Animal Spirits in 2025: Psychology & the Australian Economy Explained

Animal spirits isn’t just a quirky economic phrase—it’s the invisible force shaping the mood of consumers, investors, and businesses. In 2025, as Australia navigates persistent cost-of-living pressures, shifting interest rates, and the aftershocks of global uncertainty, understanding the role of animal spirits is more crucial than ever. Let’s unpack what animal spirits mean for everyday Australians and why policymakers are paying close attention this year.

What Are Animal Spirits?

The term “animal spirits” was first coined by economist John Maynard Keynes in the 1930s, referring to the instincts, emotions, and psychological factors that drive economic decisions. Rather than acting purely rationally, people’s confidence, fear, and herd behaviour can fuel booms, deepen downturns, or spark recoveries. In 2025, animal spirits are especially relevant as Australians face a volatile mix of economic signals:

• Persistent inflation: While inflation has eased since its 2022–23 peaks, the RBA’s June 2025 update shows headline inflation is still hovering above the 2–3% target band, keeping pressure on household budgets.

• Interest rate uncertainty: Mortgage rates remain elevated, with the RBA holding the cash rate at 4.35% as of mid-2025. This has weighed on consumer sentiment and property market activity.

• Labour market resilience: Unemployment sits at a steady 4.2%, yet underemployment remains a concern, especially for younger Australians and those in retail or hospitality.

All these factors shape how confident people feel about spending, investing, and planning for the future.

How Animal Spirits Drive Spending and Investment

When optimism is high, Australians are more likely to buy homes, start businesses, or upgrade their cars. Conversely, fear or uncertainty can trigger saving sprees, delayed purchases, and a slowdown in business hiring. In 2025, the latest Westpac-Melbourne Institute Consumer Sentiment Index shows consumer confidence remains subdued, with households citing cost-of-living worries and global instability as top concerns.

For businesses, animal spirits are reflected in:

• Capital investment: ABS data indicates private business investment is growing, but at a slower pace than pre-pandemic years, as business owners remain wary of unpredictable demand.

• Hiring intentions: NAB’s June 2025 business survey found a cautious approach to new hiring, especially in retail and construction, while tech and healthcare sectors show more optimism.

• Property market: After a brief bounce in late 2024, CoreLogic data shows national home prices have stabilised, with buyers and sellers both taking a wait-and-see approach amid interest rate uncertainty.

These patterns are classic signs of animal spirits at work: when confidence ebbs, so does economic activity—even when underlying fundamentals are stable.

Policy, Media, and the Animal Spirits Feedback Loop

Animal spirits don’t exist in a vacuum. Policy announcements, media headlines, and global events all feed into the national mood. In 2025, the Albanese government’s Stage 3 tax cut reforms—which now provide more targeted relief for low and middle-income earners—have aimed to lift household confidence. Yet, the impact depends as much on perception as on actual dollars received.

Similarly, Reserve Bank commentary is scrutinised for hints of future rate moves. Even a subtle change in language can send markets and consumers into a flurry of optimism or caution. The rise of social media means sentiment can swing faster than ever, with viral news or influencers amplifying fears or hopes.

Recent examples include:

• Budget 2025’s “Future Made in Australia” package: While designed to boost manufacturing and green industries, its rollout has been met with both optimism from industry groups and scepticism from some economists, feeding into mixed business sentiment.

• Global volatility: Ongoing trade tensions and the US presidential election have added a layer of uncertainty, keeping Australian investors on their toes.

The result? Economic outcomes in 2025 are as much about psychology as policy or numbers. Policymakers are increasingly aware that restoring confidence is key to unlocking spending and investment—sometimes even more than direct stimulus measures.

Why Animal Spirits Matter for Everyday Australians

For households and businesses alike, animal spirits can mean the difference between stagnation and growth. A few practical examples in 2025:

• Home buyers: Many first-home buyers are holding off, hoping for rate cuts or price drops, creating a self-fulfilling pause in the property market.

• Small businesses: Those who sense opportunity—even amid uncertainty—are better positioned to capture market share or expand as competitors hesitate.

• Investors: The ASX 200 has experienced choppy trading, with sentiment-driven swings amplifying both risk and reward.

Understanding animal spirits helps explain why the economy doesn’t always follow the script—and why confidence, not just cash, is the true engine of growth.