Welcome to Bendigo Bank’s monthly update for June, with the latest economic data and financial trends locally and the outlook for global markets.
Today we’ll look at the latest news on tariffs and international trade; Australia’s first quarter GDP data and any implications for RBA interest rates; and the recent rally in equity markets.
The RBA cut rates as expected in May to 3.85%. And as we forecast in last month’s update are now more concerned by global factors and downside risks via trade wars than just focusing on inflation. So the main debate for the RBA was whether to reduce the cash rate by 25 basis points or by 50.
Had US tariffs remained at the shocking levels outlined in early April, then we would have seen a half a percent cut, but the deferral of tariffs for most counties and a degree of de-escalation with China meant the RBA could cut by the standard ¼ percent, and keep more firing power for the uncertain path ahead, the fact that US tariffs today are now ‘only’ around 14% compared to double that number threatened on April 2nd is good news, but leaves the US now with a similar level of tariffs to where they were in the 1930s, the worst decade economically in modern history.
Where tariffs end up from here is anyone’s guess, but central banks and economists are universal in their expectation that the trade wars will mean lower growth rates ahead, and so lower interest rates, although those countries that are imposing tariffs will add inflation to their economies and so may limit the extent of their rate cuts.
Fortunately, Australia has a very low direct exposure to the US tariffs, and isn’t responding beyond diplomatically refuting the undeserved 10% US tariff, and the RBA share our view that overall tariffs will limit inflationary risks ahead here, not increase them, so we continue to forecast steadily lower interest rates ahead, roughly quarterly reductions down to the low 3’s.
The latest economic data also suggests the economy still needs support and warrants less restrictive interest rates, with real GDP growth of only 0.2% in Q1 which equates to 1.3% growth year-on-year, and while the economy is still growing, once again our productivity rate failed to lift (so is down 1% over the year), giving the returned ALP government a timely reminder of the imperative of addressing this long-standing issue of underperforming productivity (the primary driver of lifting standards of living).
Other details in the GDP data included a sharp fall in public sector spending (although pleasingly private sector investment rose by ¾ %) and the negative impact of extreme weather events that hit mining, shipping and tourism in the quarter, again a timely reminder today on World Environment Day. In FY26 we do expect economic growth here to gradually pickup to almost 2%, but droughts in the south and recent floods in NSW clearly add to challenges.
Our stock market has taken comfort in the outlook for more RBA rate cuts ahead, and our lower exposure to trade wars than elsewhere, taking the ASX200 to within 1% of the record high set back in February, but in other countries the outcomes have been mixed. Germany is back at a record high, with the UK just behind, while in the US the recovery has been impressive but less decisive.
Financial markets have welcomed the rolling back and deferral of US tariffs, but still hold concerns around US stagflation risks ahead and rising bond yields so, volatility on the markets is likely to remain elevated.
And lastly, residential property prices rose ½ % in May with strong quarterly gains again in Perth, Brisbane, Darwin and regional Australia; all a combination of lower interest rates and still not delivering on building new dwellings.
And that’s the market update from Bendigo Bank.
