Key insights from the week that was.
After a bumper run of data, local markets were provided space for reflection this week. The main release was the household spending indicator which, upon the cessation of the retail sales release last week, is now the sole official indicator of consumer spending. In June, nominal spending growth was on trend, rising 0.5% for a 1.0% quarterly gain. After adjusting for inflation, real spending increased 0.7% in Q2 following an upwardly revised 0.5% lift in Q1.
Our Westpac-DataX Consumer Panel corroborates this signal of firming momentum, indicating real spending grew by a solid 1.5% in Q2 after a 0.6% increase in Q1 – driven by discretionary categories across all demographics. Spending growth was not as strong for older Australians (65+), however, perhaps reflective of the recent financial market volatility and high cost of living. The Panel’s detailed insights behind household income and saving flows suggest the latest lift in spending did not come at the expense of a reduction in the savings rate, also reporting a solid quarter for average net incomes (+2.9%) and, to a lesser extent, a pick-up in personal credit usage during EOFYS – as evinced by official credit data last week.
Overall, our Panel suggests the consumer recovery is on a relatively firm footing heading into mid-year – a welcome signal in line with our expectations. This follows what has been a fairly gradual recovery in consumer spending to date, which is understandable given the depth and length of the contraction in real per capita incomes. Abating cost-of-living pressures are a crucial factor underlying the current recovery; thankfully, inflation is expected to remain within the target band, justifying 100bps of rate cuts beginning at next week’s August RBA meeting through May 2026 to a neutral terminal cash rate of 2.85%.
On the medium-term view, ahead of the Government’s upcoming Productivity Roundtable, Chief Economist Luci Ellis’ essay this week focuses on tax policy, productivity and the eventual aim, improving living standards.
Before moving offshore, it is also worth highlighting that Australia’s goods trade data continues to exhibit extreme volatility as global trade networks attempt to adjust to the Trump trade policy era – see below for the latest developments. While the surplus bounced up to $5.4bn in June from a downwardly revised $1.6bn in May, we expect the broader multi-year trend of a narrowing surplus to remain in place into the medium-term, as commodity prices step back from recent highs and the Aussie dollar strengthens.
Turning to the US, last Friday’s weak employment report remained participants focus all week, the reduction in the 3-month average pace of nonfarm payroll growth from 150k to 35k seen as a break in the labour market trend and evidence of building downside risks. Notably, household survey employment has been weaker still, declining 132k per month since January; had it not been for a 0.4ppt decline in participation over the period, the unemployment rate would now be around 4.6% as opposed to the 4.2% reported by the BLS for July.
Given this shift, it is unsurprising that the market is now pricing in 60bps of FOMC rate cuts by end-2025 and a cumulative 130bps by end-2026. In our view though, this ignores the inflation persistence and risks that have held back the FOMC in recent months and which we expect to endure. Against the market’s 130bps of easing to end-2026, we instead expect just 50bps of cuts (by end-2025), with the impact on the long end of the US yield curve more than offset by rising fiscal uncertainty.
Adding to that uncertainty this week, President Trump imposed another 25% tariff on India in response to their purchases of Russian energy, but did not act against China even though the latter nation is also a major customer of Russian energy companies. A 100% industry tariff was also mooted for semiconductors produced by firms not investing in the US, albeit without detail on the terms, scale or timing of the expected investment. President Trump has previously signalled a similar approach for pharmaceutical production and imports, again without providing any detail. In such a climate, it is difficult for US businesses to justify a material expansion of capacity outside very specific sub-industries such semiconductors and AI infrastructure. Providing another point to ponder, just announced this morning is that Stephen Miran, currently Chair of the Council of Economic Advisors, has been appointed to the Federal Reserve Board Governor position vacated by Adriana Kugler, but only until January 31 2026.
Meanwhile in the UK, the Bank of England’s Monetary Policy Committee (MPC) cut its Bank Rate by 25bp to 4.0%, a level last seen in March 2023. While the eventual outcome aligned with both our and the market’s expectations, for the first time ever, the MPC was required to vote a second time after a three-way split in the first vote, four members voting to leave policy unchanged, four for a 25bp cut and one for a 50bp cut. In the second vote, the five members wanting to ease policy this month coalesced on a 25bp cut, creating a majority.
The minutes of the meeting revealed that those favouring a cut were most concerned by disinflationary pressure from emerging slack in the labour market, evinced by the moderation in underlying wage growth. The four members in the minority, however, emphasised that, following a recent increase in headline inflation, “the disinflationary process had slowed and the risk of inflation expectations feeding through to second-round effects had risen.” The updated BoE projection for the CPI illustrated the view of the latter group well: headline inflation is now expected to peak at 4.0%yr in September, 0.3ppts higher than the BoE expected three months ago; and then return to the 2% target one quarter later. The BoE’s projection for GDP growth was little changed, and is consistent with a gradual recovery.
In the press conference, Governor Bailey admitted that, while the policy rate remains on a downward trajectory, the monetary policy path has become more uncertain, with the Committee attempting to balance upside inflation risks against concerns over economic activity and the labour market. Against this backdrop, the committee maintained its forward guidance of “a gradual and careful approach to the further withdrawal of monetary policy restraint.” While we expect the MPC to proceed very carefully, we believe a 25bp cut per quarter is likely to be maintained in Q4 2025 and Q1 2026, leaving Bank Rate at a neutral 3.50% by Q2 2026.