Key insights from the week that was.
In Australia, the RBA Minutes from the April meeting provided some extra colour around the Policy Board’s deliberations. Despite pre-dating President Trump’s ‘Liberation Day’ tariff announcements and the subsequent volatility in markets, many of the statements around the potential impact on Australia remain relevant, especially that “the effects on GDP growth and inflation in Australia could be relatively modest… reflect[ing] Australia’s limited direct trade exposure to the United States, additional policy support in China and Australia’s flexible exchange rate.” Still, they note that the risks to inflation were “more two-sided” depending on the balance between upside factors such as supply-side disruptions and a weaker exchange rate, and downside factors like weaker global demand and trade diversion away from the US. The Board noted that having a fresh set of forecasts alongside new information around inflation, wages and the labour market will “have a considerable bearing on their decision” at the next policy meeting on May 19-20. At that meeting, Westpac anticipates the Board will deliver a 25bp rate cut, bringing the cash rate to 3.85%.
On the data front, this week’s labour force data, was a bit of a mixed bag. There was only a partial bounce-back in labour supply, seeing the participation rate hold broadly steady at 66.8%. Labour demand looks to have largely moved in tandem, with employment rising +32k, falling short of expectations. Measures of labour market slack were therefore little changed, with the unemployment rate increasing only 0.01ppt. Overall, the RBA are likely to see this data as broadly in line with their expectations, still reflecting a degree of ‘tightness’ relative to full employment. Ultimately, the Q1 CPI data, due April 30, will prove to be a critical input to their May decision.
This week was not short of excitement. FOMC Chair Powell had a clearer tone. In a speech to the Economic Club of Chicago, he noted that the Fed’s “obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing problem”. This, alongside his previous references to Teal Book modelling through Trump’s first term, reaffirms his commitment to prioritising managing inflation risks over growth. This sentiment has been echoed by the Bank of England and Bank of Canada who have been quick to point out that they will allow fiscal policy to support growth, particularly if its decline is caused by supply-side factors.
The Bank of Canada kept rates steady this meeting after seven consecutive rate cuts. The pause comes as the central bank assesses the impact of trade policy with the US and its uncertain impact on the Canadian economy. Governor Tiff Macklem noted that the BoC would be ‘less proactive than usual until we have greater clarity.’ Macklem doubled down on prior comments that monetary policy cannot offset the impact of a trade war, only maintain price stability. Instead of a central forecast, the monetary policy report published two forecasts one which had minor deviations from the previous set of forecasts and another showing a recession caused by trade tensions. The overall messaging suggests the balance between growth and inflation is once again slowly being nudged towards inflation. Further moves down will come after careful consideration and confidence that inflation and inflation expectations are contained.
In the UK, CPI data for March showed a downtick in inflation. The headline rate fell by 0.2ppt to 2.6%yr while the core rate ticked down to 3.4%yr. The deceleration came from the services component, which rose 4.7%yr down from 5.0%yr. These figures came after a mixed labour market report. While the official labour force statistics indicated employment increased by 206k in February, administrative data from tax authorities was down 78k in the month. Average weekly earnings growth over the three months to February were unchanged at a downwardly revised 5.6%yr. Private sector wages excluding bonuses were also unchanged at 5.9%. While progress on inflation is being made, stubbornness in wages will keep the BoE attentive to inflation risks. Still, we expect the central bank to cut rates in the May meeting by 25bps justified by the progress on inflation and emerging growth risks from a slowdown in global trade.
In China, Q1 GDP came in stronger than anticipated at 5.4%yr and rose 1.2% in the quarter. The official press release was quick to attribute the ‘positive momentum’ to effective macro policy by authorities. Monthly activity data for March also painted a solid picture of the economy. Retail sales rose 4.6%yr on a year-to-date basis supported by spending generally seen during the Lunar New Year — household appliances, furniture and services. Industrial production lifted 6.5%yr/ytd far exceeding expectations. While the high-tech manufacturing sector continues to expand at a solid pace, this quarter also saw a solid uptick in coal and crude oil production. The 4.2% gain in fixed asset investment was supported not only by state-owned enterprises but also by private investment which has been declining since August 2024. All this offset the 9.9%yr decline in property investment. The data played well into the narrative authorities in China want to convey — China is a thriving economy and a solid trade partner. Authorities can point to its solid manufacturing sector and their policy decisions to back up their claims. We retain our view that the Chinese economy will hit its growth target of 5.0% for 2025 supported by further policy measures as the authorities see fit and growth in the high tech manufacturing sector.
Our updated views on the domestic and global economy alongside forecasts can be found in our Market Outlook for April 2025.
