Key insights from the week that was.
After coming tantalisingly close to the optimist / pessimist threshold last month, Westpac-MI Consumer Sentiment shed 3.1% in September to 95.4, a level consistent with a degree of economic unease. Results were mixed across the components. On the positive side, views on family finances – both the current assessment and year-ahead expectations – rose to the highest level in over 3½ years, providing another clear sign of reduced cost-of-living pressures. However, the one-year and five-year economic outlooks both deteriorated, down –8.9% and –5.9% respectively, although both sub-indexes are still slightly above average. The same cannot be said for ‘time to buy a major household item’ which fell 3.4% to be 21% below its long-run average.
Against the backdrop of last week’s National Accounts – which showcased a consumer-led bounce in economic activity into mid-year – this latest sentiment reading casts some doubt over the sustainability of the acceleration in household spending growth. We know at least part of the mid-year lift was due to abnormal seasonality and end-of-year sales events. Recent card activity data meanwhile points to a more gradual recovery, in line with a steady lift in GDP growth to 1.9%yr by year-end and towards trend in 2026. Our forecasts for Australia and the world are discussed in detail in our latest edition of Market Outlook, due for release today on Westpac IQ.
Before moving offshore, a final note on businesses. The latest NAB business survey reported a mixed batch of results in August: conditions up 2pts to +7 while confidence retreated 3pts to +4. On balance, the headline outcomes remain broadly consistent with the gradual recovery in growth suggested above and are corroborated by the survey detail for profitability and trading conditions. The lift in the often-volatile capex sub-component is also an encouraging leading signal for business investment, though a firming of confidence is likely necessary before a more meaningful acceleration can be seen.
Outside of Australia, market participants have this week remained focused on the debate over the health of the US labour market. August’s nonfarm payrolls print was another weak outcome, with just 22k new jobs reported in the month and the June / July estimates reduced by 21k, leaving the 3-month average broadly unchanged at 29k. While well below the 168k average gain of 2024 (excluding the just released annual revision; see below), as population growth has slowed abruptly in 2025 the current pace is only at the bottom of the St Louis Fed’s most recent breakeven range for employment (32k-82k new jobs needed per month to balance labour demand and supply). The unemployment rate edging up from 4.2% to 4.3% in August with a 0.1ppt increase in participation also points to job creation stalling versus a material contraction.
That said, the 911k downward revision to the level of nonfarm payrolls at March 2025, which implies monthly job creation over the prior year was half the initial estimate, raises the risk that current employment is also materially weaker than the published data suggests. In real time though, we are unable to gauge to what degree. Meanwhile, US inflation remains stuck well above target.
Headline consumer prices rose 0.4% in August, lifting annual inflation to 2.9%. The rate of core inflation instead held at 3.1%yr, or 3.6% on an annualised basis. Within the detail was further evidence of the slow passthrough of tariffs, core goods inflation printing at 1.1% on a 6-month annualised basis compared to 0% at the turn of the year, or around 3% annualised if only the last three months are focused on. As a result of capacity constraints, services inflation also showed strength, services prices ex-energy rising 3.6% over the year and 2.9% on a 6-month annualised basis.
Looking ahead, both goods and services inflation are likely to hold up. Regarding the continued passthrough of tariffs, while the PPI surprised to the downside, this looks to be due to the margins of wholesalers and retailers partially absorbing the initial impact of tariffs. US businesses cannot wear this cost indefinitely, particularly as the burden accumulates – the US effective tariff rate doubled in August.
Next week the FOMC will adjudicate once again on the stance of monetary policy. A 25bp rate cut is widely expected, but more important will be any change to their economic forecasts and guidance on risks. Market participants clearly desire the FOMC to look through current above-target inflation and protect against downside risks for employment and activity. But views expressed ahead of the meeting from members imply a greater degree of concern over inflation’s path back to target – a view which we believe is justified, as discussed in our September Westpac Market Outlook.
Continuing with monetary policy, as expected the ECB Governing Council left the stance of monetary policy unchanged at its September meeting. The decision was based on economic projections which are largely unchanged from June. Economic growth in 2025 was revised higher to 1.2%, but the 2026 figure was nudged lower to 1.0%, a touch below our and consensus’ forecasts, and growth in 2027 was left unchanged at 1.3%. HICP inflation is now expected to be 0.1ppt higher in 2025 and 2026, at 2.1%yr and 1.7%yr respectively. But, instead of returning to 2% in 2027, inflation now stays just below target at 1.9%.
In the press conference, President Lagarde celebrated the resilience of the euro area economy in the first half of 2025. She also noted the risks to growth have become more balanced, largely due to the EU-US trade agreement. On the inflation front, Lagarde discounted the importance of below-target inflation in 2027 and continued to emphasize that the euro area economy is in a good place. Having retained their forward guidance – “we will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance” – she emphasised in the press conference that ECB policy is not on a pre-determined path, with the Governing Council prepared to act as necessary to keep the economy on track. Even a small additional disinflationary impulse is likely to lead to additional easing, albeit just one more cut to the bottom of the ECB’s estimate of the neutral range.
