Economic Update - Janurary 2025

January felt unusual. While the usual ream of data hit the Bloomberg terminals during the month, many people’s attention turned to a little old party in good ol’ Washington, DC. After his inauguration parade, President Trump sat on stage and began to sign executive orders and he has hardly slowed down since but more on that next month! Meanwhile, US and global stock markets continued to trade high on Trump 2.0 good vibes, at least until a Chinese startup forced a Deep Think. 

What happened in Australia?

Inflation continues to head in the right direction, putting the little increase in June further in the rear-view mirror. CPI decreased from 2.8% in the September quarter to 2.4% in December on a yearly basis (see chart below). Similarly, the RBA’s preferred inflation measure, trimmed mean CPI, fell from 3.6% in the September quarter to 3.2% in December - just above the 2% to 3% target zone. Both fell slightly more than consensus forecasts!

In more good news, services inflation fell for the quarter to 4.3% after two quarters of increases.

The RBA’s predicted increase in consumer spending starting Q4 is now clearly coming through (see chart below). This is good news for the economy after September’s sluggish GDP result. It also holds little upside fears for inflation because it is expected by the RBA. Even better, the increase has been driven by spending on goods with spending on services decreasing since October - hopefully this is a further sign that services inflation will keep coming down from its high levels.

Overall, and with a minor increase in unemployment to 4%, the RBA has a strong enough case to cut interest rates in its first meeting of the year in February.

What happened around the world?

USA

In December, Jerome Powell promised that the FOMC would be cautious going forward, and in January they kept rates unchanged. A strong rebound in non-farm payrolls (nearly 100k above consensus and since revised upwards) showed that the labour market was still not as weak as everyone believed. Further, a few days after the FOMC meeting, data showed that the Fed’s preferred inflation measure, PCE, had increased for a third-consecutive month in December to 2.6% (see chart below). Core PCE was unchanged.   

Despite the Fed’s decision, the feel-good vibes in the stock market continued. Well at least until the market digested a paper from Chinese AI startup Deep Think which showed that they had developed an open-source LLM with a lot less Nvidia chips than their much larger American competition. As a result, the NASDAQ took a big hit at the end of the month with NVIDIA posting the largest-ever one-day loss (USD 589 billion). However, the markets recovered their nerve with help from positive tech earning results. They also realised that Deep Think’s efficiencies are transferable to other models.

China

Chinese GDP grew stronger than expected in the December quarter leading to an annual growth rate of 5.4% compared to the government’s target and market’s consensus of 5%. Government stimulus should have a positive impact in 2025, but consumer pessimism, deflation, and the housing crisis need to be overcome. An unexpected  decrease in official manufacturing PMI for Janaury to levels not seen since August 2024 is not a good start (see chart below).

Source: Chinese Bureau of Statistics

EU

The ECB cut interest rates by 25 bps in January - the fourth meeting in a row with a cut. The ECB believes that “inflation will settle at around the target on a sustained basis” and that monetary policy is still restrictive enough. This is despite inflation increasing for a third-consecutive month from 1.7% in September to 2.4% in December.

The ECB is easing monetary policy because it does not want economic growth to falter in the euro area. While growth was positive in the first three quarters of 2024, it was flat in the December quarter, on a quarterly basis. Germany slipped into the negative again. 

Japan

BoJ Governor Kazuo Ueda finally raised rates again! The BoJ Board voted 8 to 1 to raise rates by 25 bps at its January meeting. This was just a few days after core inflation for December came in unchanged at 2.4%. A week later, January core inflation in Tokyo showed a slight increase to 2.5%. The BoJ nearly raised rates at their last meeting but decided to be cautious given the start of Trump’s second term. While US economic policy remains uncertain, it seems the BoJ is certain that the US economy will continue to grow strongly over the next year.

UK

Inflation fell slightly from 2.6% in November to 2.5% in December. This was the first decrease since September 2024. Decreases in inflation for restaurants and hotels, clothing and footwear, and alcohol and tobacco led the way. Services’ inflation  decreased from 5.7% to 5.4%. With signs of a slowing economy, this may give courage for a cut.

Job vacancies fell for the 30th consecutive period but remained above pre-pandemic levels. 

New Zealand

Inflation was unchanged at 2.2% in the December quarter on a yearly basis. Housing rent was up 4.2% for the quarter but its contribution to total inflation was largely offset by a 9.2% decrease in petrol prices. How these two categories move going forward will have a big impact on future inflation results.

Filled jobs increased by 0.1% in December compared to November but decreased by 1.2% on a yearly basis. The RBNZ will be watching economic activity closely for any further signs of deterioration while remaining confident that the bad medicine has been taken and inflation is under control.

What this means for Australian Private Debt

Inflation continues to fall in Australia increasing the odds that the RBA will soon shift gears and cut interest rates. Of course, uncertainty over US economic policy remains a wildcard. Any tariffs on China will weigh on the Australian mining sector and economy more generally and will further increase the odds of a rate cut. Private debt investors may be coming to the top of the range for interest rates but should be delighted with a robust Australian economy.