Key insights from the week that was.
In Australia, the Westpac-MI Consumer Sentiment index posted a slight increase of 0.5% in June. At 92.6, the headline index remains well above the deep lows over 2022-24, but still some way below the neutral threshold of 100, consistent with a degree of ‘cautious pessimism’. Offshore developments are still weighing on consumer’s minds, with 77% of respondents recalling news on the topic as ‘unfavourable’. While the lower-inflation environment has certainly aided sentiment, the real per capita income decline of recent years means consumers remain hesitant to increase discretionary spending. Indeed, views on family finances versus a year ago and expectations for the year-ahead remain almost 14% and 7% below their respective long-run averages; meanwhile, the ‘time to buy a major household item’ sub-index is still 19% below its long-run average.
It is also notable that the more constructive outlook for inflation has seen consumers become more confident in the prospects for interest rate cuts – a sentiment we share. This week, we revised down our forecasts for inflation, incorporating a faster unwind of population growth in the near-term and downside risks to activity; we now expect underlying (trimmed mean) inflation to fall below the mid-point of the target band for a time. As discussed by Chief Economist Luci Ellis, these developments are likely to see the RBA’s policy easing cycle extend into the first half of 2026, seeing the cash rate trough at the lower end of our estimate of the neutral range at 2.85%.
Emphasising the downside risks to activity growth, the latest NAB business survey was weak. The business conditions index, having been trapped in a consistent downtrend for the past three years, fell to 0 in May. This is the weakest reading since the pandemic and suggests private demand may remain on a shaky footing through mid-year. Encouragingly, Australian businesses seem broadly unphased by offshore developments. Although, with the confidence index hovering around a neutral level of 0, the survey is hardly signalling a near-term rally in economic activity.
In the US meanwhile, both the CPI and PPI came in under expectations in May. Headline and core consumer prices rose 0.1% in the month, leaving the annual rates little changed at 2.4%yr for headline and 2.8%yr for core. The downward pressure in the month came from easing energy and services prices, while core goods prices were flat. The PPI also underperformed, rising just 0.1% following an upwardly revised -0.2% result in April. On an annual basis, PPI inflation rose 2.6% while the ex. food and energy measure gained 3.0%. Given how quickly the tariffs were walked back, it isn’t surprising there was little evidence of trade policy impacting prices for US consumers and businesses. Weakening consumer demand and an aggressive pull-forward of inventory stocking before May’s announcement are additional reasons to suspect that the tariff effect for inflation will be slow to come through, particularly at the consumer level.
Across the pond, UK labour market figures also came in softer than anticipated. The unemployment rate for April ticked up slightly to 4.6% but remains below the BoE’s forecast of 4.75% for the year. Wages growth also decelerated to 5.3%yr from a revised 5.6%yr, consistent with other indicators such as the Decision Maker Panel which points to a further deceleration in the year ahead. These developments jar with the recent acceleration in the CPI, making the BoE’s task of balancing growth and inflation difficult. Recall that at its last meeting, the committee was split three ways, with the decision to cut only narrowly winning. Another CPI print is due next week, but more than likely it will again point to sustained risks for inflation and consequently the need for a gradual approach to policy easing.
Finally to China. There, prices continued to decline, the CPI down 0.1%yr in May and the PPI 3.3%yr lower. These results reflect the ongoing expansion of excess capacity across the economy and soft consumer demand. Chinese trade data in the week also revealed a moderation in exports growth to 4.8%yr as exports to the US jolted lower; however, imports declining by 3.4%yr, keeping the trade surplus near record levels at USD103bn.
