The resilience of the domestic and global economy despite trade disruptions was a central theme for the year.
Just as forecasters were taken off guard by the resilience of the Australian consumer and a resurgence in inflation in the second half of 2025, worsening trade and geopolitical tensions could also catch them unawares, Oxford Economics Australia's Harry Murphy Cruise said.
As 2025 went on, investors and firms increasingly brushed off risks - evidenced in record-high equity prices and low-risk premiums.
While an outright trade war was not his base case, Mr Murphy Cruise warned tariffs had not gone anywhere and Donald Trump's latest threats towards European countries if the US was blocked from buying Greenland showed tensions were ramping up again.
"The risk is more tariffs and geopolitical tensions could snowball," he told AAP.
"Things have been good but we can't just be complacent."
Add to that the risk that AI euphoria - which has fuelled bull runs on Wall Street and on the ASX - runs out, and markets could be on track for a painful correction.
However, Australia's economy entered 2026 in a good position, Mr Murphy Cruise said.
"The risk is it's too good," he said, pointing to the chance the Reserve Bank had to step in with rate hikes to put the brake on demand.
In an Oxford Economics Australia report released on Monday, Mr Murphy Cruise predicted underlying inflation would ease to 2.8 per cent by the end of the year - within the Reserve Bank's two to three per cent target band.
The central bank's most recent forecasts put the trimmed mean on track for 2.7 per cent by December 2026, but they were last updated in November, before the monthly figure reached a peak of 3.3 per cent.
The economist predicted the unemployment rate would hit 4.6 per cent by mid-2026, up from the current 4.3 per cent.
Despite money markets pricing in at least one rate hike in 2026, Mr Murphy Cruise believes the deterioration in the labour market will have the equivalent effect of raising the cash rate by 25 basis points, cancelling out the need for the Reserve Bank to lift borrowing costs.
Souring consumer confidence in surveys released since the uptick in inflation showed the resurgence was likely to be short-lived, he said.
AMP chief economist Shane Oliver also said market rate hike expectations appeared too hawkish.
"Economic data released so far this year has been mixed, with stronger building approvals and household spending but weaker consumer confidence and new job openings," he wrote in a research note.
"December quarter inflation data to be released at the end of this month will be key, though, for the next few months."
17°C