Cliff Notes: resilience offers promise
Key insights from the week that was.
In Australia, the Westpac-MI Consumer Sentiment Index was broadly unchanged in February, nudging just 0.1% higher from 92.1 to 92.2. Though, this ‘cautiously pessimistic’ tone marks a material improvement from the last two-and-a-half years of deep pessimism, aided by more constructive views on future conditions. Indeed, the constituent sub-indexes tracking the one-year and five-year economic outlooks have both moved above their long-run averages, and the year-ahead outlook for family finances is also within striking distance. Views on current conditions are still weak however, both the ‘family finances vs. a year ago’ and ‘time to buy a major household item’ indexes notably below historic averages. This composition emphasises the weak starting point of consumers, having been battered by cost-of-living pressures and real income declines over 2022-24. That said, moderating inflation (as discussed by Chief Economist Luci Ellis this week) and the ‘Stage 3’ tax cuts combined with imminent interest rate relief are expected to support a recovery in time.
Businesses’ perspective on the economy looks to be broadly aligned with the consumer view. The latest NAB business survey confirmed business conditions continue to track the steady decline in place since 2022. This trend, alongside our own evidence from card activity and the Westpac-DataX Consumer Panel, is consistent with lingering downside risks concentrated in consumer spending. Business confidence meanwhile remains broadly neutral but extremely volatile month-to-month. With the combination of building expectations for rate cuts, a Federal Election, and an extremely fluid global backdrop, this is likely to remain the case for some time.
A final note for Australia on housing. The latest batch of loan approval data, now released on a quarterly frequency, revealed a softer finish to the year. The total value of finance approvals (excl. refinancing) rose 1.4% in Q4 despite fewer loans being approved (–0.4%qtr) owing to higher average loan sizes – a dynamic responsible for more than half the growth in total housing finance value since Q2 2022. Indeed, despite pulling back from a stellar annual pace of +25%yr in September, total housing finance values are still tracking +16%yr, reflecting the backdrop of robust house price growth over 2023/24 and stretched affordability.
Before moving further afield, this week our New Zealand economics team released their latest quarterly Economic Overview, detailing in depth their baseline expectations for New Zealand and the key risks.
Over in the US, last Friday’s January nonfarm payrolls print was solid at 143k and came with a +100k revision to the prior two months. Annual revisions in contrast cut 589k jobs from the level at March 2024. The average pace of nonfarm payrolls growth is now estimated to have slowed from 380k in 2022 to 216k in 2023 then 165k since the beginning of 2024. Arguably, gains since the beginning of 2023 are consistent with a labour market in balance.
Adjustments were also made to the level of household survey employment at January; as such, the December 2024 and January 2025 employment outcomes are not comparable. The ratios are unaffected however and provided a positive update, the unemployment rate edging down from 4.1% to 4.0%, a rate also consistent with a balanced labour market. January's strong average hourly earnings gain of 0.5% is likely a one-off given the series has, on average, increased 0.3% per month since the beginning of 2024 and the Employment Cost Index also continues to point to a trend deceleration in wage and compensation growth.
January’s CPI subsequently printed above expectations, total prices up 0.5% and the core sub-set 0.4%. Annual headline and core inflation edged higher as a result to 3.0% and 3.3% respectively. On the services side, transport and recreation services both reaccelerated, pointing to capacity constraints. Shelter inflation was also a touch stronger in the month and the annual rate, while slowly trending lower, is still materially above its long-run average. As we begin to consider the potential implications of US tariffs on domestic inflation, it is important to recognise that the highly-beneficial deflationary trend for core goods looks to have come to an end, with three of the past five readings positive and the annual change now just -0.1%. The PPI also came in stronger than expected at 0.4%mth and the history was revised up. However, components that feed into the calculation of PCE inflation, the FOMC's preferred consumer inflation gauge, were favourable, health care costs and airfares both down in the month.
Reflecting on the latest employment and CPI readings, during testimony to Congress, FOMC Chair Jermone Powell reaffirmed the FOMC is in no hurry to ease monetary policy further. He noted that “reducing policy restraint too fast or too much could hinder progress on inflation” and characterised the labour market as “broadly in balance” and “not a source of significant inflationary pressure”. When questioned on tariffs, Chair Powell kept his comments apolitical, but did note they could impact monetary policy’s stance. Overall, it is clear the FOMC is confident in the underlying health of the US economy and believe they have time on their side to judge the persistence of inflation and the consequences of the new administration's policies.
On government policy, this week saw US President Donald Trump announce a 25% tariff on steel and aluminium imports into the US, with no immediate exceptions. The pathway to implementing reciprocal tariffs is also to be studied. Reciprocal tariffs would arguably have the greatest impact on emerging markets, in particular countries such as India and Thailand where tariffs have been put in place to protect the development of critical domestic industry, including the supply of everyday essentials to household sectors with limited financial means.
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