Rejoice! Some fabulous surprises in the latest economic news

The run of recent news on the Australian economy is unambiguously good.

Not that there is much media coverage of it, but when one steps back and considers the economy's foundations, there are many reasons to have a favourable view of the changing structural underpinnings.

To be sure, the business cycle is still at play, with global conflicts presenting a particular short-term challenge, along with what appears to be a transitory lift in inflation. The U.S. economy, under the economic vandalism of President Trump, is on the cusp of recession, which will be a challenge for Australia in the year ahead and could drive a cyclical downturn.

It is also obvious that interest rates are uncomfortably high as the Reserve Bank works to tackle the inflation problem.

The encouraging news has shown up in areas that have been dogging policy makers, the business community and the general population for many years.

Australia rejoins the global economic elite

The 2025 fourth quarter results confirm Australia’s economy is again among the world’s best.

Most important is the confirmation of an uplift in productivity growth.

According to the ABS National Accounts, productivity, measured as GDP per hours worked, rose 1% in the year to the December quarter.

This shows that the speed limit of economic growth can be increased, creating more jobs, without the risk of higher inflation. This is why productivity has been such a critical aspect of the policy settings of Treasurer Jim Chalmers in recent years.

The other good news from the perspective of driving future inflation risks lower is the fall in real unit labour costs. They were down 0.1% in the year to the December quarter.

Real unit labour costs are different from wages as they include all of the costs to employers from hiring workers (wages, overtime, bonuses, payroll tax, superannuation and the like) and they provide a link between productivity and the cost of labour. The lower the result, the better the effect of productivity and further price pressures.

With productivity rising and real unit labour costs falling, two of the basic and fundamental issues underpinning the interest rate hawkishness of the RBA are now turning in favour of lower underlying inflation. In time, this will see a structural lowering in interest rates.

The other good economic news is in the unemployment rate, which has fallen in recent months from 4.4% to 4.1%. With the number of job vacancies also ticking higher, after several years of decline, there are fundamentally sound reasons to expect the unemployment rate to remain below 4.5% in the year ahead.

Ever since the early 1970s, over 50 years ago, it is rare for Australia to have the economic policy settings in place that can sustain this incredibly low level of unemployment. Indeed, there have been only three years in the last 50 that unemployment has been lower than it is today and all of this has been witnessed in the last five years.

Facts from the coalface confirm poverty is easing

As the 2025 report card on Australia’s economy is filled in, the good news is outweighing the bad.

To be sure, there are challenges in the economy that will require further policy responses from the Albanese Government. The 12 May Budget will be an important part of delivering more of those changes.

Issues to do with intergenerational inequality, housing affordability and accessibility, the efficiency of the superannuation system, infrastructure and budget repair are just some of the wider-ranging issues that will no doubt be part of the Government’s ongoing policy framework.

For now, there are some welcome signs that past reforms are delivering benefits to the economy.

What could go wrong?

There is a group of economists who have a different view. “Misery gutses” might be an apt description.

At the first hint of decent economic growth and low unemployment, they scream “higher interest rates”. Rather than embracing the good news and analysing how these conditions improve living standards, the knee-jerk “rate must rise” is simplistic and potentially harmful.

The RBA has been more sober, with several senior officials giving speeches about the experience of the trade-off between inflation and unemployment and how the current inflation problem might be a reflection of a series of transitory issues and that inflation is “not taking off”.

Managing the economy is always difficult and is subject to shocks that are outside the control of policymakers.

For now, there is some good news that should be welcomed and built upon, whilst being alert to the risks from the international economy.

The RBA would be wise to sit tight while it assesses the fallout, while the Chalmers Budget in May will no doubt see a range of new reforms and some fiscal repair, which bodes well for the medium term or at least until these global ructions fade.

Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.