Key insights from the week that was.
The 2026/27 Federal Budget was the main event in Australia this week. Our bulletin provides a detailed view of the Government’s fiscal position, policy measures and economic expectations over the forward estimates. Compared to the projections from MYEFO, the budget bottom line has improved owing to commodity price windfalls, with the deficit now expected to hold steady around 1.0% of GDP. Larger improvements in the Government’s finances are anticipated in the outer years as the Government’s major saving measures deliver. Of particular note is the clamp-down on NDIS spending announced in April, which is expected to relieve budget pressure from payment cost inflation and help keep Federal net debt low versus other OECD countries.
The tax reform proposed in the Budget was also consequential and broad-based, impacting negative gearing, the capital gains tax discount and discretionary trusts. Our conversation with Chief Economist Luci Ellis explores these proposed changes and the other key measures for households. Budget night also saw a number of initiatives put forward for business and SMEs, alongside a range of reforms that should help foster productivity growth in the long run. While meaningful, these measures are not expected to materially add or detract from the fiscal impulse over the next couple of years, thereby having little impact on the RBA’s policy calculus.
Our Q1 Westpac-DataX Consumer Panel meanwhile showed that consumers are having to reduce savings and discretionary consumption to absorb the spike in fuel and electricity prices (the latter now due to the roll-off of government rebates). Mortgage holders are well placed in aggregate to weather the shock from the Middle East and interest rate rises; but the distribution of buffers is varied, leaving some more exposed. Wages growth remains robust and is only slowing gradually, offering support to consumer demand without posing an immediate threat to inflation. That said, the pass-through of non-labour input cost inflation was a key message in this week’s NAB business survey, giving the RBA cause to remain cautious of inflation’s potential persistence.
Last Friday in the US, nonfarm payrolls beat expectations, rising 115k in April with only a small -16k revision to the previous two months. This left the three-month average at 48k, consistent with labour demand and supply being in balance. The unemployment rate remained steady at 4.3% as the participation rate edged down 0.1ppts. On a multi-month view, the labour market can be characterised as a ‘low hire, low fire’ environment, a sentiment echoed by FOMC member Schmid this week. This backdrop should result in moderate wage growth over the coming year.
The April CPI then came in as expected at 0.6%, 3.8%yr. The headline outcome reflected a further 5.4% gain for gasoline prices after March’s 21.2% surge. An outsized 0.6% increase in the shelter component was also observed, reportedly biased up by a delayed sample reset following the government shutdown late last year. Abstracting from these two effects, underlying inflation was modest in the month. Energy was also a major contributor to import prices in April, up 1.9% (0.7% ex-petroleum) to be 4.2% higher over the year. Seeing as the US is an energy product exporter, export prices have also strengthened of late, up 3.3% in April to be up 8.8%yr. US consumers look to be weathering the surge in energy prices well so far, headline and control group retail sales up 0.5% in April, a solid gain. Tax refunds have supported spending of late, and established households continue to benefit from fixed interest rates and wealth gains.
China’s price data was also stronger than expected in April because of energy prices. Consumer inflation lifted to 1.2%yr, while producer prices were up 2.8%yr. Producer price gains were concentrated in the most energy-intensive sectors such as metals, while sectors more vulnerable to excess capacity saw price declines. While recent data has been encouraging for China’s deflationary cycle, it is worth noting that it’s the supply-side driving the outcomes, not demand. Further fiscal support will be required to sustainably lift China out of deflation.
Of course, the main event in China this week was not a data release but instead the meeting between President Xi and President Trump. While limited in terms of the detail, the outcomes were productive. The US has reportedly agreed to reduce its controls over China’s access to technology; and in return, China will buy more commodities from the US. A “Board of Trade” is also to be set up to allow trade disputes to be resolved through bilateral negotiation. President Trump also reportedly emphasised the need for China to help bring the conflict in the Middle East to an end and re-open the Strait of Hormuz. Whether progress is seen on that front is an open question. President XI has been invited to Washington in September to continue in-person discussions.
