Key insights from the week that was.
The Westpac-MI Consumer Sentiment Index lifted modestly in March, up 1.2% to 91.6, still an outright pessimistic reading. The latest survey was in the field over the week to March 7, so it only captured part of this week’s conflict escalation in the Middle East. Responses over the last three days of the sample were closer to an index read of 84 – a deeply pessimistic result which emphasises just how dynamic sentiment is to the situation offshore.
Underscoring the slightly firmer headline result in the month was an improvement in current assessments of family finances (+1.8%), buyer sentiment (4.9%) and the economy in five years’ time (2.4%). This more than offset the flat and weaker readings on the year-ahead view for family finances and the economy respectively. Many of the near-term nerves stem from consumers’ hawkish mortgage rate expectations, with over 75% of respondents anticipating a lift over the next twelve months.
Recent commentary from RBA officials has continued to emphasise the Board’s pessimistic view on supply capacity, concerns over the persistence of domestic inflation and their desire to keep price expectations anchored. Now facing an additional threat from offshore in the form of surging energy prices, the RBA is likely to feel compelled to act without delay. Responding to these developments, Chief Economist Luci Ellis this week announced a revision to our RBA profile, adding an additional 25bp rate hike next week at the March meeting, in addition to the hike already forecast for May. This cumulative 50bps of tightening will take the cash rate back to its post-pandemic peak of 4.35%. The breadth, intensity and persistence of inflation risks stemming from the conflict are highly uncertain and skewed upward near term, but should fade through 2027, allowing a reversal of 2026’s rate hikes from late-2027.
Before moving offshore, it is worth noting that the latest NAB business survey suggests optimism among Australian businesses largely evaporated in February. Not only does this coincide with weaker reads on consumer sentiment, but also a somewhat softer start to the year for trading conditions and profitability. This foreshadows a plateauing of economic growth after an acceleration to near trend over the course of 2025.
In the US, current assessments and expectations of the labour market were re-written last Friday. US nonfarm payrolls surprised to the downside in February, declining 92k in the month. Gains over the prior two months were also revised down 69k, leaving the 3-month average at just 6k versus 50k in January, and the 12-month average around 13k compared to 89k the year prior. The unemployment rate also ticked up to 4.4% despite a 0.1ppt decline in the participation rate. More significantly, annual revisions reduced the participation rate and employment-to-population ratio by 0.4ppts and 0.5ppts respectively. These outcomes point to US labour supply being constrained by both structural and cyclical factors, risking economic growth into the medium term.
That said, to date economic growth has held up, as highlighted by January retail sales – the control group up 0.3%. Housing starts also showed some life in January, up 7.2%, although the level of starts is still 18% below its 2022 peak and permits are weaker still, 28% below. The run up in US term interest rates into the end of the week meanwhile signals growing risks for US inflation and financial conditions. This is particularly troubling for the US, coming at a time when labour market data warrants further easing. Our full updated expectations for the US economy and interest rates can be found in March Market Outlook, out today on Westpac IQ.
Finally to China. The January/February trade data highlighted the continued success of China’s rapid expansion of high-tech manufacturing and related infrastructure, exports up 21.8% year-to-date and the trade surplus near its widest mark at $213.6bn (for the two months combined). Persistent strength in the trade surplus is a core expectation of our China forecasts. But, after near 20% gains for several years, growth in external demand must slow. As discussed in the last edition of Cliff Notes and March Market Outlook, pro-active stimulus is necessary to accelerate domestic demand from H1 2026. The greater the risk for global energy prices and supply, the more pressing the need for action.
