Key insights from the week that was.
For Australia, the only data release of note this week was the August Westpac-MI Consumer Sentiment Survey. It did not disappoint though, the headline index surging 5.7% to 98.5, the closest it has been to outright ‘optimism’ in 3½ years. This bounce in confidence follows the RBA’s 3rd rate cut of the year and the sustainable return of inflation to the middle of the target range. In the underlying detail, assessments of current family finances vs last year rose a solid 6.2%, while the analogous measure for the year ahead increased 5.4%. Consumers’ spending intentions – which are a consequence not only of current conditions but also the cumulative change in cost-of-living since the pandemic – are steadily improving but still a long way from ‘normal’ levels, ‘time to buy a major household item’ 22pts below its long-run average despite a 4.2% gain in August.
While official and Westpac estimates of consumer spending firmed through Q2, the sustainability of these gains are yet to be tested beyond the end-of-financial-year sales. Typically though, persistent improvements in sentiment and a robust labour market boost spending over time. Such an expectation is incorporated into our forecast recovery in GDP growth to 1.7%yr by end-2025 and 2.2%yr at end-2026. Our latest Quarterly Business Snapshot provides an assessment of how Australian firms are faring currently. Looking out to the medium and long term, this week’s essay by Westpac Chief Economist Luci Ellis considers the path dependency of long-run activity and productivity growth.
Turning to New Zealand, the RBNZ delivered a 25bp rate cut at their August meeting as expected, but the accompanying communications were very dovish. Near-term growth prospects have been revised down, the RBNZ’s 2025 view now 1.6%yr compared to Westpac’s 2.4%yr. However, an additional 1.5 rate cuts into year-end are, along with policy easing to date, still expected to support a robust recovery from 2026. As a consequence, the unemployment rate is expected to peak near the current level and then decline through 2026 and 2027. Our NZ economics team now expect another 2 cuts this year, while remaining of the view that higher interest rates will ultimately prove necessary to manage inflation risks from late-2026.
In the northern hemisphere, the event of the week is still to come – Chair Powell’s address the Kansas City Federal Reserve’s Jackson Hole Symposium. Market participants will put considerable effort into parsing his remarks for any guide on the path ahead for US monetary policy. That said, Chair Powell is unlikely to stray too far from the consensus opinion of the FOMC as outlined in the July FOMC minutes, particularly with a number of key data points due between now and the September meeting.
The July meeting minutes had a clear focus on inflation. “Participants judged that considerable uncertainty remained about the timing, magnitude, and persistence of the effects of this year’s increase in tariffs”. Though, members were clear on who is paying the price, with “a few participants [describing] a mix of strategies as being undertaken to avoid fully passing on tariff costs to customers… [including] negotiating with or switching suppliers, changing production processes, lowering profit margins, exerting more wage discipline, or exploiting cost-saving efficiency measures such as automation and new technologies.” “Regarding inflation persistence, a few participants emphasized that they expected higher tariffs to lead only to a one-time increase…. [but a] few [other] participants remarked that tariff-related factors, including supply chain disruptions, could lead to stubbornly elevated inflation and that it may be difficult to disentangle tariff-related price increases from changes in underlying trend inflation.”
On the labour market, the Committee remains sanguine, “participants observ[ing] that the unemployment rate remained low and that employment was at or near estimates of maximum employment”. “Several participants noted that the low and stable unemployment rate reflected a combination of low hiring and low layoffs.”
On the policy outlook then, a “majority of participants judged the upside risk to inflation as the greater of these two risks”. “Almost all participants agreed that, with the labor market still solid and current monetary policy moderately or modestly restrictive, the Committee was well positioned to respond in a timely way to potential economic developments.”
