Summary:
Australia's economic growth slows, with May consumer prices at a three-and-a-half-year low and rate cut expectations rising.
Australian consumer prices slowed more than expected in May, with core
measure hitting three-and-a-half-year lows. Swaps now imply a 92% probability
that the RBA would cut rates on July 8.
the economy barely grew in Q1 as consumers stayed stubbornly frugal, though the labour market remained stable. The central bank has cut interest rates twice since February to spur growth.
The Australian dollar has gained around 5% in 2025, reversing its weakness over the previous year. It registered the biggest annual loss since 2018 back then as upcoming MAGA 2.0 spooked traders.
The currency has been battered for three years in a row, partly due to peak China housing. Iron ore, the raw material used to produce steel, has seen its supercycle end with a whimper.
The pains seem to be drawn-out. Due to seasonal demand weakening and expectations of production cuts by Chinese steel mills, the commodity are approaching their lowest price levels since September.
Citigroup has reduced the three-month price forecast from $100 per ton to $90, and lowered the 6-12 month target from $90 per ton to $85. That means the downtrend will likely persist.
On the other hand, grain-fed beef exports to China have ballooned more than 40% year to date. Growing middle class and rising incomes are making beef a more popular source of protein for the large population.
Asia resilience
India's economy is projected to grow at 6.5%in the current fiscal year, driven by strong domestic demand and potential monetary easing, according to a report by S&P Global Ratings.
Falling food inflation, which slowed to the level last seen on October 2021 in May, has contributed to attempted disinflation in the country, giving policymakers more leeway to be more dovish.
The report also observed that many Asia-Pacific economies began 2025 with strong domestic demand. Several economies temporarily benefited from front-loaded exports to the US ahead of tariff changes.
The agency projects GDP growth of 4.3%t for China in 2025. While it falls short of official target, the report described them as "solid results" given the current external challenges.
Nomura has lift the full-year growth projection for the worlds' second largest economy to 3.7%, while waning of a double whammy due to the prolonged housing slump and possibility of rising trade tensions.
The overall positive picture gratifies Australia whose export relies increasingly heavily on the region following Trump's sweeping tariffs. It is one of a long list of countries holding trade talks with Washington.
Australia and the EU have revived talks for a sweeping free trade agreement this month. The main obstacle is some big meat-producing EU members have reservations about opening the markets.
Restricted demographic bonus
Australia's population grew 1.7% last year to 27.4 million people, only next to Canada among rich countries, which will result in more spending, more housing, more demand for infrastructure.
Despite that, labour productivity – which is the key determinant of living standards in the long run – has essentially stalled since 2016. Very few OECD members have fared worse, according to McKinsey.
The lack of productivity growth means that on a good day, the best Australia can hope to grow is 2% per year, according to HSBC chief economist Paul Bloxham. The rate is presumably lower than the US's.
Some argued that the country's property obsession has diverted capital away from the productive economy. Australians are drowning in debt, taking out ever-larger mortgages to pay ever-higher home prices.
Once the envy of the developed world, the economy is growing at its slowest pace since the early 1990s, excluding the COVID-19 pandemic, and lagging many of its peers largely due to lacklustre consumption.
A Westpac survey showed consumers stuck in a holding pattern of cautious pessimism in June. Commonwealth Bank senior economist Belinda Allen said it could take multiple rate cuts for sentiment to improve.
Even exports could be only moderately affected by tariffs and a subdued iron ore market, underwhelming investment and household spending point to limited Aussie upside for the rest of the year.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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