Economic data released in March show economic growth threatening to decelerate in the in the US, but firmer economic indicators for the most part in China, Europe and Australia. The Trump Administration’s imposition of higher trade tariffs with the promise of more to come in April present a headwind to global economic growth prospects and a boost to inflation. In March, the major central banks showed signs of being torn between the need to support growth while avoiding adding to inflation. Both the US Federal Reserve and the Bank of England paused rate cuts at their March policy meetings, and with their respective policy rates at a relatively high 4.5%. A period of constrained global economic growth with sticky inflation appears to be in prospect as President Trump’s trade protection policies hurt both supply of goods and services and demand, not just in the US but internationally, including in Australia.
In The US, most economic indicators released in March show some economic growth momentum but tempered by sharply deteriorating consumer sentiment and confidence. Consumer spending, the mainstay of relatively strong US economic growth through 2024 – in Q4 2024 the latest revision of GDP shows 2.4% annualised growth with consumer spending at 4.0% annualised – appears to be running at a softer pace in Q1. February retail sales were up only 0.2% m-o-m, after falling 1.2% in January while total personal personal spending was up 0.4% m-o-m after a 0.3% fall in January. Softer US consumer spending growth is occurring in the face of still very strong income growth – personal income rose 0.8% m-o-m in February after increasing 0.7% in January. It seems that US households are losing confidence in President Trump’s economic policies while they also expect his policies will boost inflation.
The Trump Administration’s economic policy focus is about reducing the US trade deficit by increasing tariffs on imports where the Administration deems that countries and economic blocs are trading unfairly leading to them running surpluses with the US. The US trade deficits with those countries, however, also reflect access to cheaper goods for US consumers and US businesses where imports are part of their supply train. In the first instance raising tariffs hurts US demand and by raising business costs cuts into US supply.
Meanwhile, the labour market in the US remains very tight with still rising nonfarm payrolls, up 151,000 in February, a low unemployment rate at 4.1% and wage growth running around 4.0% y-o-y. US CPI inflation edged down to 2.8% y-o-y in February from 3.0% y-o-y January, but is unlikely to fall much further and is likely to push higher later this year. The Federal Reserve left the Funds Rate unchanged at 4.50% in March, downgraded its growth forecasts and indicated the possibility of two more 25bps rate cuts in 2025 but little more beyond. We see the growing risk of higher US inflation in 2026 limiting the Federal Reserve’s ability to cut rates further and setting the scene for a rate hiking cycle to start next year.
In China, data releases in March show a small improvement in domestic economic activity. Notably fixed asset investment spending lifted to 4.1% y-o-y in February from 3.2% in January while retail sales rose 4.0% y-o-y in February from 3.7% in January. The Peoples’ Congress meeting set a goal of achieving 5% economic growth in 2025 and policy announcements since have indicated a lift in government spending aimed at priming consumer spending although channeled through local government authorities that have least ability to prime household spending. China clearly faces growth headwinds both from President Trump’s tariff policies limiting China’s export growth as well as the continuing issues with falling residential property prices that implies the authorities need to do more to encourage households to save less and spend more.
Europe’s economic growth rate is improving slightly and more budget spending, notably on defence, notably in Germany, indicate stronger growth ahead notwithstanding the growth-crimping effect of the trade war with the US. Q4 GDP was revised up to 0.2% q-o-q, +1.2% y-o-y. Business sentiment is lifting, and the ECB has managed to lower the cash rate again, reducing its deposit rate by 25bps to 2.50% in March. Inflation has edged lower with the headline CPI down to 2.3% y-o-y in February and underlying inflation at 2.6% y-o-y. However, it seems unlikely that further progress will be made, taking inflation down to the ECB’s 2.0% target and that is causing the ECB to talk cautiously about whether interest rates can be reduced further. Sticky inflation is already preventing the Bank of England from continuing to reduce its Base Rate, on hold at 4.50% at its March policy meeting.
In Australia, economic reports released in March show firmer economic growth. Q4 GDP was up 0.6% q-o-q, 1.3% y-o-y from +0.3% q-o-q, 0.8% y-o-y in Q3. Better consumer spending was a driver of growth in Q4 and that appears to be continuing in Q1 with retail sales up 0.3% m-o-m in January after falling by 0.1% in December. Australia’s labour market remains tight with the unemployment rate steady at a low 4.1% in February even though employment fell 52,800 in the month – attributable mostly to older workers retiring, employment of younger workers rose in the month.
The Government’s pre-election Budget is a free-spending affair including extension of the electricity rebates to the end of 2025 and small tax cuts taking effect in July 2026 and 2027 if not rescinded. Real government spending will rise to a record high proportion of GDP over the next two years and structural budget deficits are baked in for the next decade. In brief, the Budget underpins demand growth over the next three years and while some budget measures hold down inflation in the near-term, they push inflation back up in 2026 and beyond. The Prime Minister has called the election for May 3rd. Even a change of government will not noticeably contain growth in government spending in the near term on the alternative policies announced by the Opposition so far.
Inflation is edging lower with the February monthly CPI down to 2.4% y-o-y from 2.5% in January and trimmed mean (underlying inflation) at 2.7% y-o-y from 2.8% in January. However, inflation is likely to rebound in 2026 to the top of the RBA’s 2-3% target band (in both the RBA’s and Commonwealth Treasury’s economic forecast). That forecast for a rebound in inflation next year means that the RBA needs to see surprisingly low inflation results or evidence of a sharp decline in economic activity if it is to cut rates again soon. It has evidence of neither at present and that means to us that the RBA is unlikely to follow up the 25bps rate cut at the February policy meeting with another cut at the meeting this week. Instead, the RBA is likely to wait for the Q1 CPI report, due later in April and if that provides a very low inflation result, that could trigger a rate cut at the May policy meeting.