• Written by Admin
  • Category News
  • Date 14 August 2023

Economic Update - July 2023

Australia and the US are looking towards soft landings with inflation on the way down and resilient domestic economies. Japan may have begun monetary tightening while China and the UK remain economic disappointments.

What is happening in Australia?

The RBA paused interest rates again in July as it zeros in on a possible soft landing.

The RBA’s targeting computer is narrowing in on inflation, with quarterly inflation falling from 7 percent in Q1 to 6 percent in Q2 on an annual basis. Monthly inflation for June was even lower at 5.4 percent.

Inflation should continue to trend lower in Q3 so long as there are no price shocks from petrol or food prices.

However, economic headwinds are starting to pick up. This is by design so that it helps slow down inflation, but the RBA needs to make sure that the economy doesn’t slow too far and too fast. Hence, the interest rate pause.

Consumers are feeling the pinch. Mortgage interest rate charges in June are 91.6 percent higher compared to a year ago (see chart below). And rents are 7.3 percent higher. 

It is thus no surprise that consumer spending fell -1.1 percent in April, on a monthly basis, and increased a tiny 0.4 percent rise in May. Retail turnover fell -0.8 percent in June on a monthly basis.

Australian miners are also facing increasing headwinds as our major trading partners slow, particularly a currently lacklustre China. The chart below shows a decreasing trend in resource exports for at least the next two years.

Unemployment, however, remains low. If this begins to deteriorate then expect the RBA to quickly change gears towards interest rate cuts.

What is happening around the world


Despite inflation really starting to slow, Jerome Powell increased interest rates again in July, by 25 bps.

Inflation increased just 0.2 percent in June on a monthly basis - the smallest increase since March 2021. June inflation was just 3 percent on an annual basis, which is well below its recent 9 percent peak (see chart below).

Core services inflation is also falling, reaching an 18-month low of 4% on an annual basis.

The market is now more optimistic of a soft landing or avoiding recession altogether. Q2 GDP came in higher than expected at 2.4 percent on an annual basis and nonfarm payroll employment is starting to show some signs of slowing down with a 187,000 increase in July.

However, oil and gasoline prices need to be watched. They were the biggest contributor to the slowdown in inflation for the month: down -36.6 percent and -25.5 percent respectively on an annual basis. With Saudi Arabia recently announcing that it is extending production cuts until at least September, oil and gasoline prices may rebound.


China’s economy again disappointed in July. While Q2 GDP came in at 6.3 percent on an annual basis, it was off a low base from last year and market commentators had expected 7.3 percent.

Consumers aren’t spending as much as expected with retail sales increasing just 3.1 percent in June. Instead, households are saving more, with deposits up 18 percent in the first half of this year. The housing market remains depressed and manufacturing PMI remains in negative territory at 49.3 for July (below 50 is a decrease).

The government has responded by announcing over 20 measures to boost consumer demand including increasing consumer car loans. The Politburo has also signalled its commitment to boost the economy. Time will tell.

“Unless concrete support is rolled out soon, the recent downturn in demand risks becoming self-reinforcing.” Capital Economics.


Inflation continues to fall in the EU with July’s euro area inflation falling to 5.3 percent (see chart below). Q2 GDP increased 0.6 percent on an annual basis with Germany now officially in recession. Euro area unemployment remains at 6.4 percent.

Despite slowing inflation and growth, the ECB increased interest rates by 25 bps in July as it maintains its commitment to getting to its 2 percent target. 


Inflation rose to 3.3 percent in June on an annual basis and is now higher than US inflation - the first-time since 2015. 

At its Monetary Policy Meeting on 27 July, the BOJ surprised the market by tightening monetary conditions. It announced that it would now buy 10-year Japanese government bonds at 1 percent, which is 50 bps higher than the previous Yield Curve Control upper limit. The BOJ said it wants to give itself more flexibility with monetary policy. However, some commentators think that this might be the start of the long-awaited monetary policy tightening.


The UK has turned into the ugly duckling of the G7. Inflation decreased in June but at 7.9 percent on an annual basis, it remains much higher than other large economies (see chart below). Further, GDP continues to crawl along with Q2 GDP up just 0.1 percent on a quarterly basis. The economy has hardly grown in four years.

The BOE raised interest rates 25 bps on 2 August, but two members of the Monetary Policy Committee wanted 50 bps. There is little respite for the UK at the moment.

“Prior to the 2008 global financial crisis, the UK had been a strong performer among the Group of Seven countries. But this momentum was lost in the middle of the last decade.” IMF.

What this means for Australian Private Debt

The missing post-COVID Chinese economic rebound puts a cap on Australian economic growth. But the strength of the domestic and US economies should keep us from falling into a bad recession. A soft landing seems increasingly likely in the US and Australia. This is good news for the Australian private debt market, which can continue to enjoy high interest rates and reasonably good business conditions.