Policy Makers’ Focus: Recent Economic Developments and Global Outlook

Notable takeaways from this week’s developments.

The June minutes of the Reserve Bank of Australia’s Monetary Policy Board indicated that the economy is experiencing excess demand and broad inflationary pressures. While members expressed differing views on the magnitude of current capacity constraints, they agreed that these pressures remain elevated and pose a risk to achieving the inflation target. Regarding the Middle East conflict, the board welcomed recent progress toward a resolution but continued to see inflation risks as skewed to the upside and growth risks to the downside, suggesting that further increases in the cash rate target may be warranted.

Deputy Governor Hauser’s recent address clarified the RBA’s view that inflation is especially responsive when the economy is tight, yet this environment also provides room to reduce inflation with limited impact on employment. This perspective reflects the series of rate hikes earlier in the year and the board’s decision in June to pause and assess conditions.

The Reserve Bank continues to monitor housing market developments and their impact on wealth and consumption. Cotality’s June home value index slipped 0.4%, with Sydney and Melbourne price corrections deepening as growth slowed from higher bases in smaller capitals. Coupled with slowing credit and the dampening effect of rate hikes and sentiment, the market outlook is turning downward. Westpac expects further price declines for the remainder of the year, albeit constrained by robust population growth and limited supply.

Turning to trade, May’s goods trade balance swung unexpectedly to a $3.0 billion deficit from a $1.4 billion surplus, marking the largest shortfall in more than a decade. The shift was driven largely by volatile gold flows, a notable decline in iron ore exports, and a strong increase in car imports, especially electric vehicles. Although data‑centre equipment imports have moderated, they remain well above historic levels, and continued volatility is anticipated over the coming year.

In the United States, June nonfarm payrolls fell short, adding only 57,000 jobs, while April and May were revised down by a combined 74,000. The three‑month average has slipped to 111,000, compared with 164,000 in May, indicating that labour demand is barely matching supply. The household survey, however, showed a sharp decline of 507,000 jobs in June, averaging losses of 195,000 per month over the last three months, and the labour participation rate fell to 61.5%—implying that, had participation remained constant since January 2025, the unemployment rate would be above 5% rather than the reported 4.2%. Overall, the data suggest a stagnating labour market, with notable downside risks highlighted by the household survey.

The latest ISM manufacturing report aligns with the Federal Open Market Committee’s waning concern about inflation in the coming months. The prices component dropped 9.1 points to 73, indicating a shift in upstream price pressures. Coupled with recent declines in oil benchmarks and a lack of material secondary inflation effects from the Middle East conflict in both CPI and PPI data, this moderation should ease the FOMC’s worries about a sustained resurgence in consumer inflation.

June Euro Area inflation data, released preliminarily, showed a 0.1% decline—matching expectations—signalling a more benign inflation outlook. Annual headline inflation fell to 2.8% year‑on‑year from 3.2%, and core inflation slipped to 2.4% from 2.6%, all while the labour market remains historically tight.

Federal Reserve Chair Kevin Warsh highlighted the recent decline in inflation expectations and risks at the ECB’s Sintra Forum on Central Banking, noting that the trend is evident across developed economies in the northern hemisphere, not just the United States. The conference keynote panel also emphasized the need for greater flexibility and timeliness in monetary policy, the incorporation of AI advances into decision‑making, and the importance of preserving financial stability.

Turning to Asia, the Q2 Tankan survey was received positively, with large manufacturers’ sentiment rising from 17 to 22. However, smaller manufacturers and service firms remained cautious, and expectations for research and development were revised downward, putting pressure on profitability and labour market indicators. The survey indicates that the Bank of Japan must remain vigilant regarding evolving risks as it continues to normalise policy.

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