The Westpac economists reveal their latest thinking on the Australian economy, commodity and financial markets, and the global economy

By the Westpac economists

Over the past month, the global dataflow has showed economic trends are unfolding gradually. How this is shaping views on the outlook varies distinctly across the major economies.

For the US, Chair Powell’s Jackson Hole address set out the delicate balancing act facing the Fed: walking a tightrope with upside inflation risks on one side and downside labour market risks on the other (never mind the political crosswinds). Markets have largely focussed on the latter, taking their cue from a slowing in jobs growth that is coming from an even weaker starting point following recent revisions. This has bolstered expectations for a quicker and deeper rate cutting cycle – with six cuts now pencilled in by 2027 – seeing the 10-year yield drop around 30bps back toward the 4% mark.

We think this is significantly under-weighting the risks around inflation. The US average effective tariff rate doubled in August, and while inflation measures have not ‘jumped’ there is clear evidence of unwanted momentum and building upside risks. The tariff pass-through and inflation lift may be more of a ‘slow burn’ than a sudden surge. Add capacity constraints to the mix and the US inflation outlook looks firmly skewed to the upside. As such, we see the FOMC moving more cautiously, with just 50bps of cuts provided until there is more comfort about inflation.

The situation is less precarious elsewhere but the theme of gradual change is also a common thread. In China, trade continues to be the centrepiece for growth amid a lacklustre recovery in the consumer and soft housing sector. In Europe, inflation back at target and growth moving slowly moving towards trend is seeing the ECB continue to take a patient approach to policy setting. 

Back in Australia, a consumer-led bounce in economic activity during mid-year has been a welcome surprise. But the extent to which this marks a sustained acceleration in household spending growth remains unclear with a variety of one-off factors likely at play in the recent data. Meanwhile the labour market has more clearly moved back into a gradual softening. All of which is to say that risks have tilted from favouring the downside towards something more two-sided rather than outright positive.

Australia: The Australian economy grew a solid 0.6%qtr in the June quarter 2025 and 1.8% in year-ended terms, the first per capita annual gain in just over two years. Even with one-off factors at play, the consumer recovery looks to be on a firmer footing. However, investment is tracking more slowly. Net-net, our GDP forecasts have been revised up 0.2ppts in both 2025 and 2026, 1.9%yr and 2.4%yr respectively.

Commodities: August was a solid month with Westpac’s Commodity Export Price Index gaining around 3% since our last report. The gains were reasonably broad based but the most significant was a 7½% surge in gold. We see little reason to call a top for gold at this stage for while the extent of further upside is uncertain, current momentum suggests gold can continue to push into record territory in the near term.

Global FX Markets: The US dollar DXY index has this month held a tight range just below its 10-year average. We see this as consistent with the market pricing a growing chance of growth stalling. Persistently weak but positive growth is expected to result in the US dollar drifting lower to end-2027. Risks are to the downside, if the US labour market lets go.

New Zealand: The main development over the past month has been the RBNZ’s dovish pivot, with the Bank indicating an intention to reduce the OCR to 2.5% by year-end. This will further support the recovery and makes it more likely that policy will reverse course before the end of 2026. Meanwhile, New Zealand’s current account deficit appears to have been slightly overstated.

United States: Economic expectations and market pricing currently conflict. Consensus forecasts point to an expectation the US will grow at or above trend in 2026–2027 and see persistent above-target annual inflation. Despite these expectations, 150bps of rate cuts are priced to January 2027.

China: Participants remain concerned over China’s excess capacity. Yet through trade it continues to provide significant dividends. Financial stability is also being managed effectively. Housing and its effect on consumers’ appetite to spend remains the key risk for growth.

Japan: Despite long-standing concerns about high government debt levels (currently 235% of GDP) and new sources of political uncertainty, Japan’s fiscal fundamentals are improving and are unlikely to materially impact debt stability for the foreseeable future.

Europe & UK: Credit growth remains subdued, with demand for business credit struggling to pick up, as previous interest rates cuts are feeding into the economy slowly. While the ECB appears to be content with the current monetary policy stance, we see downside risks to the euro area inflation outlook, and, therefore, we think that another ECB interest rate cut is probable.

The full report is here.