Economic data released in June showed evidence of moderating global economic growth but still tight labour market conditions and mixed picture for inflation with stickiness showing for some, notably the US and UK, but reducing for others including much of Europe outside the UK and Australia and China skirting deflation. Global economic prospects remain clouded by US tariff policy that notwithstanding faltering progress on bilateral trade deals with US still leave US effective tariff protection at a much higher than was the case before President Trump’s ‘Liberation Day’ tariff announcements. War between Israel and Iran flared in June, but after dramatic US intervention, seemed to settle in an uneasy ceasefire with developments reflected in sharp rise and fall in oil prices. Some central banks, including the RBA, have seen enough progress reducing inflation to indicate they will continue cutting interest rates while others, such as the US Federal Reserve and the Bank of England, are on hold awaiting a clearer view of the inflation outlook.
In the United States, Q1 GDP growth was revised lower from -0.2% annualised to -0.5%. The mainstay of US economic growth, consumer spending, was revised softer to +0.4% annualised from +1.2% initially for Q1 and +4.0% in Q4 2024. A sharp bringing forward of imports to the US ahead of higher tariffs was the main reason why the US suffered negative economic growth in Q1 and the big fall off in imports in Q2 should mean growth bounces positive. But the likely size of the bounce back in growth in Q2 (advance reading out in late-July) is looking less pronounced with US consumers becoming more cautious. May retail sales fell 0.9% m-o-m after downward revision to April retail sales to -0.1% m-o-m from +0.1% reported initially.
The US labour market still appears to be tight with May non-farm payrolls up 139,000 and the unemployment rate low and steady at 4.2% in May. US wages continue to grow strongly with average hourly earnings in May up 0.4% m-o-m, +3.9% y-o-y, but consumers and businesses are losing confidence. The June ISM manufacturing and non-manufacturing purchasing Managers’ indices were both below the expansion/contraction marker of 50 at respectively 48.4 and 49.9.
Despite mostly softer US economic growth signals in June, inflation was sticky and above the Federal Reserve’s 2.0% target with the CPI in May at 2.4% y-o-y, up from 2.3% in April and the core CPI holding at 2.8%. With inflation sitting above the Federal Reserve’s target, and the uncertainty about how much higher tariffs will lift inflation down the track, Fed Chairman Jerome Powell has indicated that he is in no rush to lower the Fed Funds rate, currently 4.50%, and putting him at odds with President Trump who has voiced that he wants much lower interest rates. The growing dispute between President Trump and Fed Chairman Powell, plus President Trump’s ‘big, beautiful bill’ that will bump up already high US budget deficits and government spending, plus tariff boosted inflation all point to higher US government bond yields ahead.
In China, international trade and industrial production showed softer signs in May. Export growth moderated to 4.8% y-o-y from 8.1% in April and industrial production growth moderated to 5.8% y-o-y from 6.1% in April. Growth in these two parts of the economy are set to weaken much more under the impact of still high US import tariffs, wherever current trade negotiations settle. In the past, China might have tried to offset the demand-side growth shock from weaker international trade and industrial production by boosting fixed asset investment spending but that option is limited by the lengthy downturn in the property sector. Growth in fixed asset investment moderated in May to 3.7% y-o-y from 4.0% in April. What China needs is a big mind-set change in the household sector towards saving less and spending more. That requires a big lift in government spending aimed squarely at boosting household income and spending together with much lower borrowing interest rates. Small moves towards these policies have been made this year and have been rewarded by modest lift in retail spending, up 6.4% y-o-y in May from +5.1% y-o-y in April, but much more will be needed to counter the increasing headwinds from weakening exports and softer industrial production.
In Europe, economic reports show modest growth combined with lower inflation. The UK differs in that modest growth is running hand-in-hand with sticky inflation. Returning to the EU, Q1 GDP growth was revised up to +0.6% q-o-q, +1.5% y-o-y (initially reported at +0.3%, +1.2%) while headline CPI inflation fell in May to 1.9% y-o-y from 2.2% in April and core inflation was down to 2.3% from 2.7% in April. Unemployment fell to a new low for this century at 6.2% in April from 6.3% in March. While near-term growth indicators are firm in Europe and government spending is increasing, especially in Germany, higher US tariffs on imports from the EU will hurt growth prospects. The European Central Bank continued cutting interest rates at the June policy meeting taking the deposit rate down 25bps to 2.00%. The Bank of England at its June policy meeting, in contrast, stymied by inflation still sitting above 3%, left its Base Rate unchanged at 4.25%.
In Australia, promising signs of improving household spending growth in Q4 2024 have suffered a set-back in Q1 and early in Q2. Q1 GDP rose by only 0.2% q-o-q leaving annual growth unchanged at 1.3%. Growth in household consumption expenditure moderated in Q1 to +0.4% q-o-q from +0.7% in Q4. In April retail sales fell 0.1% m-o-m while household spending lifted by only 0.1%, both readings pointing to a soft start to Q2 GDP growth. Household disposable income is growing strongly helped by real wage growth running above 1% y-o-y, lower income tax through 2024-25 and lower mortgage interest rates. For the present, Australian households are preferring to save rather than spend more freely.
Australian labour market conditions remain tight. While employment fell by 2,500 in May, the fall came after an out-sized 87,600 increase in April and the unemployment rate was low and steady at 4.1% in May. Labour conditions remain tight enough to maintain annual growth in wages at around 3.5% y-o-y, or higher.
Inflation fell in May according to the May CPI report, to 2.1% y-o-y from 2.4% in April thanks to big falls in petrol prices, -10.0% y-o-y and electricity, -5.9% y-o-y.
Underlying or trimmed mean inflation also fell in May to 2.4% y-o-y from 2.8% in April. Inflation is inside the RBA’s 2-3% target band on these latest readings and is likely to stay well inside the band over the next month or two. Annual inflation is likely to start to rise during Q3 with the end of the annual fall in electricity prices. The effect of higher electricity prices will become more pronounced in Q1 2026 after the ending of the Government’s $75 electricity rebate.
Another factor likely to lift inflation next year is wage growth running around 3.5% y-o-y with no productivity improvement in sight. Lower inflation in the near-term provides leeway for the RBA to cut the cash rate in both July and August and assuming 25bps at each meeting that takes the cash rate down to 3.35%. Beyond the August RBA policy meeting, rising annual inflation not only dims the prospect of further rate cuts but it also sets the scene for a possible rate hiking cycle to start late next year.