Key insights from the week that was.
In Australia, GDP printed broadly as expected in Q4 2024, rising 0.6%qtr to be up 1.3% over the year. On a per capita basis, GDP rose for the first time in two years, albeit by just 0.1%, ending the longest run of consecutive declines on record. While both public and private demand rose in the quarter, new public demand continues to do most of the heavy lifting, reaching a new record share of the economy.
Overall, the recovery in private demand is starting to unfold gradually, with household consumption lifting 0.4% in the quarter to be up just 0.7% over the year. Improved growth in real disposable income is an important driver of this trend, principally thanks to decelerating inflation. As foreshadowed by the Westpac Consumer Panel, the boost to incomes from the ‘Stage 3’ tax cuts looks to have largely been put aside to rebuild savings buffers. This could lay a foundation for stronger consumer demand later in 2025. But if the precautionary mindset persists, downside risks for consumption are likely to grow. The latest data on retail sales subsequently pointed to a modest gain in January; today’s household spending indicator was close to expectations at 0.4% though the previous month was marked down from 0.4% to 0.2%.
A surprise in the national accounts worthy of close scrutiny is the rise in unit labour costs reported for Q4, the consequence of a step-up in wage growth and declining productivity. Crucial to the significance of this outcome is the sectoral composition. Interestingly, today’s labour account revealed that labour productivity deteriorated across both market and non-market sectors. In this week’s essay, Chief Economist Luci Ellis considers the downside risks for inflation and growth with reference to Australia’s economic experience during the late 2010’s.
Before moving offshore, a final note on housing. February’s CoreLogic data reported a 0.3% lift in house prices across Australia, a post rate-cut bounce consistent with historical patterns. Both the breadth and persistence of this turnaround over coming months will be of great interest, especially given the stretched starting point for affordability. Supply remains a crucial factor for the longer-term outlook; encouragingly, the firming uptrend in dwelling approvals is coinciding with tentative evidence of easing supply constraints for construction, reducing risks for the pipeline. For more detail on our views around the housing market, see our latest Housing Pulse on Westpac IQ.
Offshore, the focus was again on the US as President Trump’s tariffs on Canada and Mexico were imposed and then deferred (again). Eventually it was made clear that goods covered by the USMCA would be exempted for now, materially reducing the immediate effect of the tariffs, especially for key US manufacturers such as the auto industry and farmers who import fertiliser. Still President Trump was clear that this is a short-term deal, and that these tariffs along with the industry specific measures would come into full effect April 2.
The uncertainty being created by US trade policy is becoming evident with US consumer confidence hit in the most recent readings and personal consumption disappointing in January – down 0.2% on a nominal basis and 0.5% for real sales volumes despite a stronger-than-expected rise in personal income of 0.9%. Financial markets are also becoming increasingly concerned over the potential ill effects of tariffs on the US economy, the US dollar sharply lower over the week from almost 108 last Friday to 104 today on a DXY basis. An aside, Australian exporters look to be getting ahead of the building tariff risk, our trade surplus jumping higher to $5.6bn in January as exports to the US soared, albeit at the expense of shipments elsewhere.
US business surveys are yet to show a definitive effect however, the ISM services index edging higher in February from 52.8 to 53.5 while the ISM manufacturing PMI reported a modest decline from 50.9 to 50.3. The prices paid component for manufacturing shows tariffs are front of mind however, the index surging 7.5 points to 62.4, the highest level since mid-2022. The manufacturing employment index is worth keeping an eye on, having fallen to a contractionary 47.6 in February; though for aggregate employment, services is the dominant sector and remains in robust shape, its employment index at 53.9.
Across the Atlantic, downside risks were also front of mind for the ECB who cut its key rates by 25bps, bringing the deposit rate to 2.50%. GDP growth was revised down by 0.2ppt for 2025 and 2026 to 0.9% and 1.2%, a revision attributed to weakness in exports and firms holding back on investment decisions in the face of uncertainty. We expect three more cuts in coming months bringing policy to a neutral stance, with the ECB likely to remain cautious of downside risks to activity thereafter.
While Canada and Mexico received a short-term reprieve from the US on tariffs this week, China did not. Nonetheless, Chinese Premier Li Qiang’s address to China’s 2025 National People’s Congress struck a very confident tone. Manufacturing investment and technological development remain priorities, but the need to bolster the housing sector, employment and consumer confidence is also front of mind. Fiscal support will be increased in 2025, and authorities are ready to provide additional support if downside risks crystalise. All told, authorities expect to repeat 2024 and grow the economy by another 5.0% in 2025 in fair or stormy weather.
