Market Commentary
Last updated: April 2025
Economic review
Australia: Australian economic growth improves in Q4’24, but remains weak
The Australian Federal Budget released in March focused on cost of living, including a small tax cut, a reduction in student loan debt and increasing healthcare funding. After consecutive surpluses, this year’s Budget returned to a deficit; with the 2024-25 financial year forecasted at -$27.6 billion and -$42.1 billion deficit for the 2025-26 financial year. Government debt is projected to increase to 23.1% of GDP by 2028-29. While this trend is worth monitoring, the projected debt levels remain low compared to other developed economies.
Ex-Tropical Cyclone Alfred is expected to reduce economic growth by up to 0.25% of quarterly GDP. The Budget also noted that the rebuilding effort is expected to contribute positively to GDP growth in subsequent quarters. However, the rebuild is likely to increase building costs and damage to farmland is expected to raise the cost of fresh produce.
Australian economic growth improved in Q4’24, with GDP rising to 0.6% QoQ, up from 0.3%. This is in line with market expectations and exceeds the RBA’s forecast of 0.5%. The increase in GDP was assisted by the stronger than expected household consumption data. The Australian unemployment rate remained at 4.1%, as the labour market weakened in February with 52,800 jobs lost, marking the largest drop since 2023. The RBA will likely look for evidence of a weakening labour market before cutting rates again. However, this weaker data did not significantly alter market expectations for rate cuts, which is currently three further cuts in 2025.
International: German parliament passes historic defensive infrastructure spending bill.
Since the Trump-Zelenskyy meeting in February, European leaders have been prompted to increase fiscal spending, especially on defence. The German parliament passed a bill to exclude defence spending from the debt limit and increased infrastructure spending by 500 billion Euro. The coalition also pledged to accelerate defence procurement and streamline infrastructure planning to expedite spending. Additionally, the European Commission is creating fiscal space by excluding defence spending from deficit calculations. This is a huge shift for Europe, especially for Germany which has historically been conservative in its fiscal policy.
US President Trump has imposed further tariffs on imports, with a 25% tariff on auto and auto parts. Reciprocal tariffs, designed to match the import duties placed on US goods and services by other nations, were announced in early April.
The US Federal Reserve left interest rates unchanged at 4.25-4.5%. Governor Powell noted that while short-term consumer inflation expectations have risen due to tariffs and uncertainty, he did not see any long-term shift in expectations based on market-based measures. The US unemployment rate increased by 0.1% to 4.1% in February. Healthcare and finance sectors posted strong gains, while nonfarm payrolls also rose. The leisure and hospitality sector witnessed a second straight decline.
MARKET REVIEW
Australia
Australian Shares outperformed global share markets, down -3.3%. The technology sector was the largest detractor to performance, likely impacted by negative sentiment towards global technology companies. The consumer discretionary sector also declined, being the second worst performing sector. The utilities sector was the only one to gain in March, and it was only marginally up.
Australian sovereign bonds were up 0.1% in March, as Australian bond yields were largely flat.
The Australian dollar was largely unchanged in March against the US dollar; however, it fell significantly against the British Pound and the Euro following the announcement of the German fiscal spending package.
International
International shares saw negative returns in March, down -5.0%, as US tariffs concerns rattled investor confidence. US Technology shares fell significantly, as the Mag 7 shares (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla) continued to underperform the broader market.
International sovereign bonds were down 0.5% in March. While US government bond yields were flat in March, government bonds in the EU saw yields rise significantly after the announcement of Germany’s new fiscal spending package.
International REITS fell -2.6% in March, due to rising global bond yields. Australian REITs were down by -4.8%, remaining weak after last month’s capital raising in the REIT sector.
International credit declined by -0.6%, as credit spreads widened over the month, since investor sentiment deteriorated due to ongoing trade rhetoric.
MARKET INSIGHTS
Australia: No expectation that the RBA will rush into further rate cuts
While the RBA delivered a cut at its February meeting, the labour market likely remains stronger than the RBA would be comfortable with. Therefore, we do not expect the RBA to rush into further rate cuts. Market expectations are for a further three interest rate cuts in 2025, which will likely hinge on sustained signs of loosening labour market conditions and/or weakening wage growth.
While unemployment remains low, both wage growth and job vacancies continue to fall, which suggests we should see the labour market begin to soften and a modest rise in unemployment in 2025.
We continue to expect growth to remain weak, as higher interest rates and cost-of-living pressures are likely to keep consumption suppressed. Geo-political concerns are likely to see businesses cautious about investing.
Locally, we favour Australian sovereign bonds over cash, with interest rates likely to have peaked this cycle.
International
It is likely the impact of tariffs will be a one-off impact to inflation, and central banks will treat it as such. Continued introduction of new tariffs will likely weigh on business and consumer confidence. The longer this continues, the greater the implications are for economic growth.
Central banks around the world are likely to continue to cut rates as inflation moderates, with cuts expected at a slower pace. The exception is Japan, where we expect interest rates to rise as it emerges from a multi-decade deflation period.
Japan is likely to continue to do well economically, driven by income growth and continued investment in capital expenditure. We continue to favour Japanese shares relative to other developed country share markets.
We favour global listed property, as fundamentals are broadly healthy and valuations are attractive. We also favour Japanese shares, due to the potential growth rebound and solid earnings growth.
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