Key insights from the week that was.
In Australia, the latest instalment of the household spending indicator, which covers around 60% of the consumer basket, provided another soft read on the consumer spending pulse. The indicator suggests nominal spending fell –0.3% in March, knocking the quarterly growth pace down to 1.0% which, after accounting for inflation, left real spending flat over the first three months of the year. Although this data is still considered experimental, the signal it provides matches other official ABS data, retail sales volumes flatlining over the same period, and clear signs of weakness within Westpac’s own panel data and card spending insights, as discussed in detail in the Westpac Red Book.
There are still some crucial unknowns when it comes to the full wash-up for household consumption, particularly as it relates to services spending. But the dataflow thus far is clearly pointing to downside risks for Q1 consumption and GDP growth, due in roughly four weeks’ time. Balancing these risks, a positive contribution from net exports is likely amid extensive tariff front-running prior to ‘Liberation Day’.
While immediate and medium-to-long term trade risks remain for the global economy, this week’s essay by Chief Economist Luci Ellis highlights that enduring opportunities are present for countries like Australia. Detailed below, this week also witnessed the first steps towards a hoped-for end to US trade hostility, with a trade ‘framework’ agreed between the US and UK.
Next week, labour market data will be in the spotlight domestically with the release of the Q1 Wage Price Index and April Labour Force Survey. Any further indication of easing labour market conditions will be closely scrutinised in the context of moderating inflation and heightened global uncertainty – dynamics that Westpac and the market believe will support a 25bp rate cut from the RBA at its May 19-20 policy meeting.
Offshore, the focus was the US and the UK.
The FOMC kept rates steady at its May meeting as they await further clarity on trade policy. Notable in the meeting communications is that the FOMC remain sanguine on the immediate outlook for growth and the labour market, emphasising for economic activity that annualised domestic demand growth (which omits net export’s contribution) was around trend at +2.4% in Q1 against GDP’s –0.3% print (net exports sizeable contraction in Q1 the result of tariff front running by business). On the outlook though, the committee “judges that the risks of higher unemployment and higher inflation have risen”.
In the press conference, Chair Powell went on to outline that, in determining the appropriate stance of policy, the deviation from target for both inflation and unemployment and the risks to each trajectory will jointly determine the Committee’s action at each meeting. Westpac continues to forecast just 50bps of cuts in the second half of 2025 and stability through 2026 as inflation and associated risks linger. The market continues to call for more easing, with at least 100bps of cuts priced by mid-2026.
Subsequently in the UK, the Bank of England cut Bank Rate by 25bps to 4.25% as inflation eased and slack builds in the economy. The detail of the vote revealed a wide range of views on the outlook – two members voted to leave policy unchanged, two to cut by 50bps, while five supported the 25bp cut. The committee’s language about their policy stance remained largely unchanged, continuing to emphasise “a gradual and careful approach to the further withdrawal of monetary policy restraint”.
While previous increases in energy prices are expected to push headline UK inflation to 3.5%yr later this year, “progress on disinflation in domestic price and wage pressures is generally continuing”. The BoE’s updated inflation projections showed downward revisions, with inflation now anticipated to reach 2%yr in Q1 2027, three quarters earlier in comparison to the February forecast. And, although the GDP growth this year was revised significantly higher, to 1.1%yr, the change mostly reflected a steeper increase in Q1 2025, with growth in 2026 now expected to be 0.3ppts lower at 1.2%yr – a rate below the BoE’s estimate of supply growth, suggesting weakness in demand will continue to act against remaining inflation pressures.
Uncertainty from global trade policies were also considered. Governor Bailey welcomed emerging news that the US and UK had reached a trade deal (see below). However, he also pointed out that the UK is a very open economy, so it will be impacted through tariffs imposed on other economies. Bank of England analysis suggests that, over the three-year forecast horizon, tariffs are likely to lower UK GDP by around 0.3%. The estimated impact on inflation is inconclusive, affected by exchange rate movements, the health of global demand, global supply chain disruptions and US export prices.
To the deal struck on US/UK trade. Admittedly it is considered a trade ‘framework’ not a ‘full and comprehensive’ agreement as promised previously by US President Donald Trump. Nonetheless, it has been cheered by markets who hope it is the first of many steps towards an end to the heightened uncertainty over global trade. Under the framework, the UK will give the US improved access to UK agriculture (beef and ethanol were noted in particular) and will purchase more aircraft from Boeing. In return, the first 100,000 cars exported from the UK to the US each year will be tariffed at 10% rather than 25%. The UK communications on the deal also referenced the tariff on UK steel and aluminium exports to the US being reduced from 25% to zero, but the US communications referenced only “an alternative arrangement”. Pharmaceutical exports from the UK to the US will also reportedly receive preferential treatment, though details are still to be agreed. There is no change to the UK’s digital service tax or food safety rules, and UK goods not specified under the agreement will still face a 10% tariff in the US. We expect to see more limited agreements in coming weeks. Whether negotiations continue to build towards comprehensive arrangements remains an open question.
