Economic Update - July 2025

President Trump’s July 8 tariff deadline was extended to 1 August to give key negotiations more time. Japan and the EU both walked away with a 15% general tariff from their US “trade deals”. In return, they had to promise a lot of new investment to the US. While many expected the tariffs to be lower, Japan and the EU are clearly hoping that they will now have greater certainty going forward. Australia was ecstatic with its 10% tariff with the US. Meanwhile, after stalling on interest rates earlier in the month, the RBA got what it wanted, with June-quarter inflation falling. After near complete conviction of a July rate cut, the market is now convinced that the RBA will provide a Christmas-in-July rate cut in August.

What happened in Australia?

After disappointing the market by holding interest rates steady in July, the RBA looks set to cut interest rates in August.

The RBA was reluctant to make a decision in July while it waited for the June-quarter inflation results. Those results are now in, and they show inflation continuing to fall. The RBA’s preferred measure trimmed-mean inflation is now at 2.7% on a yearly basis, nicely within the RBA’s target zone of 2% to 3% (see chart below). Further, services inflation is now at its lowest level since June 2022. Any concerns the RBA may have had about lowering rates, should now be allayed.

During the month, Michele Bullock gave a closely-watched speech on the RBA’s dual mandate of inflation and unemployment. She pointed out that while it has been difficult to determine the tightness of the labour market, the rise in unemployment in June (see chart below) suggests that the market is becoming less tight, which provides the RBA with more confidence to cut rates.

"That on its own suggests that the labour market moved a little further towards balance, as we were anticipating.”

Consumer spending increased 0.9% in May on a monthly basis, this was the strongest result since October last year. This follows three months of subdued results: 0.2%, -0.1%, and 0%. The increase occurred across both discretionary and non-discretionary measures (see chart below).

The increase in consumer spending is in line with RBA forecasts of increasing consumer spending due to increasing real income. The increase is expected to moderate over the second-half of the year. In the meantime, it will provide some support to the economy.

Prime Minister Anthony Albanese visited China during July, signalling the continuing thawing in relations.

As for the US, Australia made a long asked for concession to the US by relaxing bio-security restrictions on US beef imports -  Australia has been holding this card for a very long time and finally got to play it. This helped Australia to secure a 10% tariff with the US - the lowest available.

“What this decision means, in conjunction with all of the other changes to other countries, is that Australian products are now more competitive into the American market,’’ Don Farrell, Australian trade minister.

What happened around the world?

USA

July started with President Trump applying his full charm to get his Big Beautiful Bill passed before the fourth of July US holiday. The bill has been controversial because it is expected to add USD 3.3 billion to US public debt over the next 10 years and is estimated to cut around 12 million Americans from Medicaid. However, its proponents argue that extending the 2017 tax cuts will result in higher economic growth that will ultimately boost tax revenue.

Trump then turned his attention back to tariffs and Fed chair Jerome Powell.

Trump was able to extract concessions from Japan, the EU, and Mexico while maintaining tariffs of higher than the apparent base rate of 10%. Japan, the EU, and Mexico were just happy to bank in some certainty. Despite rescinding its digital services tax, Canada remains in the cold. Brazil is seemingly being punished for prosecuting former President Jair Bolsonaro for his attempted coup with a 45% tariff on selected goods.

Trump continued to criticise Jermoe Powell before and after the FOMC kept rates on hold during the month. Powell “maintained optionality” by buying more time to see the nascent impact of tariffs on inflation and whether labour market supply or demand will slow faster.

At the moment, Powell is still more concerned about the inflation side of the Fed’s dual mandate. Trump would argue that tariffs are going to have little effect on inflation while the market has been underwhelmed by the impact thus far.

“It takes some time for tariffs to work their way through the chain of distribution to the

end consumer.” Jerome Powell.

The Fed’s preferred inflation measure PCE has inched up the last two months and was higher than expectations both times (see chart below).

On the other side, the labour market has been looking just a little softer over recent months. But July’s non-farm payrolls and the downward revisions for the previous two months (see chart below) will have got Powell’s attention. It got Trump’s, who immediately fired the head of the Bureau of Labor Statistics! Beware the bearer of bad news!

June-quarter economic growth came in at an annualised rate of 3% but the result should be viewed alongside the March quarter because many companies increased imports ahead of Trump’s tariffs thereby pushing GDP down in the March quarter. They then cut back on imports in the June quarter thereby inflating GDP. The annualised average across the two quarters was a more sober 1.2%. Personal spending increased from last quarter’s fall but remains well down compared to last year (see chart below).

There is no question that the Fed will cut rates sometime this year, the debate is just about timing.

The sharemarket continued to test new highs with the latest earnings from the US tech giants largely beating expectations.

China

GDP increased 5.2% in the June quarter on a yearly basis compared to an expected 5.1% from a Bloomberg survey. The IMF has now revised up their 2025 estimate for Chinese growth from 4% to 4.8%.

Stronger than expected exports are the driver behind the result (see chart below). Trade talks with the US are keeping US tariffs lower for now but Chinese exports are also benefiting from diversification away from the US.

Deflation remains an issue with strong competition among domestic companies and not enough domestic demand pushing down prices (see chart below). Official manufacturing PMI was down again.

Consumer spending continues to disappoint. The government is hoping that the start of construction of the USD 167 billion dam in Tibet will help boost the local economy. The government has also increased social spending to USD 795 billion in the first half of the year, the highest level in nearly two decades.

“Better supporting people’s well-being will help boost domestic demand and is part of the rebalancing of the Chinese economy,” said Tommy Xie, OCBC,head of Asia macro research.

EU

The ECB left interest rates on hold in July after eight cuts since August last year. It is time to take stock! Hopefully the new trade agreement with the US delivers much needed certainty.

Euro area Inflation was 2% in June on a yearly basis while GDP fell slightly from 1.5% in the March quarter to 1.4% in the June quarter on a yearly basis. Euro area unemployment was steady at 6.2%. Manufacturing PMI reached its highest level in 11 months (see chart below).

The trade deal with the US, with its tariff rate of 15% and promise of USD 600 billion investment in the US closely mirrors the earlier Japanese deal.

Japan

Japanese exports fell for the second-consecutive month in June (see chart below).  But with agreement on a new trade deal with the US, trade should now improve. US tariffs will be decreased from 25% to 15%. With inflation still well above 2%, the BoJ will now feel more.

UK

CPI increased again to 3.6% in July. This is a long way from the 1.7% in September last year. The recent rise in UK inflation has seen it diverge from the downward trend of other large advanced economies (see chart below).

The BoE kept interest rates steady at its last meeting and will likely have to keep them steady again at its meeting in August. This is despite unemployment creeping up to levels not seen since the pandemic and job vacancies falling to pre-pandemic levels (see chart below).

New Zealand

While June-quarter inflation increased less than expected to 2.7%, decreases in consumer spending (-0.7%) and exports (see chart below) offered little good news for the New Zealand economy during the month.

"The time line for New Zealand’s long-awaited economic recovery just keeps getting pushed further and further out," Doug Steel, Bank of New Zealand, senior economist.

While New Zealand ended up with a better than most 15% tariff from the US, it must feel disappointed when looking across the Tasman Sea at the 10% result obtained by Australia.

What this means for Australian Private Debt

A good inflation result for the June quarter and reducing pressure in the labour market should see the RBA cut rates in August after surprising the market with a stay in July. RBA governor Michele Bullock is facing increased criticism for not cutting in July but she cannot be criticised for the way the RBA has guided the economy back to stability after the post-pandemic inflation spike. A nice comfy-soft landing!