Economic Update - June 2023

The RBA and Federal Reserve are both having a breather as inflation continues to head in the right direction. More interest rate increases are coming but their economies are proving resilient. The UK is an outlier with its stubbornly higher inflation. China remains a disappointment.

What is happening in Australia?

Spooked by the Fair Work decision, the RBA raised interest rates in June by 25 bps but paused in July.

The monthly CPI indicator fell from 6.8 percent in April to 5.6 percent in May. This is encouraging.

However, when we look at the monthly CPI in more detail, we see that housing (8.4 percent) and food and non-alcoholic beverages (7.9 percent) were the biggest drivers. Both of these are sticky and will take time to come down. Automotive fuel saw the biggest drop at -8 percent, but this is of little comfort because it is just as likely to jump back up again in the near future due to the volatility of the oil market.

Consumer spending continues to slow with consumers spending less on services such as eating out and holidays (see chart below).

Retail turnover increased just 0.7 percent in May on a monthly basis and 4.2 percent on an annual basis. It is well and truly down from the peak last August (see chart below).

Unemployment decreased slightly in May to 3.6 percent seasonally adjusted. However, some of the pressure in the labour market is starting to release. Job vacancies fell by -2.2 percent in May on a quarterly basis. Wages and salaries paid by employers decreased by -1.7 percent in April on a monthly basis. Further, the number of working days lost to industrial action fell from 21k in the December quarter to 7.7k in the March quarter. It peaked in the June 2022 quarter at 128.1k.

Business turinover fell for 9 out of the 13 industry categories in April compared to March. Only Accommodation and food services (1.7 percent); retail trade (1.3 percent); manufacturing (0.9 percent); and construction (0.2 percent) posted increases on a quarterly basis. Mining decreased -10.6 percent and Electricity, gas, water, and waste services -9.4 percent.

What is happening around the world


500 bps and 15 months later, the FOMC finally paused interest rates in June.

“We’ve covered a lot of ground, and the full effects of our tightening have yet to be felt.” Jerome Powell, Press Conference June 14, 2023.

The FOMC’s decision was likely shaped by May’s inflation data, which was released the day before the FOMC’s meeting. Inflation fell 0.4 percent on a monthly basis in May and fell from 4.9 percent in April to 4 percent in May on an annual basis. This was lower than expectations and the lowest annual inflation rate in two years.

Energy prices were the main driver of the fall. Gasoline decreased 5.6 percent and fuel oil decreased 7.7 percent on a monthly basis.

The Fed’s preferred inflation measure, PCE (Personal Consumption Expenditure) also decreased in May, down from 4.3 percent in April to 3.8 percent on an annual basis.

Even the Atlanta Fed’s Sticky Inflation measure is now trending downward. Sticky inflation measures a basket of goods whose prices change slowly - see chart below.

However, the labour market remains tight in the US. The chart below shows that the number of unemployed people relative to job openings is  still historically low. Many economists believe that until unemployment rises, inflation will not fall to the Fed's 2 percent inflation target. Others argue that the pandemic has somehow changed the structure of the labour market and that the Fed should not be too concerned with the tightness of the labour market.


Pessimism hangs over the Chinese economy like a cloud. Any hopes of China lifting global GDP is now gone with many global investment banks cutting their Chinese growth forecasts.

Manufacturing PMI in June was soft while the 12-month outlook has fallen to an 8-month low. Consumer retail spending fell from 18.4 percent in April to 12.7 percent in May on an annual basis.

At the WEF in June, Premier Li Qiang promised new government measures to boost the economy:

"We will launch more practical and effective measures in expanding the potential of domestic demand, activating market vitality, promoting coordinated development, accelerating green transition, and promoting high-level opening to the outside world,"  


The ECB increased interest rates by 25 bps in June. While inflation fell from 6.1 percent in May to 5.5 percent in June on an annual basis, the ECB still believes that inflation could take longer to fall to its 2 percent target than previously expected.

“Staff have revised up their projections for inflation excluding energy and food, especially for this year and next year, owing to past upward surprises and the implications of the robust labour market for the speed of disinflation.” ECB, Monetary Policy Decision Press Release, 15 June 2023.


At its monetary policy meeting In mid-June, the BOJ decided to keep monetary policy at its ultra-low setting. Inflation decreased slightly in May and the latest Tankan survey shows total manufacturing has moved into the expansionary zone - see chart below. Consumer spending surprised on the upside in May, increasing by 1.3 percent. The biggest risk to the Japanese economy seems to be a slowdown in the international economy.


The BOE surprised markets in June by increasing interest rates by 50 bps instead of the expected 25 bps. A day earlier, May’s inflation data showed inflation stable at 8.7 percent. However, core inflation increased from 6.8 percent in April to 7.1 percent in May on an annual basis - its highest level since March 1992 -  see chart below.

What this means for Australian Private Debt

The continuing resilience of the Australian and US economies while inflation continues to fall  suggests that while interest rates may still need to go higher, the expected recessions may be shallower than previously thought. This means private debt can continue to enjoy the best of both worlds, higher rates and a good outlook for companies.