Bendigo Bank’s Chief Economist David Robertson drills down in his latest Economic Update on yesterday’s GDP data, what’s next on rates and the latest on Trump’s tariffs.
Key takeaways:
- Sluggish GDP growth builds case for less restrictive rates
- RBA holds its rate-cutting firing power
- US tariffs at 1930s levels - the worst decade economically in modern history
“The latest data suggests the economy still needs support and warrants less restrictive interest rates, with real GDP growth of only 0.2% in Q1, equating to 1.3% growth year-on-year,” Mr Robertson says.
“While the economy is still growing, once again our productivity rate failed to lift, 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,” he says.
“Residential property prices rose 0.5% in May, with strong quarterly gains again in Perth, Brisbane, Darwin and regional Australia thanks to a combination of lower interest rates and insufficient new dwellings being built.”
GDP data also highlighted a sharp fall in public sector spending, although pleasingly, private sector investment rose by .75%. The negative impact of extreme weather events hit mining, shipping and tourism in the quarter, and served as a timely reminder on World Environment Day of the impact of climate change on the economy.
“In FY26, we expect economic growth here to gradually pick up to almost 2%, but droughts in the south and recent floods in NSW clearly add to challenges of maintaining a steady trajectory,” Mr Robertson says.
RBA holds its rate-cutting firing power
“As the RBA puts global factors such as trade wars firmly in its sights, we can expect to see two more cash rate cuts this year – a drop of 25 basis points per quarter,” Mr Robertson says.
“There is also potential for one more cut next year, which would take the cash rate to a neutral 3.1%,” he says.
“Had US tariffs remained at the shocking levels proposed in early April, we would have seen a half a per cent cut by the RBA in May. But the deferral of the tariffs for most counties and a degree of de-escalation with China meant the RBA could cut by the standard .25%, and keep more firing power for the uncertain path ahead.”“Our stock market has taken comfort in the outlook for more RBA rate cuts ahead, and our lower exposure to trade wars than elsewhere has taken the ASX200 to within 1% of the record high set back in February.”
US tariffs at 1930s levels - the worst decade economically in modern history
“The RBA shares our view that overall US tariffs will limit inflationary risks here, not increase them. So we continue to forecast steadily lower interest rates ahead,” Mr Robertson says.
“The fact that US tariffs are now ‘only’ around 14% compared to double that number threatened on 2 April is good news,” he says.
But, he stipulates, it's all relative.
“It leaves the US now with a similar level of tariffs to where they were in the 1930s – the worst decade economically in modern history,” Mr Robertson says.
“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. Those countries that are imposing tariffs will add inflation to their economies and so may limit the extent of their rate cuts,” he says.
“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.”
