By Lucinda Jerogin, associate economist at CBA:
- Real GDP surprised to the downside at 0.2%/qtr. The annual rate held steady at 1.3%.
- The current account deficit narrowed to $14.7 bn in Q1 25, driven by a $2.2 bn fall in the net income deficit.
- Home prices across the eight capital cities rose by 0.5% in May, the fourth consecutive month of growth.
- Consumer spending has started the June quarter soft with the ABS monthly Household Spending Indicator recording a subdued 0.1%/mth lift.
- The Minutes of the May Monetary Policy Meeting highlighted a dovish Board focused on weak domestic conditions and downside risks to inflation from global uncertainty. We continue to expect two more 25 bp rate cuts this cycle.
- The FWC handed down a 3.5% increase in minimum and award wages, a little higher than expected.
- Offshore, tariff news continued to make headlines. The ECB cut its policy interest rates by 25 bp overnight.
- The week ahead will see the release of the CBA Household Spending Insights for May. WBC/MI consumer sentiment and the NAB Business Survey are also due. Abroad, markets will focus on US nonfarm payrolls tonight, UK labour force data on Tuesday and US CPI on Wednesday.
It was a busy week for Australian economic data and global financial markets. Domestically the focus was on the data flow and the RBA May Board Meeting Minutes. The Q1 25 National Accounts showed a tepid 0.2%/qtr increase in real GDP, a slower pace than the 0.6% recorded in Q4 24. However, there were temporary factors at play with weather events affecting parts of the economy. That said, annual growth remained soft at 1.3% and given the population grew by 0.4%/qtr, GDP per capita was sluggish down by 0.2%/qtr and 0.4%/yr. The slowdown was driven by weaker public demand which detracted from growth unlike in previous quarters.
After a weak retail sales print a week ago, consumer spending reads for the June quarter so far are tepid. The MHSI was weaker than anticipated also, rising by 0.1% in April. The annual rate now sits at 3.7% around where it has in recent months, reinforcing the notion that the lift in spending growth has not come through as of yet. Despite this, momentum is still expected to pick up through the rest of this year as real household disposable incomes rise. The key to recovery though will be a switch in household behaviour, see the Chart of the Week for more.
In addition to the National Accounts, the Balance of Payments was released on Tuesday. The current account deficit narrowed by $1.7 bn to $14.7 bn in Q1 25. This shift was driven by a $2.2 bn fall in the net income deficit owing to lower mining returns. Company profits fell in the quarter, declining by 0.9%/qtr after adjusting for inventories (-0.5%/qtr without adjustment for inventories), led by weather related disruptions in the mining sector.
On a more positive note, according to Cotality home prices lifted by 0.5%/mth in May across the eight capital cities. National prices are now 1.7% higher over the first five months of this yearand up 3.3% annually. The improvement in housing market momentum since mid-February continues to be assisted by the RBA’s rate cutting cycle. However, continued affordability constraints, normalising population growth and a shallow easing cycle remain significant headwinds.
The Minutes for the May Monetary Policy Board Meeting were also released last week and confirmed the dovish take markets and economists inferred. The meeting Minutes highlighted a 50 bp cut was actively considered but ultimately a 25 bp cut was decided. Despite their dovish tilt, the RBA has yet to revise their assessment of full employment, instead choosing to incorporate downward judgment on their profile for wages and inflation. Through that lens, we believe that in the near-term it is the labour market and inflation data that the RBA will be most closely watching ahead of the July Board meeting.
In a speech on Tuesday, RBA Chief Economist Sarah Hunter reinforced that the negative demand impact from US tariffs will outweigh any inflationary pressures from supply chain disruptions. Our base case remains for another 25 bp cut to be delivered in August and September. July very much remains live, however, as the softer growth data and strong market pricing shifts the balance of probabilities towards a cut.
Offshore this week the news flow was again dominated by tariffs. President Trump doubled tariffs on steel and aluminium to 50% on Wednesday, escalating tensions between the US and Canda. The Canadian manufacturing sector, already under pressure from ongoing trade uncertainty, has been hit hard. This didn’t push the Bank of Canada to cut rates however as the BoC struck a more hawkish tone in its post meeting communication saying it wants to wait for more information on how the trade war will playout. Our international team is pessimistic about the Canadian economic outlook and forecasts a recession this year amidst US tariffs and migration cuts. In contrast, the Eurozone CPI came in slightly softer than expected at 2.3%/yr in May causing the ECB to cut interest rates by 25bp as widely expected.
Tensions also heated up and have since cooled between the US and China with each accusing the other of not sticking to last month’s trade agreement early in the week. President Trump and Chinese President Jinping have spoken overnight, and news of progress supported financial markets. Turning our attention to the week ahead global markets will focus on US non-farm payroll jobs tonight to gauge the state of the labour market.
US CPI is out next week, our international team forecasts +0.3%/mth core inflation in May as some of the impact of higher tariffs feeds through to prices. Elsewhere, UK labour force data for April and May will be released on Tuesday.
In New Zealand, housing data, migration statistics and the Business NZ PMI are due.
Closer to home, the domestic data flow is considerably lighter. We will release the May edition of the CommBank Household Spending Insights (HSI) report on Thursday. This is one of the most timely indications of household spending in Australia. Other economic releases next week are ‘soft’ data in the form of the June WBC/MI consumer sentiment survey and the May NAB Business Survey.
