Macro (Re)view (7/3) | US-European divergence widens

Divergence in market sentiment between the US and Europe widened further this week. US equities were down for the 3rd week in succession as growth concerns continued to drive a reappraisal of elevated valuations. Meanwhile, the euro surged through the 1.08 level to the USD - a 4-month high following a historic repricing in the Bund market - the 10-year yield rising more than 40bps on the week - as Germany announced plans to reform its deficit controls, paving the way towards a new fiscal regime to significantly ramp up defence and infrastructure investment. Larger fiscal deficits are also being targeted in China, up from 3% to 4% of GDP to counter the effects of trade tariffs imposed by the Trump administration.    

Key payrolls data in the US came in on the soft side of expectations in February, leaving market pricing for 3 Fed rate cuts through the remainder of 2025 intact. However, comments from Fed Chair Powell post release continued to reiterate a message of patience where the economic conditions see the FOMC in a place where it will not be in a hurry to adjust policy. Employment on nonfarm payrolls rose by 151k in the month - just shy of the 160k expected increase - and with minimal backward revisions (-2k) to the figures from December and January. The unemployment rate ticked up from 4% to 4.1% (vs 4% expected) alongside a lower participation rate of 62.4% from 62.6% prior, while average hourly earnings growth softened from 4.1% to 4%yr (vs 4.1%). 

Germany's fiscal reform overshadowed this week's ECB meeting. An expected 25bps rate cut was delivered, lowering the key depo rate to 2.5%. With rates now having been cut by 150bps from their peak, the Governing Council noted policy is becoming 'meaningfully less restrictive', hinting that the easing cycle is nearing its conclusion. But President Lagarde was reluctant to provide any firm guidance in the post-meeting press conference, with new forecasts published by the ECB already out of date given they do not factor in any effect at all of Germany's fiscal plans. 

Australian GDP growth expanded at its fastest quarterly pace in 2 years lifting by 0.6% in the December quarter to 1.3% through the year, up from 0.8%. But as covered in my review, this was driven by public demand and net exports, with underlying momentum across household consumption and private investment remaining soft (see here). That keeps RBA rate cuts in play; markets are pricing in a terminal rate of 3.5% by year-end, down from 4.1% currently. Reviews are also available of the releases for January published this week including a 0.3% lift for retail sales, a 6.3% rise in dwelling approvals, and a wider trade surplus of $5.6bn. 

Australia's trade surplus widens to $5.6bn in January

Australia's trade surplus widened from ($A) $4.9bn in December 2024 to $5.6bn in January 2025. Exports lifted by 1.3% over the month - their fourth consecutive rise - as the value of non-monetary gold exports surged to a new record high ($5.4bn). Imports were 0.3% softer, declining for the first time in 4 months.

The surplus on the goods trade account widened by around $0.7bn at the start of the year to $5.6bn in January. That is broadly in line with its 3-month average ($5.7bn) but has nearly halved from its level 12 months earlier ($10.1bn). That narrowing has been driven by a decline in exports, down 2.9% over the year alongside falling commodity prices, and a 7.4% rise in imports. 

Monthly exports lifted by 1.3% to $44.5bn in January (-2.9%yr). This gain was overwhelming driven by non-monetary gold, the value of those exports up 78.6% on the prior month to $5.4bn, a new record high that eclipsed the previous peak from August 2023 by 34.9%. Trade price data from the ABS reported a 9.7% increase in gold prices in the final quarter of 2024 on rising demand for the commodity amid uncertainty in financial markets and in the real economy. Rural goods moved 0.7% higher in the month on rises in meat and cereal exports. Meanwhile, the value of non-rural goods was down 5.3% in January, its sharpest decline since April 2023. This occurred on weakness across iron ore (-4%), coal (-13.8%) and LNG (-4.9%). 

Import spending weakened slightly by 0.3% in January to $38.9bn, up 7.2% across the previous 12 months. Intermediate goods were up 5.5% in the month, rebounding to be near record highs after rising oil prices and a weaker Australian dollar contributed to fuel imports lifting by 11.7% in January following a 14.4% increase in December. Both capital (-7.7%) and consumption goods (-0.6%) declined in January. 

Australian dwelling approvals rise 6.3% in January

Australian dwelling approvals lifted by a well above consensus 6.3% in January (0% expected, prior 1.7%), rising to their highest level (16.6k) since the end of 2022. From low levels, approvals trended higher through 2024 - momentum that has continued early in the new year. High-rise approvals in Sydney were the key driver of approvals growth in January, which was also supported by house approvals (1.6%) after a run of 3 consecutive declines.   

Headline dwelling approvals were up 6.3% in January 2025 compared with December 2024. Over the 12 months to January 2025, approvals increased by 21.7%. While these gains lifted approvals to their highest total in 25 months at 16.6k, that is a level almost 30% below the cycle peak in March 2021 (22.9k). Unit approvals surged 12.8% month-on month to 7.3k - also a 25-month high - driven by high-rise approvals in Sydney (40.2%). Meanwhile, a 1.6% rise came through in house approvals - their first increase in 4 months. 

Yesterday's National Accounts for Q4 reaffirmed that the sensitivity of the home building sector to higher interest rates as well as cost pressures and labour constraints - long-lasting legacies from the pandemic - have weighed on residential construction (see here). But the improving momentum in approvals suggests those headwinds are at least easing, with the latest data coming ahead of the RBA's rate cut in February. For the 3 months through January, approvals averaged 15.6k, up 14% on 12 months ago. The momentum is currently with the higher-density segment; approvals there averaging 6.6k over the past 3 months, an uplift of 27.3% over the year. After trending higher since the middle of 2023, house approvals have started to ease back averaging 9.2k over the past 3 months but still up 6.1%yr.  

Alteration approvals rose by 1.1% in the opening month of 2025 to $1.1bn, up 8.7% on 12 months ago. Inflation pressures have (likely) permanently raised the cost of alteration work, with these approvals significantly above where they used to come in prior to the pandemic. The volume of alteration work in the National Accounts was reported to have risen by 1% through the year to Q4.  

In review | Australian Q4 GDP: Momentum remains soft

The Australian economy expanded at its fastest quarterly pace in 2 years as real GDP increased by 0.6% in the December quarter, in line with forecasts. This outcome lifted growth through the year from 0.8% - a 30-year low outside the Covid shock - to 1.3%. Although this is a little stronger than the RBA's forecast (1.1%), growth has been running below official estimates of trend (around 2.5%) for much of the past couple of years. 

The uplift in quarterly GDP in Australia occurred somewhat against the tide as growth across the OECD slowed into year-end. A key dynamic was increased uncertainty around the outcome of the US Presidential election last November. However, growth lifted in parts of Asia including Japan and China. 

In the domestic economy, growth improved as 2024 progressed, output lifting from a 0.4% pace in the first half of the year to 0.9% across the back half. But that lift was driven by public demand and net exports - components that are not necessarily reflective of the underlying momentum of activity. 

Public demand (5.5%Y/Y) has been the mainstay of growth over the past year, bolstering the economy from weakness in private demand (0.8%Y/Y). The malaise of cost-of-living pressures and higher interest rates have weighed on household consumption; business investment has plateaued; and residential construction is subdued reflecting the interest-rate sensitivity of the sector and capacity constraints. 

In its recent February Statement on Monetary Policy, the RBA forecast GDP growth to pick up to a 2.4% year-ended pace in 2025. Key to this will be the re-emergence of the consumer. There were tentative signs of improvement within household consumption in the December quarter, supported by the Stage 3 tax cuts, cost-of-living measures and rising real incomes. The RBA's February rate cut provides some additional support, but pressures remain significant with interest and tax payments remaining at an elevated share of income. 

Market pricing has the RBA cash rate on a declining path to around 3.5% by year-end from its current level of 4.1%. Recent communication from the RBA indicates the Board is taking a cautious approach and will need to see further progress on inflation prior to cutting rates again, while weakness in productivity - GDP per hour worked fell by 1.2%Y/Y - has not helped the situation. However, lower rates through 2025 does look like the most likely course of action. 

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National Accounts — Q4 | Expenditure: GDP (E) 0.7%q/q, 1.3%Y/Y

Household consumption (0.4%q/q, 0.7%Y/Y) — Following consecutive declines in Q2 (-0.2%) and Q3 (-0.1%), household consumption rebounded tentatively with a 0.4% lift in the December quarter. This suggests that slowing inflation and fiscal support measures, which include the Stage 3 tax cuts and electricity rebates, are gaining some traction with households; however, the effect has been modest as caution has prevailed.  

Tax relief and other fiscal support measures have helped drive real incomes up by 1.9% through the year to Q4, lifting from a 0.4% pace a year earlier. Alongside this, year-ended consumption growth is little changed, and has in fact eased a little from 0.9% to 0.7% across that period. Meanwhile, the household saving ratio has lifted from 2.8% a year ago to 3.8% in Q4 - its highest since Q3 2022 - indicating much of the income boost has been saved. 

All components of the consumption basket rose in Q4: goods up 0.6% and 0.3% for services, while essentials lifted 0.5% and discretionary spending increased 0.4% - a first since Q2 2023. Most notably, discretionary consumption - which had been cut back by households - is now showing a modest but clear improvement in momentum. Consumption in this segment lifted by 0.5% through the back half of the year, up from a flat first half of 2024 (0%) and a sharp decline in the second half in 2023 (-1.0%). Areas of discretionary consumption that performed in Q4 were clothing and footwear (1.3%) and furnishings and household goods (1.9%), gains indicative of price-sensitive households turning out strongly for the Black Friday sales. Meanwhile, hotels, cafes and restaurants saw its strongest increase (1.5%) since Q2 2023, supported by major sporting events. 

Dwelling investment (-0.4%q/q, 2.5%Y/Y) — Contracted by 0.4% in the December quarter; however, after rising through the first 3 quarters of 2024, residential construction activity lifted by 2.5% through the year, its fastest pace in 3 years. The soft finish to 2024 was attributed to the return of cost pressures and labour constraints. Both new home building (-0.1%) and alteration work (-0.9%) turned in their weakest quarterly outturns in a year. 

Business investment (0.5%q/q, 0.3%Y/Y) — Rebounded from a 0.4% decline in the September quarter to rise by 0.5% in December quarter. Overall, business investment plateaued in 2024 as year-ended growth slowed from an 8.8% pace a year ago to 0.3% in Q4. This has occurred around diverging movements. Non-residential construction - impacted by capacity constraints and higher interest rates - has pulled back (-4.5%Y/Y), equipment and machinery investment has levelled out (0.8%Y/Y), while other areas of investment - led by intellectual property products - advanced at a robust pace (9.5%Y/Y).   

Public demand (1.0%q/q, 5.5%Y/Y) — Growth in public demand slowed to a 1.0% rise in Q4, down from a 2.5% lift in Q3; however, base effects saw growth over the year step up from 4.4% to 5.5% - its fastest pace in 2½ years. Public demand has been the stronghold for growth in the domestic economy over the past year, directly adding 1.3ppts to GDP growth. In the latest quarter, government expenditure advanced by 0.7% (5.1%Y/Y), driven by state and local government spending on key services (health, education and policing). Public investment (excluding transfers) rose by 2.2% in Q4 to be up 7.7% through the year, supported by the large pipeline of transport, water and renewable energy infrastructure projects. 

Inventories (0.1ppt in Q4, 0.2ppt yr) — Made a broadly neutral contribution of 0.1ppt to quarterly growth. Private non-farm inventory levels increased during Q4 ($123m) on builds in the mining ($204m) and retail sectors ($223m), the latter reflecting the arrival of hybrid and electric vehicle imports. There were largely offsetting movements in public authorities and farm inventories in the quarter. 

Net exports (0.2ppt in Q4, -0.8ppt yr) — The external sector added 0.2ppt to quarterly GDP but has been a headwind to growth over the past year (-0.8ppt). In the latest quarter, export volumes lifted modestly by 0.7% - their strongest gain nonetheless in 5 quarters - as base effects swung year-ended growth from -1.2% to 1.7%. Services (3.4%) drove quarterly exports as inbound travel picked up (1.2%). Meanwhile, goods exports were broadly flat (0.1%) as an acceleration in rural goods (6%) helped offset softness from commodity exports (-0.7%).  

Import volumes were up by just 0.1% in the December quarter (5.8%Y/Y), plateauing over the back half over the year (-0.1%) following strong growth in the first half (6%). Goods imports advanced by 1.1% in Q4 supported by hybrid and electric vehicles. This was largely offset by a 2.5% decline in services imports as a weaker Australian dollar weighed on overseas travel. 

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National Accounts — Q4 | Incomes: GDP (I) 0.5%q/q, 1.3%Y/Y 

External dynamics had been a headwind for Australia for much of 2024 but turned more favourable into year-end. Growth in China picked up on the back of stimulus measures, driving up prices for Australian iron ore and LNG exports. Accordingly, export prices lifted by 2.5% quarter-on-quarter, underpinning a 1.9% rise in the terms of trade in Q4 - its first increase in a year and a boost for national income. 

With the terms of trade rebounding, nominal GDP increased by 1.6% in Q4 - its fastest rise since Q2 2022 - as year-ended growth firmed a little from 3.5% to 3.7%. The rise in nominal GDP of 1.6% reflected a 1.0% lift in economy-wide prices and the 0.6% increase in real output.  

Higher commodity prices together with strong crop yields in grain harvesting bolstered corporate profits in the December quarter. After falling sharply in Q2 (-3.2%) and Q3 (-4.1%), private sector non-financial corporations gross operating surplus saw a modest rebound of 0.6% quarter-on-quarter. However, that still left profits down by 5.3% over the past year, reflecting the earlier retracement in commodity prices and margin pressures. Small business profits (gross mixed income) were broadly flat rising by 0.2% in Q4 (0.9%Y/Y). Financial corporations gross operating surplus continued to rise solidly, up by a further 1.8% in Q4 to be 5.7% higher through the year.  

Continued strength in the domestic labour market drove wage incomes further. Compensation of employees rose by 2.0% in the quarter to a 6.1% year-ended pace, up from 5.6%. Private incomes (1.9%q/q) slightly underperformed but were supported by a pick-up in activity and bonuses in industries including transport and construction. In the public sector, wage incomes were up 2.4%q/q driven by wage increases, bonuses and increased employment. 

Staying with wage dynamics, unit labour costs had been on an easing trend since the middle of 2023 but picked up into the end of 2024. Non-farm unit labour costs lifted from 4.5% to 5.4%Y/Y on a nominal basis and from 1.7% to 2.7%Y/Y in real terms. Playing a role in these increases has been weakness in productivity (-1.2%Y/Y).

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National Accounts — Q4 | Production: GDP (P) 0.5%q/q, 1.2%Y/Y

Turning to the production approach to GDP, the services sector (0.4%q/q, 1.5%Y/Y) continued to lead the way over the goods sector (0%q/q, -0.5%Y/Y). 

Strength in services was broadly based in the December quarter, up by 0.5% across household services and 0.3% in business services. Drivers of growth in household services included accommodation and travel (0.6%) on increased overseas tourist arrivals; education and training (1.1%); and health care (0.5%). Business services were supported by finance and insurance (1.0%) - associated with banking activity and superannuation services - and administration (0.8%) and hiring services (0.6%). 

In the goods sector, a 1.4% lift in goods distribution was moderated by a 0.7% decline in goods production. Goods distribution was led by a strong gain in the transport industry (3.0%) following a strong grain harvest and by increased air travel. Retail (0.6%) also advanced on a strong Black Friday sales event. Standing out amid the overall decline in goods production was utilities with a 3.0%q/q rise as warm weather drove up electricity demand. This was more than offset by declines across construction (-1.3%) and manufacturing (-2.3%). 

Australian GDP 0.6% in Q4

Australian real GDP rose at its fastest quarterly pace in 2 years expanding by 0.6% in the December quarter of 2024, in line with market expectations. This lifted year-ended growth from 0.8% - a 30-year low outside of the Covid period - to 1.3%; growth at that pace is a little stronger than the RBA had forecast (1.1%) but is still well below estimates of trend growth (around 2.5%) - validating the Board's decision to dial back policy restriction with its February rate cut. The RBA forecasts growth to rise to a 2.4% pace through 2025. Improving signs around household consumption in Q4 will need to gather momentum if this outlook is to materialise. 

Fourth quarter growth in real GDP came through at 0.6%, which as the chart below shows continued a sequence of progressively stronger growth outcomes as 2024 unfolded. To suggest this reflects a pick-up in underlying momentum in the economy would be a stretch. Public demand - driven by the electricity bill rebates and spending in the care economy as well as in defence - was the mainstay of growth last year amid patchiness elsewhere. Business investment plateaued, while residential construction continued to be held back by higher interest rates and capacity pressures that are proving very difficult to address. Inventories added modestly to growth in Q4, as did net exports. But the main story remains around households. 

There were signs that the malaise caused by cost-of-living pressures and higher interest rates was easing in Q4 following the Stage 3 tax cuts and other cost-of-living measures. Slowing inflation has been another key factor, with real incomes rising (1.9%Y/Y) for the fourth quarter in succession. Supported by that backdrop, household consumption lifted by 0.4%q/q, rebounding from declines in Q2 (-0.2%) and Q3 (-0.1%). Consumption across all components of the basket increased for the first time since Q2 2023: goods up 0.6% and 0.3% for services, while essentials lifted 0.5% and discretionary spending increased 0.4%. Rising real incomes, a lift in the saving rate to 3.8% in Q4 - its highest since Q3 2022 - and the RBA's rate cut argue in favour of consumption improving further in the first quarter of 2025. 

More analysis to come. 

Australian retail sales rise 0.3% in January

Australian retail sales opened 2025 rising by 0.3% month-on-month in January, matching market expectations. Supermarket sales and dining out over the holidays supported by large attendances at the Australian Open and cricket matches around the country were key contributors. Today's report indicates that retail sales had decent momentum leading into the RBA's February rate cut. 

Headline retail sales rose 0.3% (seasonally adjusted) across the month in January, rebounding after sales had pulled back in December (-0.1%) following the Black Friday boost in November (0.7%). Smoothing out the volatility, sales averaged a 0.3% increase over the past 3 months. Momentum in retail sales has been consistent around this sort of pace since the middle of 2024 (see chart below) as the Stage 3 tax cuts and cost-of-living fiscal support measures came into play. It will be interesting to observe if there is a discernible impact from the RBA's first rate cut in 4 years in February.  

The composition of sales growth in January was supported by a range of categories. Basic food rose 0.7%m/m as supermarket sales increased at their fastest pace (1.0%) since November 2022, helped by supply chain disruptions in Victoria easing. Cafes and restaurants were up 1.1% - rising to a 1.9% increase if catering services are included - with the ABS highlighting the boost from crowds attending the Australian Open and cricket matches. Clothing and footwear sales also advanced (2%), rebounding from a post-Black Friday pullback in December (-1.7%). Meanwhile, 'other' retailing lifted in January (2.4%) driven by gains in recreational goods (5.3%) and pharmaceuticals (2.3%). The one area of weakness was in household goods, falling 4.4% month-on-month - their sharpest decline since December 2021 - as spending on furniture (-4.9%) and electrical goods (-8.2%) unwound following strong rises in December.   

Turning to the states, sales fell in New South Wales in January (-0.3%) - the first decline there in 6 months - but rose in all other states. Gains ranged from 0.4% (Queensland and Western Australia) to 1.1% (Tasmania). Annual growth is fastest in Western Australia at 5.5% and slowest in New South Wales at 2.3%. 

Australia Current Account -$12.5bn in Q4; net exports 0.2ppt

Australia's current account deficit narrowed broadly in line with expectations coming in at -$12.5bn in the December quarter (vs -$12bn forecast). The deficit had deteriorated to an 8-year wide (-$16.3bn) in the middle of 2024, but weaker import spending and a rebound in exports over the back half turned the tide slightly going into 2025. Movements in volume trade were modest in Q4: exports up 0.7% and imports firmer by 0.1%, dynamics the ABS estimates will translate into a 0.2ppt addition from net exports to quarterly GDP growth in tomorrow's national accounts.   

The current account - a summary statement of Australia's trade and financial transactions with the rest of the world - was reported to be in deficit to the tune of $12.5bn in the December quarter (1.8% of GDP), in from a deficit of $13.9bn (revised from $14.1bn) in the September quarter (-2% of GDP). As the chart below shows, Australia has historically run current account deficits; however, this flipped during the pandemic period where sizeable surpluses were posted - largely due to very high commodity prices and border restrictions curtailing offshore travel. As these effects have faded, the current account has been reverting towards the historical experience. 

Driving the narrower current account deficit in Q4 was an increase the trade balance - the difference between revenue from exports and spending on imports - to a surplus to $7.5bn (from $3.8bn); meanwhile, the income balance - the income earned by Australian residents from wages and investments offshore minus wages and dividends paid to foreign investors - was a deficit of $19.8bn in Q4, widening from $17.5bn deficit in Q3. 

In nominal terms, Australian exports to the rest of the world were $162.1bn in Q4, an increase of 3.3% on the previous quarter. Higher export revenue was driven mainly by an uplift in prices (2.6%), rebounding from 3 consecutive declines, while underlying volumes rose modestly (0.7%). Coal and gas underpinned higher export prices, and strength from export volumes was predominantly in services (3.4%). 

On the import side, spending was 0.9% higher in the quarter to $154.6bn. Prices were up 0.8% and volumes were near-flat (0.1%). Notably, services imports (dominated by travel) pulled back (-2.5%), posting just their second quarterly decline in the past 3 years. This was moderated by a 1.1% rise in goods imports, consumption goods (1.9%) - including vehicles and household goods - the main contributor. 

From this, two key dynamics emerge: 1) the terms of trade (ratio of export to import prices) increased in Q4 (1.7%) - representing a boost to national income; and 2) export volumes (0.7%) outpaced imports (0.1%) - driving a positive contribution from net exports to GDP growth, estimated to be 0.2ppt. 

Touching on the income deficit, it remained substantial in Q4 ($19.8bn) but is well off the peak of around $32bn in late 2022. Income fell in the quarter (-0.5%) reflecting lower returns from offshore investments; meanwhile, payments were higher (4.8%) on the back of increased interest servicing costs and returns to offshore investors.