Key insights from the week that was.
The January Monthly CPI Indicator printed broadly as expected, with prices falling 0.2% in the month, leaving headline inflation up 2.5% over the year to January, the mid-point of the target range. In the monthly detail, there were surprises on both sides. On the one hand, the roll-off of Queensland’s state government energy rebates saw electricity prices jump more than expected. However, dwelling price inflation continues to ease. The trimmed mean estimate printed at 2.8%yr, up slightly from 2.7%yr in December; but, like all other ‘core’ measures of inflation in the month, it remained within the 2-3% target band. One monthly result is not enough to shift expectations, especially as the monthly measure is only a ‘partial’ read on inflation. The next update for the quarterly series is not due until just before the RBA’s May Board meeting.
In the lead-up to Q4 GDP due next week, two partial indicators of investment were also received.
Although construction activity was softer than expected in the quarter, up 0.5% in Q4, the trend over last year points to a solid recovery, up from an annualised pace of 1.3% in H1 to 5.0% in H2. Public infrastructure has played an important role in supporting construction activity; a nascent recovery in private activity has also started to form across both infrastructure and residential construction. Importantly, the price detail suggests capacity constraints are starting to ease.
Private CAPEX subsequently surprised to the downside, the –0.2% fall in Q4 bringing the annual pace down to a tepid 0.6%yr. Weakness was evident across the sectors but concentrated in mining (–0.6% versus -0.1% for non-mining). On investment intentions, 2025-26 CAPEX plans made clear the uncertainty present in both the domestic and global economy, the first estimate reflecting a pullback in firms’ investment expectations.
However, it is important to recognise the variability seen in early estimates of CAPEX expectations for a given financial year and the emerging positives for business, discussed in depth in Westpac’s latest Quarterly Business Snapshot.
Our preview for Q4 GDP will also be published later today on Westpac IQ.
It was a quiet week for international data. Of greatest significance, US consumer confidence data highlighted concern amongst households over the potential economic consequences of tariffs and immigration policy, particularly for inflation. Core durable goods orders meanwhile implied businesses are largely waiting to see how the economy evolves before committing to new capital expenditure, and home sales data the impact of higher mortgage rates on affordability – new and pending home sales down 10.5% and 4.6% respectively in January.
On tariffs, President Trump announced he is pushing ahead with the 25% tariff for all imports from Mexico and Canada (excluding energy) on 4 March. An additional 10% tax will added for China at the same time. European imports will also face a 25% tariff and, come April, reciprocal and product-specific tariffs will follow. Canadian Prime Minister Trudeau quickly vowed an immediate and strong response to the formal introduction of tariffs on Canada, which could elicit a further response from the US. It is unsurprising that the FOMC members who spoke through the week highlighted uncertainty for inflation and inflation expectations and a need for caution with policy.
Back in Asia, the Bank of Korea lowered its base rate by 25bp to 2.75%, the third cut since October 2024. Accompanying the decision was a downgrade to the 2025 growth forecasts, from 1.9% for 2025 to 1.5%, owing to the impact of tariffs and dwindling domestic demand. Tariffs are now expected to be imposed in Q1 2025, earlier than previously thought, and are also expected to be larger. Allowing policy to respond, core inflation is expected to be lower in 2025 at 1.8% (previously 1.9%). The Bank of Thailand also cut rates by 25bps to 2.0%, surprising markets. The cut came as structural problems in the manufacturing sector threaten growth. Tariffs and trade tensions in the region will only further exacerbate existing problems.
Without the inflation concerns of the US, emerging market economies in Asia have the capacity to take a proactive approach to managing the growth risks that will eventuate from geopolitical tensions and tariffs.
