AI. Market records. Tariffs. Penguins. TACO.
It's been a big year of economic shocks and surges as the international framework of global trade was shredded.
In other major news, a company famous for making gaming PC chips became the world's most valuable, and Australia's key interest rate stuttered downwards then flatlined.
George Tharenou, chief economist for Australia at investment bank UBS, was in New York during April's so-called "liberation day", when US President Donald Trump revealed a sweeping regime of tariffs that stunned global markets.
"It was surreal seeing the markets move to meltdown amid the uncertainty," he recalled.
"It really was panic for several days."
"This is a true bubble-like mentality, and it doesn't look like there's initially anything right now to pop it," argues UBS's George Tharenou. (ABC News: John Gunn)
And there were many more shocks to come.
Economic hits and misses of the year
To analyse the hits and misses of 2025, the ABC quizzed some of Australia's most prominent economists about four intertwined elements that helped to define the year.
Those key events and trends:
- Trump's tariff regime ripping up the rule book that had governed world trade for decades
- The Reserve Bank's interest rate cuts
- Markets in Australia, the US, UK, Japan and elsewhere hitting record highs
- Explosive growth in artificial intelligence (AI).
Asked to summarise 2025's economic picture, Shane Oliver, the head of investment strategy and chief economist at AMP, was succinct: "Resilience.
"There's been a lot of shocks thrown at the global economy, many of them from Donald Trump, but the world has remained pretty resilient and so too have share markets."
But tell that to the penguins of the uninhabited Heard and McDonald Islands to the distant south-west of Australia — bizarrely singled out in one of the biggest developments of the year, April's US tariffs.
Loading...Rules of trade roiled by tariff turmoil
Placing heavy tariffs on exports from islands that have no human residents or trade with the US was emblematic of the chaos unleashed when the US administration revealed expensive new costs on goods sent to the nation.
"The big thing for the last year in terms of markets has just been how strong they've been," says Shane Oliver. (ABC News: Daniel Irvine)
"What we saw on 'liberation day' was a sign that Donald Trump wanted to rip up the global architecture that had prevailed for much of the post-[World War II] period," Dr Oliver said.
The tariffs place a cost on trade from allies, neighbours and perceived enemies alike. While staunch US allies such as Australia and the UK were hit with a 10 per cent rate, at one point, a 145 per cent tariff was going to be put on trade with China.
The US defended placing tariffs on islands that lacked trade or humans, suggesting that otherwise they would become a penguin-portal of countries seeking to avoid US levies.
"The idea is that there are no countries left off," US Commerce Secretary Howard Lutnick told broadcaster CBS.
Taxing penguins was just part of the slapdash nature of the levies, which would make goods imported into the US more expensive, according to Dr Oliver.
"There was no logic in economics for those tariffs being levied at the particular level that they were put at."
The impact — as countries scrambled for deals, exceptions and new markets for their goods — was panic.
Sally Auld, chief economist at NAB, said she grabbed the red pen, essentially revising down projections of US and global economic growth for 2025.
But as deals were made and the application of many tariffs was paused, that frosty view thawed.
"We went from really worrying about … what could have been a global trade war to something where those downside risks disappeared really quite quickly."
NAB chief economist Sally Auld says stock markets, worldwide, are buoyant for a single reason: "The whole tech complex has really led the market higher." (ABC News: John Gunn)
Australia held on the "baseline" 10 per cent tax on goods exported to the US, while countries across the globe cut deals.
"It became clear that most other countries really just didn't want to fight," Ms Auld said.
Betashares chief economist David Bassanese watched the initial tariff hit play out on financial markets.
"Markets reacted, fearing it could tip the US economy into recession," he recalled.
What came next was the so-called "TACO trade" — standing for Trump Always Chickens Out — when the negative impact of deals or ideas became known.
"We didn't get a tit-for-tat escalation in the trade wars. So most countries … basically rolled over and accepted the tariffs that Donald Trump imposed on them," says David Bassanese. (ABC News: John Gunn)
"We have seen that. He has scaled back the tariffs through the course of the year. He's announced some deals with countries," Mr Bassanese said.
"I think markets have fallen back on the view that, look, if push comes to shove, Trump may buckle."
Our nation is heavily exposed to moves in global trade — particularly commodity markets that set the price for exports like iron ore and gold.
But at the start of the year, a huge focus was placed on a boardroom in a temporary office in Sydney, where the Reserve Bank of Australia (RBA) board was meeting to set interest rates.
Rate cut relief after years of mortgage tension
At the start of the year, anticipation of a cut to official interest rates was intense.
The RBA had hiked the cash rate to 4.35 per cent in November 2023 and held it there through 2024.
With around one-third of Australians servicing a mortgage — and a further third renting, many from landlords with mortgages — the public was feeling the pain of higher repayments.
Consumers slashed their spending as the cost-of-living crisis kept chomping at household budgets.
"There was undoubtedly a lot of tension," said independent economist Nicki Hutley.
"Part of the reason [households] were doing it tough wasn't just interest rates, it was higher-than-usual inflation."
"We're very tightly poised", said independent economist Nicki Hutley, between lowering inflation without risking some significant rises in the unemployment rate. (ABC News: John Gunn)
By late 2022, consumer prices were rising at a rate of 7.8 per cent a year.
That tempered this year, with price rises at one point slowing to 1.9 per cent, below the 2–3 per cent target range the central bank was aiming for.
The RBA cut the cash rate by 0.25 percentage points in February, May and August.
"The pressure was there because we could see inflation was coming down, we could see the economy was really, really sluggish," Ms Hutley said.
"If the bank hadn't cut rates then, it really would have been very difficult for them to explain."
NAB's Ms Auld said the impact of a lower cost of money was flowing through the economy, with stronger consumer spending and higher housing prices.
"The challenge has been that the recovery that we've got is already starting to lessen the scope for inflation to fall," she said.
Most market watchers have now changed their initial view that the RBA would cut rates further in the final months of 2025 or the start of 2026, as inflation has ticked up, once again rising above the central bank's 2–3 per cent target.
Mr Tharenou has what will be an unpopular view for people with big outstanding debts — interest rates are more likely to go up than down.
It's a view shared by a growing cohort of economists, and expressed by RBA governor Michele Bullock herself.
"I think begrudgingly the RBA is going to shift towards raising the cash rate by the middle of next year," Mr Tharenou said.
AMP has forecast rates to remain on hold through 2026, with the risk skewing towards a hike. Dr Oliver said in order for a rate cut to be back on the table, unemployment would need to rise.
In the most recent data, the unemployment rate remained at 4.3 per cent in November, down from 4.4 per cent in seasonally adjusted terms in September. At the end of 2024, both the trend and seasonally adjusted measures were 4 per cent.
The RBA's rate-setting board next meets on February 2 and 3.
Stocks at record highs as bubble fears emerge
"Liberation day" might have sounded like freedom but the initial reaction of global stock markets was unrestrained panic.
In New York, the S&P 500 index wiped $7.5 trillion in value in the two days after the announcement.
The tech-heavy Nasdaq index fell 22 per cent from its December 2024 record close and the Dow Jones, European indices and Australia's markets fell more than 5 per cent.
"The push-pull factors in markets this year have been a) Donald Trump and tariffs, but b) the positive of the AI boom," said Betashares's Mr Bassanese.
Massive investments in artificial intelligence, data centres and computer chips propelled the so-called "Magnificent Seven" tech companies most exposed to the boom — Google's parent Alphabet, Amazon, Apple, Tesla, Facebook's parent Meta Platforms, Microsoft and Nvidia.
The stock price of the latter has rocketed more than 1,200 per cent after its computer chips — originally powering the visuals of gaming computers — became the bedrock of an AI boom.
Nvidia leapfrogged Microsoft to become the most valuable company in the world, and the first to be valued at more than $US4 trillion ($6 trillion).
It's what George Tharenou of UBS describes as an "up-crash".
"It's almost a detachment from fundamentals," he said.
"We haven't really had a boom in the real economy, but we have had a boom in asset markets."
"People call it FOMO [Fear of Missing Out]. The higher the price, the higher the demand. People just want to get into asset markets and not miss out."
Despite a recent dip, the ASX 200 index of our largest companies is up close to 5 per cent year-to-date.
That makes sense to Shane Oliver of AMP.
"We've seen the interest rate cuts, we've seen profits, particularly in the US, continue to surprise on the upside. And even though conditions have been on the soft side [in Australia], we've avoided recession".
AI learning fast that humans like big profits
The runaway performance of the "Magnificent Seven" has brought fears of a repeat of the late-1990s, early-2000s dot-com market crash.
But there's a key difference, said NAB's Sally Auld.
"These companies have genuinely delivered earnings growth."
While the dot-com bubble and the subsequent burst were driven by hysteria around companies trading at really expensive valuations despite being "yet to turn a dollar", Ms Auld said, "that's definitely not the case this time around".
Bolstering that case is the mind-melting amounts of money being spent on data centres, factories and technology to power the AI revolution.
"I think that number is now close to $500 billion, which is a huge number, and really forcing people to accept that this is a new innovation cycle," she said.
The capital expenditure has been so large that it has put a so-called floor under the growth of the US economy.
"Somewhere between 40 to 50 per cent of [gross domestic product] growth in the first six months of this year in the US can be accounted for by that huge AI capex spend — it's helping to prop up equity markets."
The potential impact remains huge. So is the risk.
"We're all openly talking about the fact that there are bubbles and almost thinking that it doesn't matter, that somehow, mystically, this time will be different," economist Nicki Hutley said.
George Tharenou is another who isn't convinced the gains are justified by fundamentals.
"It's almost the opposite of the law of economics," says Mr Tharenou, describing this year's market behaviour.
"This is a true bubble-like mentality, and it doesn't look like there's initially anything right now to pop it."