Economic data released in February show economic growth around long term trend in the in the US, still soft economic indicators in China, Europe languishing and Australia showing signs of a lift in household spending and a still very tight labour market. The fall in inflation through much of 2024 is showing signs of stalling in some countries, notably in the US, while in Australia the fall continued throughout the year and allowed the RBA to start cutting its cash rate in February. US President Trump’s America First economic policy announcements are threatening to soften growth in global trade while also increasing the risk of higher inflation in the US and elsewhere.
In The US, most economic indicators released in February still show economic growth running close to trend. GDP rose at 2.3% annualised growth pace in Q4 and trackers of where growth is travelling in Q1 2025, such as the Atlanta Fed’s GDP now, place growth continuing at 2.3%. Consumer spending, the mainstay of US economic growth, could be faltering. January retail sales fell by 0.9% m-o-m after an upwardly revised 0.7% increase in December. The University of Michigan’s consumer sentiment survey results for February were also softer showing a fall to 64.7 from 71.1 in January.
On the stronger side, previously weak manufacturing activity and outlook is enjoying a revival. The January ISM manufacturing purchasing managers’ index rose from 49.2 in December to 50.9 in January, the first time above 50 in three years. Industrial production rose 0.3% m-o-m in January after lifting 0.9% in December. The labour market remains tight and is generating strong wage growth. The unemployment rate fell to 4.0% in January from 4.1% in December while annual growth in average hourly earnings remained at 4.1% in both December and January and marks real wage growth around 1.2%.
US inflation has been rising since mid-2024 with the January CPI report showing annual headline inflation at 3.0% y-o-y, up from 2.9% in December and the core CPI (excluding volatile food and energy prices) at 3.3% y-o-y up from 3.2% in December. President Trump’s focus on lifting tariffs is likely to add to inflation already showing signs of drifting higher. The Federal Reserve left the Federal funds rate unchanged at 4.40% at its January policy meeting and has indicated that it is in no rush to cut rates further. We see a risk that the next rate move by the Fed may be to hike the Funds rate, although probably not until late this year, or early next year.
In China, data releases have been limited by the Chinese New Year holidays. What limited data was released in February show the economy still beset by the long running and continuing downturn in the property market. January house prices fell 5.0% y-o-y, a touch better than -5.3% recorded in December, but still a drag on the willingness of China’s consumers to save less and spend more freely. China’s economy is still suffering from excess productive capacity showing in low consumer price change – January CPI only +0.5% y-o-y – and declining producer prices, -2.3% y-o-y in both December and January. China needs a fiscal package that primes households to spend more. Without such policy change, China’s growth prospects are vulnerable if its international trade is harmed by rising trade protectionism led by the United States.
Europe’s economic growth rate appears to be flat-lining close to recession. Q4 GDP was up by only 0.1% q-o-q, +0.9% y-o-y with weakness centred in the two biggest EU economies, Germany and France. European consumer spending is weak with retail sales down by 0.2% m-o-m in December after a 0.0% flat result in November. The option to lift government spending and prime growth is limited by an excessive government debt burden in France and statutory limits on government debt in Germany as well as weak government in both countries. The ECB is responding to weak European growth prospects and at its early February policy meeting reduced the deposit rate by 25bps to 2.75%. The ability of the ECB to continue cutting rates going forward may be constrained by lack of progress reducing inflation. Europe’s January CPI rose to 2.5% y-o-y from 2.4% in December while core inflation was steady at 2.7%, both readings sitting above the ECB’s 2.0% target.
In Australia, progress reducing inflation evident in the Q4 CPI report showing headline inflation down to 2.4% y-o-y and underlying (trimmed mean) inflation down to 3.2% y-o-y provided leeway for the RBA to cut the cash rate by 25bps to 4.10%, but it was a cautious cut because of uncertainty surrounding whether inflation will stay on a path towards being sustainably inside 2-3% target band next year. The main problem with the inflation outlook is the continuing tight labour market. In the quarterly Monetary Policy Statement also released last week the RBA revised upwards materially forecast annual employment growth this year to 2.8% y-o-y (previously 2.2%) in June 2025 and 2.0% (previously 1.4%) in December 2025.
As a result of the upward revisions to the RBA’s employment growth forecasts it also lowered its forecasts for the unemployment rate to 4.2% (previously 4.4%) in June 2025 and 4.2% in December 2025 (previously 4.5%). It is worth noting that the January labour force report released last week with employment up a stronger-than-expected 44,000, taking annual employment growth up to 3.5% y-o-y indicates the RBA’s latest employment growth forecasts already need upward revision. The January unemployment rate at 4.1% also implies the RBA is still forecasting too high an unemployment rate.
The revisions that the RBA has made to labour market conditions in the February Monetary Policy Statement also prompted upward revision to the RBA’s inflation forecasts for 2026 with end year forecasts of 2.8% y-o-y for the CPI (previously 2.5%) and 2.7% for underlying inflation (previously 2.5%). Also, the RBA’s latest forecasts show the CPI and underlying inflation at 2.7% y-o-y in mid-2027, above the middle of the RBA’s 2-3% target band.
These latest RBA forecasts of tight labour market conditions persisting with inflation sitting above the middle of the 2-3% target band through to mid-2027 explain why the RBA is saying it will take time before considering the next interest rate move and will be watching data closely. The latest data relating to retail sales was relatively strong with Q4 real retail sales up 1.0% q-o-q. While Q4 wage growth was soft, up 0.7% q-o-q, 3.2% y-o-y there is no guarantee it will stay soft given tight labour market conditions and several big wage claims sitting in the pipeline. Government spending rising at more than 4% annual pace in real terms is not slowing. Indeed, ahead of the Federal Election there has been a flurry of proposed big ticket new spending initiatives. All told, we see very limited scope for the RBA to cut the cash rate further, perhaps one or two more cuts at most before focus turns to whether the RBA may change tack and start hiking rates again in 2026.