Economic Update - May 2025

The US equity market largely regained the ground lost in April as the market decided that it could see through Trump’s tariff tantrums. Like April, May was marked by more tariffs announcements, followed by more high-level meetings, and followed by more pauses.

Economists everywhere have revised down US and global growth because of the US tariffs but we are in a strange in-between time, where the impact of the tariffs is not yet manifesting in the hard economic data such as spending, employment, and inflation.

Meanwhile, central banks around the world dished out interest rate decisions according to how their respective economies are travelling. In Australia, the RBA cuts interest rates by 25 bps. This was guided more by increased certainty over falling inflation than uncertainty over global economic conditions.

What happened in Australia?

After a 25 bps cut in February and pause in March, the RBA cut the official cash rate by another 25 bps in May. The RBA has become more dovish since late last year because of a run of favourable inflation results and the concern over the global impact of US tariffs.

“Price increases have slowed and it is fairly broadly based so this is good news.” Michel Bullock, RBA, governor.

So far, the economic collateral damage from US tariffs have had little impact on the Australian economy. Consumer sentiment fell 6% in April but recovered 2.1% in May to 92.1 points and remains significantly higher than results from the first half of last year (see chart below). Labor’s “feel good” election win likely buoyed the mood of consumers. However, any momentum towards positive sentiment (above 100 points) has now been lost.

Consumer spending decreased 0.3% in March compared to February but remains 3.5% higher compared to March last year. Business turnover increased 0.5% in March. Business turnover and consumer spending for April and May, post Trump’s "Liberation Day”, will provide a truer litmus test.

Westpac-Melbourne Institute and Westpac Consumer Sentiment Index

Source: Trading Economics

On the inflation front, monthly CPI for April was unchanged at 2.4% while the RBA’s preferred measure increased slightly from 2.7% to 2.8%.

More important was the release of the quarterly Wage Price Index for the March quarter. Growth in the WPI increased for the first time since June last year, from 3.2% to 3.4%. However, looking under the bonnet showed that the increase was driven by the public sector (see chart below), with recent agreements for state employees in several states being the cause.

What happened around the world?

USA

US tariff policy continued its rollercoaster ride in May. A meeting in Geneva between Chinese and US officials saw a tariff truce. Later in the month, a quick telephone call by EU Commission President Ursula von der Leyen to President Trump averted 50% tariffs on EU imports.

While the unpredictability is set to continue, the US equity market feels like it has Trump mostly figured out, with equities regaining their ground since Liberation Day (see chart below) and seemingly less phased by new announcements.

The bond market, however, also has Trump’s “Big Beautiful Bill” to worry about. Increased concern over medium and long-term US public debt keeps pushing long-term yields up.

“This massive, outrageous, pork-filled Congressional spending bill is a disgusting abomination." Elon Musk.

Meanwhile the USD keeps falling (see chart below).

In terms of the real economy, the impact of the tariffs have yet to show up in inflation, spending, or employment data. The Fed’s preferred inflation measure PCE fell from 2.3% in March to 2.1% in April. At its May meeting, the Federal Reserve kept interest rates unchanged.

“With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance” Jerome Powell.

However, the impact is coming with imports falling by nearly 20% in April and custom duties skyrocketing in April and May (see chart below).

China

Despite the tariff truce early in the month, shipping between China and the US has not improved (see chart below).

However, so far, it looks like China has been able to find other outlets for its exports (see chart below). China has been working hard on the diplomatic front to strengthen trade relationships and to allay fears of dumping.

On the domestic front, the government is planning to spend USD 70 billion on shovel-ready infrastructure to cushion any negative trade impact of US tariffs.

EU

On Friday, 23 May, President Trump threatened to put 50% tariffs on the EU. By Sunday, EU Commission President Ursula von der Leyen was on the phone to Trump and secured a delay until at least 9 July.

“The EU and US share the world's most consequential and close trade relationship. Europe is ready to advance talks swiftly and decisively.” Ursula von der Leyen.

Meanwhile, EU area inflation was stable at 2.2% for April.

Japan

The rising price of rice dominated conversations in Japan in May and even claimed a government minister. It rose 98.4% in the month. Given government control over rice growing, rice is a special case but overall inflation is also running hot, rising from 3.2% in March to 3.5% in April (see chart below).

March quarter GDP fell 0.2% on a quarterly basis, the first decrease in a year and larger than market expectations.

Earlier in the month, BoJ Governor Kazuo Ueda said he would “... adjust the degree of monetary easing as needed”. The question is which way? The BoJ has been keen to normalise interest rates but they need to keep an eye on inflation and the fallout from US tariffs. To complicate the matter further, yields for long-term Japanese government bonds rose quickly during the month (see chart below), pushing up the government’s borrowing costs.

Japanese 20-year Government Bond Yields

Source: worldgovernmentbonds.com

UK

On May 8, the BoE reduced interest rates by another 25 bps with a vote of 5-4. However, 2 of the dissenters wanted to cut rates by 50 bps!

“There has been substantial progress on disinflation over the past two years, … Underlying UK GDP growth is judged to have slowed since the middle of 2024, and the labour market has continued to loosen.” BoE,  Monetary Policy Summary, May 2025.

But has the BoE moved too early? Later in May, March-quarter GDP was released and was stronger than expected at 0.7% on a quarterly basis (see chart below) while CPI increased from 2.6% in March to 3.5% in April.

“In my view, that withdrawal of policy restriction has been running a little too fast of late,” Huw Pill, BoE, chief economist. Huw argued to keep rates on hold at the last monetary policy meeting.

New Zealand

The RBNZ cut interest rates by 25 bps at its May meeting, marking the 6th cut in a row.

“... core inflation is declining and there is spare productive capacity in the economy. … Both tariffs and increased policy uncertainty overseas are expected to moderate New Zealand’s economic recovery and reduce medium-term inflation pressures.” RBNZ Monetary Policy Media Release, 28 May, 2025.

 What this means for Australian Private Debt

Australia and the RBA remain well poised to meet the challenge of uncertainty over the next year. However, more data is needed to gauge what the impact of US tariffs will have on the global and Australian economies.