The past year tells us that trying to predict the future of the global and Australian economies is pretty much a coin toss.
Geo-economic fragmentation has been a dominant theme of 2025, with the old WTO-governed international trading order apparently tossed into the dustbin of history. The definitive moment arrived in April with “Liberation Day” and the Trump administration’s imposition of a baseline tariff of 10 per cent on most US imports, along with a list of so-called “reciprocal” bilateral tariffs of up to 50 per cent. A shocked financial market reaction triggered a temporary pause, but that short-term response was a signal of the messiness to come, not a lasting retreat. More tariffs came and went, the “TACO (Trump always chickens out) trade” became a thing, and countries paid court to the US, negotiating varying degrees of trade relief.
Washington and Beijing also sparred repeatedly as China responded with aggressive trade measures of its own. Indeed, a second theme of the year has been the intensifying geo-economic contest between the world’s two great powers.The battleground has extended beyond tariffs as both sides have demonstrated an increased willingness to weaponise economic variables — from finance and investment flows to rare earths, computer chips and AI. The contest between the US and China over the commanding heights and chokepoints of the world economy will continue to shape the international environment through 2026 and beyond.
An ongoing geopolitical instability has accompanied geo-economic fragmentation. The Trump administration succeeded in containing a Middle Eastern conflict that at times seemed to be spiralling out of control, eventually pushing through a fragile ceasefire. Elsewhere, the conflict between Russia and Ukraine has ground on while Moscow has tested the resolve of European NATO members via a mix of micro-aggressions and grey area provocations. Other regions, from the Sahel to South Asia, also look fragile. In May, for example, border skirmishes between the nuclear powers India and Pakistan briefly threatened to flare into something much worse.
Finance and productivity
AI-related exuberance has been another major theme of 2025. After the year started with China’s DeepSeek “Sputnik Moment”, AI has remained in the headlines — from an AI-led capex boom that has been large enough to shape US macroeconomic outcomes, to the increasingly large bets on the AI revolution that have fuelled a dramatic “risk-on” surge in financial markets.
Deepening connections between the traditional financial sector and crypto, as well as the expanding influence of the attention economy have further supported ever more stretched asset valuations. Should all this end in tears, the idea of financial markets as efficient allocators of capital will suffer another major blow.
This year has also delivered other indicators of economic regime change as the US Federal Reserve came under sustained political pressure. Together with a rising risk of fiscal dominance across advanced economies, signs are the golden age of central bank independence may be receding.
Constrained by aging populations, distrustful and volatile electorates and poor productivity, policymakers have continued their search for ways to lift growth and tame voters. Books with titles like Abundance and Why Nothing Works have captured the quest for a new economic dynamism, with some looking to a new deregulation agenda and others to AI as potential silver bullets.
Yet for all this turmoil, the global economy remained surprisingly resilient. Forecasters spent the first half of 2025 cutting their growth projections only to spend the second half nudging them up again.
A key question for 2026 is whether this forecasting reversal reflects a fundamental misreading of the economic implications of the emerging new order, or merely the ameliorative effect of temporary factors such as the front-loading of activity ahead of incoming tariffs, supportive but ultimately unsustainable fiscal policies, and uncertain lags between economic regime shifts and their consequences for economic performance.
On the home front
Here in Australia, key developments included May’s landslide federal election victory for the Labor government, a result that dramatically overturned 2024’s bonfire of the incumbents, but which — in its electoral decimation of the main opposition party — nevertheless remained consistent with the broader theme of political disruption.
The RBA’s cautious easing of monetary policy has dominated the cyclical economic backdrop, with three 25bp rate cuts delivering a partial unwinding of the previous 425bp of tightening. This occurred in the context of a refreshed institutional framework, including a new Monetary Policy Board (MPB) and accompanying arrangements designed to boost transparency.
There were still policy surprises, however, with markets particularly wrong-footed by a decision to hold rates unchanged in July, as the MPB recorded its first split vote. Later in the year, an unexpectedly strong September quarter CPI reading seemed to validate the central bank’s caution and suggested that 2025’s third rate cut was likely its last.
On the fiscal front, Australia recorded a modest underlying cash deficit of about 0.4 per cent of GDP in budget year 2024–25. That ended the brief two-year interregnum when receipts had exceeded payments, returning the budget to the more familiar post–2007–08 reality of an inability to balance the books. Budget 2025 expects that red ink to continue to flow through to 2035–36.
Two other big-policy items with important future implications captured policymakers’ attention this year.
First, Australia had its own encounter with Abundance-style thinking as concerns over our lacklustre productivity growth and increasingly unfit-for-purpose tax system culminated in August’s Economic Reform roundtable. How much that discussion will shape future policy remains to be seen.
Finally, 2025 also saw Canberra commit to a new 2035 greenhouse gas emissions target, with plans to cut emissions by 62–70 per cent relative to 2004–05 levels. Achieving that ambition would have profound implications for the energy sector, requiring a significant acceleration in the rate at which Australia is adding new renewable energy and storage capability, plus a major new expansion of transmission networks.
This article first appeared as 'Uncertainty principle' in the December 2025/January 2026 Issue of Company Director Magazine.
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