating labor market may effectively raise the cash rate by 25 basis points, negating the necessity for the RBA to increase borrowing costs.
Consumer confidence has also taken a hit, with recent surveys indicating that the uptick in inflation may be fleeting. Shane Oliver, chief economist at AMP, echoed these concerns, asserting that market expectations for rate hikes appear overly aggressive. He noted that “economic data released so far this year has been mixed,” highlighting stronger building approvals and household spending alongside weaker consumer confidence and job openings.
The upcoming inflation data for the December quarter, set to be released at the end of this month, will be pivotal for shaping expectations in the months ahead. As Australia navigates these complex dynamics, the interplay of tariffs, inflation, and consumer sentiment will remain critical to the economic outlook.
