Inflationary pressures, domestic and international uncertainty and persistent workforce shortages mean businesses are more concerned than confident about the year ahead.
At a webinar to launch the 12th Australian Industry Outlook report, the Australian Industry Group (Ai Group) explored key findings including how improving productivity is a central focus for business this year.
Business leaders from across the industrial ecosystem are surveyed in the annual report, developed with the support of AustralianSuper, to understand their expectations and strategies for the coming year.
“The top-line takeaway of the survey, conducted late in 2024, was the recovery that had been expected through the back half of last year didn't occur,” Ai Group Chief Executive and webinar panellist Innes Willox said.
“Expectations were high this time a year ago; the sentiment was that the economy would be improving — certainly from where it was a year before.
“That didn't come to fruition, and that has really impacted business sentiment as we get well into 2025.
“Business is expecting another subdued year; there will be more bunkering down and getting by than looking forward to significant growth and significantly better times.
“Business is looking more and more to the short term and making decisions around short-term matters rather than looking to long-term prospects.
“The focus is on getting through the period we're in now — a rather sticky period, a flat spot in our economy that continues and has been in place for some time.
“Businesses are telling us they're going to cut back on longer-term investment and on investment in areas like research and development.
“This is being impacted by a range of factors in their decision-making; inflation, weakening consumer demand and labour and skill shortages continue to bedevil industry at all levels.
“Inflation, which remains high and sticky, has been the underlying cause of our economic lows since we emerged from the pandemic around three years ago.
“We’re starting to see some moderation in inflation, but we still have a long way to go.
“Then there is regulation and general uncertainty — uncertainty domestically around what policy directions will be and the impact of existing policies, as well as uncertainty around the next election, due within weeks.”
International uncertainty is a key influence on business decision-making around investment and employment.
“Global uncertainty has increased dramatically in recent weeks since the inauguration of President Trump,” Mr Willox said.
“We've seen the issue around steel, aluminium and iron tariffs emerge and impact Australia directly, and that will have to be worked through very quickly by government.
“There is also the prospect of broader tariffs beyond steel, aluminium and iron which the US administration has under consideration.
“Then there are broader tariffs on Canada, Mexico and China.
“Mexico and China, in particular, are big sources and markets for Australia, with China our No.1 trading partner.”
Fellow panellist Amber Rabinov, Head of Thematic Research at AustralianSuper, added: “Some of the actions and announcements that have come out of the Trump administration have been more aggressive than we at AustralianSuper had expected, but others have been a case of trying it on and sorting out the legalities and details in the courts later.”
Ms Rabinov shared a framework AustralianSuper has been using to explore the macro impact of Mr Trump's policies.
It identified four policy areas: tariffs, tax, immigration and regulatory policy.
“The order of focus by Trump and his team on starting with actions on tariffs and immigration, rather than, say, tax policy, which has clearly defined sunset dates that are going to start kicking in over the next couple of years, differed from our expectations,” Ms Rabinov said.
“We think it’s because actions on immigration and tariffs have been able to be implemented by executive orders, unlike the changes in the tax and regulation realms, which require a slower legislative process and need to be worked through Congress.
“One point to note on tariffs, which have been topical since Trump took the presidency back, is that tariffs don't just represent trade policy to him. It's almost as if he's using tariffs as a multi-tool or a Swiss army knife, if you will.
“Sometimes, the instrument is intended to achieve an industrial policy — to boost local manufacturing. Sometimes, it's for domestic policy objectives, such as around the imports of illegal drugs and undocumented migrants.
“Other times, it's to pressure countries to achieve other geopolitical aims and to boost the US's external power, and sometimes, Trump's looking to use trade policy — in particular, tariffs — as a fiscal tool, in terms of being able to raise revenue to help the budget deficit.”
“We're a small open economy exposed to trade, and while we're not directly caught in Trump's crosshairs — we don't have a trade surplus with the US — we get caught up in the action through some of the tariff policy that's blanket spread across the world,” Ms Rabinov said.
“However, the direct impact of the steel and aluminium import tariffs, at the macro level, is quite negligible.
“When we look to steel and aluminium exports in terms of Australia's trade relationship with the US, they're quite small.
“They make up less than 4 or 5 per cent of Australia's total goods exports into the US, and when we look at all of Australia's goods exports with the world, they only represent about 0.1 of a percentage point.
“Where we really get caught up in terms of the macro implications from Trump's policies is via the US's policy on China's trade.
“It's this indirect effect via China that makes an impact for Australia.
“China is our largest export market. It takes about a third of our total exports with the broader Asian market — about 80 per cent of Australia's exports.
“At this stage, we think the impact is going to be mostly felt through the currency – the Australian dollar and commodity prices — although elevated uncertainty also has the potential to weigh on investment and hiring.
“In summary for Australia, we can say Trump's trade policy presents definite growth headwinds for our economy.
“The inflation impacts are probably a little more mixed. There are concerns that, potentially, China could dump goods around the world, and our market is one of those in the crosshairs there.
“Certainly, for those big transition mechanisms, the Australian exchange rate and interest rate markets are going to get caught up in the bigger global moves.”
“We're gearing up for more of the same as last year,” Ai Group Senior Research Analyst Colleen Dowling, who led the research, said.
“We have challenges of inflationary pressures, uncertainty in Australia and globally, and persistent workforce shortages.
“In response, we're seeing businesses reshape their investment in a continuation of a back-to-basic cycle that we saw emerge last year.
“To manage this, industry leaders are planning to improve processes, lift current workforce skills and upgrade technology to improve productivity — making more with what we have.
“Businesses are either growing or maintaining a focus on shorter-term horizons.
“There's definitely more concern for businesses this year than confidence,” Ms Dowling said.
“Since the pandemic, we've experienced very tight labour market conditions: unemployment is still historically low, and job vacancy rates are elevated well above their long-term average,” Ms Dowling said.
“The leading impact of these shortages is reduced operational efficiency, which suggests Australia's poor productivity performance can in part be attributed to these skill shortages.
“We're seeing missed opportunities for business development, reduced financial performance and a reduction or a deferment of projects. There's also increased risks around regulatory compliance and safety.”
Ai Group Head of Research & Economics Jeffrey Wilson said staff shortages could be largely attributed to the need for technical staff and the growing care economy.
“The need for specific technical skills or occupational licensing requirements — such as those for trade workers and technicians — acts as a barrier to new supply of labour in those areas,” Dr Wilson said
“It's hard to add new staff when they have to go through the training and licensing system.
“Then there is the care economy, which has had significant growth over the past few years.
“Significant increases in childcare, aged care and disability care through the NDIS are causing growing pains for these industries.
“The outlook is that staff shortages are going to lessen, but it's in these two areas that the tail is probably going to be the longest.”
“Ai Group research last year showed workforce skill shortages are holding back technology adoption rates,” Ms Dowling said.
“Productivity gains are a primary motivator for adopting technology, but we're being held back from this adoption by a deficit of workforce skills and capability."
Retention and better utilisation of the existing workforce are key strategies business is using to manage labour shortages.
Leaders plan to increase their headcount where they can.
“Businesses tell us that when they can't hire skills directly, they hire for workforce instead and then retrain or upskill those people,” Ms Dowling said.
Technology investments have also increased in importance from last year.
“However, these are all shorter-term strategies, which come at a cost to longer-term planning,” Ms Dowling said.
“One major victim is R&D spending.
“R&D intentions are not only at their lowest level in a decade but the bottom-ranked of all investment priorities.”
Only 11 per cent of businesses ranked R&D as a top priority for 2025, down from 24 per cent this time last year.
The survey responses cover around 1 per cent of the Australian labour market and about 1.6 per cent of all Australian business revenue that, when combined, is over $60 billion of revenue.
“The survey is a powerful stocktake of sentiments and strategies in Australia's boardrooms today,” Ms Dowling said.
“The findings enable Ai Group to advocate effectively for industry because we have this solid and substantive evidence base.”
Read the full report here.
Wendy Larter is Communications Manager at the Australian Industry Group. She has more than 20 years’ experience as a reporter, features writer, contributor and sub-editor for newspapers and magazines including The Courier-Mail in Brisbane and Metro, the News of the World, The Times and Elle in the UK.
