Cliff Notes: consumers wonder what’s next
Key insights from the week that was.
In Australia this week, the Westpac-MI Consumer Sentiment Index clawed back only a quarter of April’s collapse, rising 3.5% to 83.0. This leaves sentiment at a deeply pessimistic level, reminiscent of the scars inflicted by the post-pandemic cost-of-living shock. The halving of fuel excise provided some relief in May, facilitating an improvement in views around family finances – the ‘last 12 months’ and ‘next 12 months’ sub-indices rising 9.0% and 10.7% respectively. However, a third consecutive cash rate increase left 85% of consumers bracing for further increases in mortgage rates over the coming year. Adding in the uncertainty created by the seemingly open-ended Middle East conflict and anxiety over the tax changes proposed in the Budget, it is not surprising views on the economic outlook for one and five years hence sit at a combined three-and-a-half year low.
April’s labour force survey also points to an imminent slowing in economic momentum. Employment fell 18.6k, abruptly halting the uptrend that commenced early this year. The participation rate nudged 0.1ppt lower to 66.7%, but the unemployment rate still rose 0.2ppts to 4.5%, the highest reading since the ‘delta’ COVID-19 outbreak of late-2021. Some of the surprise can be explained by ‘abnormal’ seasonality around Easter and noise in youth outcomes, but genuine weakness is also evident just as the shocks associated with the Middle East conflict and 2026’s rate increases reverberate through the wider economy.
Aware of the volatility of labour data, like us the RBA will probably expect some degree of payback next month. This week’s data will give the RBA cause to pause in June. But we continue to expect them to raise the cash rate in August and September as energy costs are passed through and given their desire to keep inflation expectations anchored. The cash rate is then likely to remain on hold until 2028, when a return to near-target inflation will allow a reversal of this year’s rate hikes.
In the US, the minutes of the April FOMC meeting primarily focused on the outlook for inflation. There was a lengthy discussion of potential upside risks to inflation, with the Middle East conflict’s direct and indirect effect on prices, US tariffs and the strength of AI infrastructure investment all commented on. In contrast, participants were sanguine on the labour market, assessing there to be balance between labour demand and supply and limited downside risks. GDP growth was also expected to be solid this year, the staff forecasting momentum to hold just above trend. On policy, members indicated that, if they see evidence of disinflation being back on track or the labour market weakening, easing could be considered. A “majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent”.
Over in Europe, Euro Area CPI inflation met expectations in April, prices rising 1.0% in the month, lifting annual inflation from 2.6%yr to 3.0%yr. Core inflation was elevated in the month, but remained close to the 2.0%yr medium-term target on an annual basis. Gains were broad-based across the different categories, but transport contributed the most. UK annual CPI inflation meanwhile moderated from 3.3%yr in March to 2.8%yr in April as prices rose 0.7% in the month. The deceleration in inflation came from several discretionary goods categories including clothing and furniture. Core CPI inflation rose 2.5%yr in the month, down from 3.1%yr in March. Comments from Bank of England Governor Bailey noted the monetary policy committee has time to assess the impacts of the war, having already effectively tightened by removing the expectations of a cut set at the start of the year.
Also in the UK, employment rose by 148k over the three months to March while the unemployment rate eased to 5.0% for the same period. While on the surface this may paint a rosy picture, signs of labour market softening are starting to emerge. The unemployment rate for March rose to 5.5% and the number of payrolled employees fell 100k in April. Wages growth excluding volatile bonuses moderated from to 3.4%yr from 3.6%yr previously and, for the private sector only, underlying wage growth is a considerably more modest 3.0%yr.
Turning to Asia, China’s partial indicators for April again highlighted a need for stimulus. Retail sales growth slowed sharply to 0.2%yr in April from 1.7%yr in March, a post-pandemic low, as reduced government subsidies weighed heavily on car and household appliance sales. Fixed asset investment fell 1.6%ytd driven by the private sector. Having improved in recent months, the decline in property investment accelerated again in April to -13.7%ytd. Industrial production growth also slowed from 5.7%yr to 4.1%yr in April, suggesting supply disruptions related to the Middle East are beginning to be felt. This is a risk for the entire Asian region for both activity and inflation, and a particular challenge for policy makers coming at a time of surging strength in tech-related production and investment.
Closing with the Middle East conflict. Iran has said the latest proposal from the US partly bridges the gap between the two sides, but comments from Supreme Leader Khamenei about keeping Tehran’s uranium stockpile and a dispute over tolls in the Strait of Hormuz suggests a deal remains some way off. President Trump also said he opposes efforts by Iran and Oman to establish some form of permanent toll system for the Strait of Hormuz: “We want it open, we want it free, we don’t want tolls”.
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