Economic Update - August 2025

In August it was the turn for geopolitics to swallow some uncertainty as President Putin went to Alaska. Meanwhile for many central bankers, the (near) future became clearer. Australia cut rates with confidence while Jermome Powell indicated that the Fed was becoming more concerned about the labour market.

What happened in Australia?

After surprising nearly everyone in July by not cutting interest rates, the RBA cut interest rates by 25 bps in August. According to governor Michele Bullock, the Board has become “increasingly confident” that inflation is moving in the right direction.

The Australian consumer is also increasing in confidence with consumer confidence reaching its highest level in 3.5 years. Consumer spending also continued its recent climb, rising 0.5% in June on a monthly basis and 4.8% on an annual basis (seasonally adjusted). Australia house prices also rose for the seventh consecutive month.

However, monthly inflation rose from 1.9% in June to 2.8% in July. This was mostly driven by a 13.1% increase in electricity costs (on an annual basis) as government subsidies continued to ease (see chart below).

The trimmed mean, the RBA’s preferred inflation measure, excluded the electricity price increase, but still rose from 2.1% in June to 2.7% in July. This reflected increases in alcohol and tobacco (6.5%), fruit and vegetables (4.8%), health (4%), rents (3.9%), and holiday and travel accommodation (3.3%).

Back in July, Bullock flagged that the RBA was expecting inflation to jump with the end of electricity subsidies. Its August Statement of Monetary Policy also shows inflation increasing slightly over the rest of the year. However, the RBA was not forecasting a similar increase in trimmed mean inflation (see chart below). While the RBA does not trust the monthly figures too much, it will now be looking towards the September quarter CPI to better gauge what is happening with underlying inflation. 

On the positive side, the Wage Price Index was flat for the June quarter (see chart below), and unemployment ticked down from 4.3% in June to 4.2% in July (seasonally adjusted).

What happened around the world?

USA

With no Fed Reserve Meeting in August and no rate cuts since December last year, commentators moseyed on over to Jackson Hole to peruse Jerome Powell’s speech at the annual economic symposium.

Jerome did not disappoint. He noted that inflation had fallen a long way from its pandemic highs while the impact of tariffs on inflation remained unclear.

Meanwhile on the other side of the dual mandate downward risk to employment was increasing - the downward revisions to nonfarm payrolls for May and June were likely still fresh in his mind. When he remarked that the “balance of risks appears to be shifting”, the market interpreted that to mean that the Fed’s concern over the labour market is increasing and that the Fed is now more inclined to cut.

“... downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” Jerome Powell.

However, an upward revision to June-quarter GDP from 3% to 3.3%, with an upward revision in consumer spending and investment (see chart below), had markets second guess their expectations of a rate cut.

But markets were reassured when Personal Consumption Expenditure, the Fed’s preferred inflation measure, came in flat at 2.6% (see chart below). All eyes now turn to next month’s release of employment data with any slowdown to increase the odds of a cut by the Fed.

Meanwhile, the S&P 500 posted new highs during August and is up over 10% for the year despite trade wars, Jeffrey Epstein, and Alaskan summits! Nvidia released its second quarter results, slightly beating most estimates.   

China

Chinese exports continue to hold up despite US tariffs, increasing from 5.9% in June to 7.2% in July. According to Bloomberg, Chinese exports have recently been finding new markets in Africa.

However, manufacturing activity continues to contract (see chart below), with authorities stepping in to prevent price wars. Retail sales fell from 4.8% in June to 3.7% in July on an annual basis.

Construction activity fell into negative territory (see chart below) while the once mighty property developer Evergrande delisted from the Hang Seng stock exchange.  

EU

No ECB meeting in August but the ECB would be happy to see euro area inflation steady at 2% in July (see chart below), manufacturing PMI now in positive territory - the first time since June 2022, and unemployment ticking down from 6.3% in June to 6.2% in July. The ECB will likely keep rates on hold at its meeting in September.

Japan

The BoJ kept rates on hold when they met at the end of July ,torn between the desire to raise rates and caution over the impact of US tariffs.

June quarter GDP increased 1% on a quarterly basis beating an expected 0.4%. The data suggests that Japan is weathering US tariffs better than expected. Business investment contributed 1.3 percentage points to the growth while exports contributed 0.3 percentage points.

However, exports decreased for a third consecutive month in July and by the largest margin since the introduction of Trump’s tariffs (see chart below). The decrease was driven by a decrease in car, auto parts, and steel exports. Hopefully last month’s tariff deal with the US will arrest the slide.

UK

The monetary policy board voted 5-4 to cut interest rates by 25 bps when it met in early August. The four dissenters voted to leave rates unchanged.

Despite headline inflation kicking back up recently and with a forecasted peak of 4% in September, the BoE believes that inflation is still on its way down. Later in the month, July’s CPI came in at 3.8%, up from 3.6% in June.

The Board unanimously agreed that interest rates need to stay restrictive, but the majority won the argument that the level of restrictiveness needed to be loosened a little, given signs of a weakening labour market (see chart below).

June quarter GDP surprised slightly on the upside, increasing by 0.3% on a quarterly basis compared to the expected 0.1%. 

UK Unemployment Rate

Source: Office of National Statistics

New Zealand

The RBNZ cut interest rates by 25 bps in August. Inflation is on its way down but a decrease in household and consumer spending, and a rising unemployment rate (see chart below) has caught the central bank’s attention.

What this means for Australian Private Debt

The RBA finally cut interest rates again. The economy is holding up and with inflation continuing to fall, the RBA decided to ratchet down the level of restrictiveness. As expected, Australia is not suffering too much from tariff uncertainty.