Economic Update April 2025

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points:

- Trump policy changes continue to drive instability and uncertainty

- Trump’s global tariff policy has the potential to bring on economy sapping trade wars

- The US Federal Reserve keeps interest rates on hold as it awaits the outcome of tariffs on the economy 

- Markets reflecting concerns that US tariffs could result in slower growth and consumption

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact the team.

The Big Picture

It is nigh impossible to keep up with Trump’s claims and executive orders. Even if we compiled a detailed list, Trump changes his direction – sometimes within 24 hours – and judges have thrown out many of his attempts to change policy. Trump has already signed more than double the number of executive orders he did in his first term as president (Trump 1.0) during the first 100 days!

Trump’s strong supporter, and unelected official leading the Department of Government Efficiency (DOGE), Elon Musk, seems to be accountable only to Trump. He appears to try and close departments without reasoning, and he too gets some of his policies overturned by judges when his actions are challenged through the courts.

There has been a very strong pushback against Musk both within and outside the US. The share price of his flagship company, Tesla, has fallen from over $400 to nearly $250 since Trumps inauguration on 20 January. Sales of Tesla cars have fallen by 30% to 40% in a number of countries, including the US, and by a reported 70% in Germany. To make matters worse Tesla was forced to recall nearly every cyber truck to fix a defect. And there are reports of the vandalising of Tesla vehicles in the street and in car dealerships as a protest. With the apparent chaotic approach of this Trump administration there are very few parallels with that of the former Biden presidency. 

Here in Australia, we have had a Federal Budget and Prime Minister Albanese called an election for May 3rd. The importance of this has been overwhelmed by events in the US this week.

We are uniquely in the position of being able to count on Dr Janet Yellen’s expertise. We recently heard her speak on this topic to a closed room. She spent a five-year term as Governor of the US Federal Reserve – the equivalent of the Governor of the Reserve Bank of Australia (RBA) – and a four-year term as Secretary to the US Treasury. She held several other public offices, including leading the White House Council of Economic Advisers – and she has been a long-serving Professor of Economics at the prestigious University of California – Berkeley (since 1980).

There is no one more qualified to speak on these issues from both an academic and a public office perspective.

One of Trump’s main stated reasons for introducing tariffs is to redress the US trade deficit. Yellen says they won’t; exchange rates adjust to accommodate the tariffs. Historical evidence supports this view.

Trump seems to talk in terms of import tariffs being paid by the exporting country. Yellen says the US consumer will bear the brunt and consume less as a result. We agree. Even Trump urged current Fed Chair, Powell, to cut rates now to ease the burden on the consumer. 

Yellen thinks tariffs might only cause a blip in inflation unless they seep into the formation of inflation expectations. The latest University of Michigan estimate of long-term inflation expectations is 4.1% which is the highest since 1993!

Some countries have already responded with new retaliatory tariffs for US exports. This tariff war could end badly. But Trump has often said – and we have written in past Updates – that Trump wants to use tariffs as a bargaining chip to get his way on other things – such as concessions on the location of industry, curbing drug importation and immigration. He said at the end of March – just before his April 2nd reciprocal tariffs are due to kick in – ‘there’s some flexibility on reciprocal tariffs’.

We, like Fed Chair Powell, think it is wise to wait for policies to be firmed up before we finalise our opinions. But the US consumer is confused (and why wouldn’t they be?). Both the well-regarded University of Michigan and Conference Board consumer confidence indexes have plummeted in the last three months.

On top of falling confidence, retail sales in the US are weakening yet, unlike in Australia, wage inflation is outpacing price inflation, so people are getting better off but not spending! The danger of stagflation is mounting as there are some signs of inflation rising a fraction – whether it be from tariffs or not.

At the time of writing, Trump has imposed or increased tariffs on Canada, Mexico and China. He has imposed tariffs on all aluminium and steel imported into the US. At the end of March, he imposed a 25% tariff on all (finished) autos but, importantly not on auto components.

Had tariffs been imposed on car parts, the US auto export industry would have been hurt. A significant proportion of the components of autos built in the US are imported. And, according to Yellen, autos cross the Mexico border six to eight times as autos pass through the production process. Will foreign auto makers like BMW start to export autos as components with final assembly in the US? We don’t know but quite likely the world might respond to Trump’s tariffs. 

One point Yellen stressed was that all these new trade policies could be reversed in less than four years when a new president is elected. At the moment, US presidents can only serve two four-year terms in office. However, there is ongoing speculation that Trump will try to challenge this rule.

While all these political disruptions were taking place, some hard macroeconomic data were posted. Since data are published in hindsight and with a lag, there has not yet been much opportunity for the data to reflect Trump’s economic impact.

US inflation data has been ‘sticky’ in the sense that inflation is only slowly returning to the Fed’s 2% target. We have argued for some time, most of this stickiness is a statistical artifact created by the way in which shelter (or rent) inflation is calculated. The problem has been acknowledged by the Fed but they have not acted to correct the situation. 

Our calculations based on official US data reveal that Consumer Price Index (CPI) inflation less shelter inflation has already returned to the 2% target. Moreover, there are sound economic reasons to believe further rate cuts could flow through to falls in mortgage rates and make room for landlords to cut rents. However, in the last couple of months there has been some signs of possible increases in CPI inflation.

US jobs data have continued to be reasonably strong both in terms of the number of jobs created and in the unemployment rate. The current unemployment rate is 4.1%, up from 4.0%, but low by historical standards. Of course, the nature of work has been evolving in recent times and it is not clear how appropriate it is to compare current unemployment rates with those of 5 to 10 years, or more, ago.

The US Fed is comprised of 12 regional Federal Reserve Banks. One such bank is the Atlanta Fed which provides updates on economic statistics before the official data are released. After strong GDP growth data in 2024, the Atlanta Fed came up with an early estimate of March quarter 2025 growth of 2.3% which was reasonably similar to the official 2024 growth. However, subsequent updates have turned sharply negative. The latest estimate is  1.5% which, if confirmed at the end of April, when the official data are released, could cause the Fed to quickly change tac with monetary policy.

The current year started with major hurricanes on the east coast of the US and an unusually destructive wildfire in California. They could have impacted the March quarter 2025 data. Furthermore, the Atlanta Fed’s early estimates often show some instability over the course of data collection and updating.

Until recently, most commentators were siding with the notion of a soft landing in the US. That is, the Fed was binging inflation down to target without causing a recession. In late March, the calls for a recession increased markedly under the barrage of Trump’s executive orders.

At the latest Fed meeting on March 19th, the Fed kept interest rates on hold. Fed Chair, Jerome Powell, argued that it was in a good position to act appropriately as new data are posted. The Fed’s ‘dot plots’ showed the individual views of members of the committee on where interest rates might be heading.

The latest dot-plot has two more interest rate cuts pencilled in for the rest of 2025. Market pricing gives a reasonable chance of two or three more cuts this year.

Importantly, Powell conducted himself with calm and self-assuredness under questions from the media after the recent interest rate decision. He is not a man who fears Trump. When asked whether his job was in jeopardy, Powell calmly replied, ‘I answered that question in previous meetings. Nothing has changed’. The president has no power to dismiss the Fed chair and Powell is not a man to be bullied.

The Australian Federal Budget, delivered by Treasurer Jim Chalmers, on March 25th was ‘election-friendly’ but it didn’t announce any big policy changes. After seven successive quarters of negative per capita growth, the latest quarter’s growth was deemed to have been positive to the tune of +0.1%. That rate is very close to zero!

Australia faces a cost-of-living crisis far more than that in the US. Australian wages, after adjusting for price inflation, are over 6% below what they were at the start of 2020. Even if these so-called ‘real wages’ caught up with that 2020 level, there would still be five years of ‘lost’ wages to regain before Australia could get back to its previous position.

Chalmers did deliver some improvements in the budget: Tax, healthcare, childcare and other social conditions. Albanese announced on March 28th that there will be a general election on May 3rd. Let’s hope both parties come up with a more comprehensive plan for Australia’s future by then.

Immigration has been central to Australia’s growth and prosperity. But immigration flows must be co-ordinated to match the needs in the workforce and the supply of suitable housing. Probably because of the pandemic, immigration and housing got out of kilter causing big increases in home prices and rents. Energy prices have also become unsustainable, but for other reasons. 

The government did introduce a stop-gap measure by way of a flat subsidy for electricity, but this subsidy will end this year. The way the Australian Bureau of Statistics (ABS) has calculated CPI inflation has artificially brought headline CPI inflation to within the RBA’s target band of 2% to 3%. When the subsidy ends, CPI inflation will most likely jump well above the target band. A long-run solution is needed.

Some of Australia’s macroeconomic data looks quite reasonable. The latest labour force survey indicated the unemployment rate was steady at 4.1% but 52,800 jobs were lost in February. We are not alarmed like some over the job losses because there was an unusually large jump up in the prior two months. ABS data can be volatile.

The unemployment rate might be a bit flattering for those comparing it with rates in years past. Reportedly, the NDIS has contributed a significant number of jobs – some from people previously doing similar work without pay for family and friends. We are not arguing the scheme is not worthwhile, but it should change the way economists view labour market data. These jobs are funded by the taxpayer and not market forces. They are essentially a form of fiscal stimulus.

As expected, the RBA did not change our official cash interest rate at its April 1st meeting. A cut at the following meeting – after the election – is a possibility as are a couple more later in the year.

Even with this optimistic view of monetary policy, we will end 2025 with an interest rate above the so-called neutral rate meaning that monetary policy will still be restrictive.

Any relief to mortgage holders would be most welcome. The 6% fall in real wages we wrote about would still be a major issue but households would have a greater disposable income after mortgage payments fall. Renters too might gain from rate cuts as landlords may pass on the cost savings to tenants.

Elsewhere, the Banks of China and Japan kept their interest rates on hold. Both the ECB and the Bank of Canada cut their respective interest rates by 0.25% points to 2.5% and 2.75%. It was Canada’s 7th successive cut. By comparison, our official cash interest rate stands at 4.1% which is well above the neutral rate of 2.5% to 3%.

China’s Purchasing Manager’s Index (PMI) climbed back above 50 to 50.2 from 49.1 when 49.9 had been expected. Its retail sales beat expectations with a growth of 4.0% but industrial production was just under expectations at 5.9%. China’s trade data disappointed, possibly due to the tariff war. We expect China to add further stimulus as needed.

It is a difficult time to give strong guidance for investors. We do think Trump’s blustering style has led many to fear conditions far worse than may eventually transpire. Those who look at recent stock market falls as indicative of bad times might be over-reacting. So far, the US and Australia’s main markets have suffered no more than a 10% correction and that follows two successive years of gains above 20% for the S&P 500. Corrections are the norm and not the exception in stock market behaviour. It is too soon to run for cover.

By next month we should have a much better view of what is happening with Trump’s policy agenda. We should also know by then what the respective main election promises are for Australia.

Asset Classes

Australian Equities 

The ASX 200 fell sharply ( 4.0%) again over March with only one sector, Materials, registering a gain (+1.5%) while nine sectors recorded losses and Utilities was flat.

The index finished March down  8.3% since the recent all-time high of 8,556. During this sell-off – which is about the same as that on the S&P 500 – the broker-based forecasts of the ASX 200 component-companies’ earnings forecasts remained strong and forecast capital gains above the historical average over the next 12 months.

International Equities 

Except for the Shanghai Composite and the Emerging Markets indexes, all the six major international indexes we follow were well down.

Unsurprisingly, the S&P 500 was the worst, affected by news of tariffs with a loss of  5.8%; Emerging Markets gained +1.7%. The Shanghai Composite also posted a gain but only +0.4%. The Nikkei and DAX were down with losses of  4.1% and  1.7%. The London FTSE index was down  2.6%.

Bonds and Interest Rates

The ECB and the Bank of Canada have been the most active of the central banks we follow in cutting interest rates in this cycle. The RBA has been the least active in cutting rates.

Market pricing suggests that there will be two or three more interest rate cuts this year by the Fed in bringing the Fed interest rate down to a range of 3.5% to 3.75% or 3.75% to 4.0%. Market pricing also suggests two or three cuts in the RBA official cash rate to 3.6% or 3.85%.

It is important to note that most mortgagees in the US hold 30-year fixed rate mortgages and so many locked in very low rates during the pandemic. In Australia, most mortgagees have variable rate loans or a mix of variable and fixed-rate loans for a period of only 1 – 3 years. Therefore, Australian homeowners were hit much harder than their US counterparts when rates were on the hiking cycle. It is fallacious to state that the RBA should be in less of a rush to cut rates because they did not take rates to the same level as the US Fed.

The Fed left interest rates on hold in March but there is an 14% chance of a cut priced in at the next meeting on May 7th but a 76% chance of one or two cuts by June 18th. The RBA has a 75% chance of an RBA interest rate cut by May. There is a 91% chance of three interest rate cuts by the RBA during the rest of the year.

Other Assets 

Brent Crude oil (+2.1%) and West Texas Intermediate Crude oil (WTI) (+2.3%) prices were up in March. 

The price of gold was up +9.6% in March finishing the month at $US3,125

The price of copper (+4.9%) was up sharply again but iron ore prices ( 1.6%) were down. However, the price of iron ore held above $US100 / tonne.

The VIX ‘fear’ index is still elevated at 22.3 but down from its intra-month high of 27.9.

The Australian dollar (AUD) traded in a wide range ($US0.6191 to $US0.6375) over March but finished up (+0.5%).

Regional Review

Australia

Australia will hold its general election on May 3rd. Polls suggest the election may be close between the two major parties but the prospects for the Greens, Teals and Independents is much harder to judge. Rather than comment on recent press releases and speeches, we will reserve our opinion until we have seen the full set of election promises.

The jobs data posted in March disappointed many commentators because 52,800 jobs were lost. However, we note that there were unusually large increases in the two previous months of 59,800 and 30,500. After allowing for the usual noise in these data and possible inaccuracies in seasonal adjustment procedures we think it is far too early to suggest an imminent problem in the labour market.

When we look over the last 12 months, we see that total employment grew by 1.9%, full-time jobs by 2.0% and part-time jobs by 1.6%. This is the first time in a year or two that the three measures were in alignment. Recently, part-time employment was growing by over an unsustainably large 6%.

The unemployment rate was steady at 4.1% but we have noted that a big increase in taxpayer funded NDIS jobs makes it harder to understand the new dynamics of the labour market.

GDP growth for 2024, was released in March. Growth was 0.6% for the quarter and 1.3% for the year. Per capita growth for the December quarter 2024 came in at 0.1% after seven consecutive negative readings. The household savings ratio improved to 3.8% from 3.6% in the previous quarter. We regard 5% to 6% as a healthy savings ratio based on historical data. This ratio sank to 1.5% in 2023. Households need to put aside savings for emergencies, durable goods, holidays and retirement. The Superannuation Guarantee Levy is a part of this definition of household savings.

China 

Late last year China seemed to need a stimulus package, and it provided one. Most economic data – except trade – are getting back to normal. China has set 5% as its goal for growth this year.

Trump imposed a further 10% tariff on imports from China making 20% in total. In addition, the 25% tariff on finished cars and the steel and aluminium tariffs are headwinds facing China. It has been reported that China’s electric vehicles (EV) are providing stiff competition for US EV autos, particularly Musk’s Tesla offerings.

US

The nonfarm payrolls (jobs) data came under expectations at 151,000 new jobs as 170,000 had been expected. The unemployment rate climbed one notch to 4.1% from 4.0% and wage growth at 4.0%, undershot the expected 4.2%. With CPI inflation well below 4% – even with the shelter inflation problems – means that the US worker is experiencing improved compensation month by month.

Retail sales, adjusted for CPI inflation, came in at 0.0% for the month and 0.3% for the year. These are not strong numbers, but we have noted that consumers have adopted a more cautious approach to spending. They have the money to spend but they are (sensibly) applying caution in these troubling times. Sales could spring back quickly when consumers feel more confident.

Europe 

Trump’s reaction to North Atlantic Treaty Organisation (NATO), and the Ukraine in particular, has acted to galvanise Europe in providing a more concerted and unified response to conflict and geopolitical tension in the region. Germany just passed a massive bill to issue over one trillion dollars’ worth of debt to build a military capability to make up for a possible US withdrawal or disengagement from NATO. Europe looks to be working hard to replace any gap left by Trump’s apparent receding commitment to NATO. Of course, in four years’ time, the old normal could be restored.

EU inflation fell to 2.4% and the European Central Bank (ECB) cut its rate from 2.75% to 2.5%.

Rest of the World 

Such is the extent of Trump-created chaos that so much of the world is now caught up in the ensuing economic maelstrom.

Mexico sent a number of drug-cartel ‘suspects’ to the US for trial but that didn’t seem to overly appease Trump’s appetite for blaming Mexico for the US’s drug problems.

Mark Carney, a celebrated former governor of both the Bank of England and the Bank of Canada was sworn in as the Prime Minister of Canada. He has the credentials and the apparent resolve to take on Trump over the tariffs imposed on Canada. 

The cease fire between Israel and Hamas in Gaza has again run into difficulties.

Japan recorded stronger than expected economic growth in 2024. A rate of 0.6% for the December 2024 quarter was much stronger than the 0.4% which had been expected. That’s good for the global economy.

The Ukraine-Russia ceasefire seems to exist in concept only without any real headway being made save for a supposed naval truce in the Black Sea.

New Zealand recorded growth of 0.7% in 2024 – a bounce back from recession.

Have more questions? Reach out to our knowledgeable team today.

We acknowledge the significant contribution of Dr Ron Bewley and Woodhall Investment Research Pty Ltd in the preparation of this report.

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