Cliff Notes: some promising signs for the consumer
Key insights from the week that was.
In Australia, updates on the consumer were constructive overall. Nominal retail sales lifted 1.4% during Q4 and prices were up 0.4%. Retail sales volumes therefore managed a gain of 1.0% in Q4, building on Q3’s 0.5% increase to be up 1.1% over 2024. That all states and retail categories gathered momentum into year-end not only highlights the breadth of the current upturn but also points to a delayed tax cut response beginning to come through. These findings were corroborated by the ABS’ new experimental measure of household spending (covering two-thirds of total household consumption compared to one-third for retail) which lifted 0.4% (4.3%yr) in December on strength in discretionary spending, particularly goods.
While these developments point to upside risks to our current Q4 household consumption forecast of 0.7%qtr, we are mindful that the uncertainty surrounding our forecast are two-sided. Evidence from card activity data and our Westpac Consumer Panel suggests the overall response to Stage 3 tax cuts has been underwhelming, with consumers seeking to rebuild savings buffers eroded over 2023 and 2024. Looking forward, the durability of the upturn is yet to be tested beyond the year-end sales period, which reportedly saw aggressive discounting. The latest edition of the Westpac Red Book discusses these themes in depth.
On housing, the latest CoreLogic data pointed to a broadening slowdown in price growth across the major capitals. Sydney and Melbourne continued to record declines in January with buyers constrained by affordability and supply. Perth, Adelaide and Brisbane meanwhile are gradually seeing annual price growth decelerate to low double-digit rates as demand and supply come into better balance. On new construction, the modest increase in dwelling approvals – driven by a bounce in high-rise units – masked a third consecutive monthly decline in private detached house approvals, raising questions over the pipeline’s persistence and breadth.
Before moving offshore, it is worth highlighting the downside surprise in December’s goods trade data, the surplus narrowing from $6.8bn to $5.1bn. Greater-than-usual monthly volatility looks to be at play, trade flows shifting, at least in part, in anticipation of tariffs being imposed by the US. Australia is not immune from global trade tensions, but an assessment of our direct and indirect trade with the US makes clear we are well positioned to minimise the net cost. In this week’s essay, Chief Economist Luci Ellis reflects on global developments in trade policy and the implications for markets.
Offshore, the pulse of key data was favourable overall, though policy makers continued to emphasise greater-than-usual uncertainty over the outlook.
In the US, the manufacturing PMI increased by 1.7 points to 50.9 points in January, its first expansionary read since October 2022. The gain was supported by strength in new orders, prices, production and, most notably, employment, up 4.9 points. President Trump’s promise to support US manufacturing investment and production is likely a factor here despite any windfall being a future prospect not a present reality. Notably, the average reading through President Trump’s first term exceeded that of both the Obama and Biden administrations by around 2 points. The non-manufacturing index meanwhile declined 1.2 points, although at 52.8 still points to expansion. Activity, new orders, inventories and prices saw a substantial decline while other measures saw tepid increases, including a 1 point increase in employment. All components except prices remain below their 5-year pre-COVID average, indicative of modest growth in the sector. Still to come tonight is the January employment report and 2024 annual revision for nonfarm payrolls. Available labour market detail continues to broadly point to balance between demand and supply, limiting risks to demand and inflation over the period ahead.
Across the Atlantic, the Bank of England cut rates by 25bps to 4.5% in a 7 to 2 vote, the dissenters preferring a 50bp cut. Growth forecasts were marked down out to Q1 2026, the economy now expected to grow 1.2%yr through 2025, down from 1.7%yr in the November projections. Mild upward revisions were made to the out years, though with the passage of time comes risk. Projections for headline inflation were lifted, particularly for 2025. This was attributed to higher energy prices and the government policies announced in the Autumn Budget 2024, with underlying inflation still anticipated to ease. The Monetary Policy Report also highlighted tariff uncertainty, with analysis showing downside risks to growth, due to the UK’s close relationship with the EU and a potential rotation in production from the UK to the US, and uncertainty for inflation. Looking back, the Bank also reviewed its estimates of neutral, the primary findings being that neutral is higher post pandemic but that uncertainty around estimates is high. A rate cut per quarter this year seems most probable, but if growth continues to disappoint, the pace of easing could be accelerated.
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