Australian Consumer Confidence Rebounds as Trade Tensions Ease

Australian consumer confidence staged a dramatic recovery in May 2025, buoyed by easing global trade tensions, expectations of interest rate cuts, and a cooling inflation environment. The rebound, captured in key consumer sentiment surveys, signals a potential turning point for households and businesses, though lingering risks—including persistent trade uncertainties and subdued global growth—demand cautious optimism.

The Rebound in Data

The ANZ-Roy Morgan survey showed consumer confidence rising to 87.5 in May, a 4.1-point jump, with the four-week moving average climbing to 85.2 points. Improvements spanned all components: confidence in current financial conditions surged 9.1 points, while medium-term economic confidence rose 5.2 points. Meanwhile, the Westpac-Melbourne Institute index hit 88.1, its largest monthly gain in 50 years, though it remains below the neutral 100 threshold.

Drivers of the Rebound

1. Trade Tensions Ease: Global markets stabilized after U.S. tariff announcements initially spooked investors, but subsequent trade optimism—likely tied to ongoing negotiations—helped calm nerves. While the U.S. and China remain locked in a tariff war, the temporary pause in escalation reduced immediate risks to supply chains and consumer prices.
2. RBA Rate Cut Expectations: Markets priced in a 25 basis point (bps) cut by the RBA in May, with some economists predicting a 50 bps reduction as trimmed mean inflation dipped to 2.9% annually—its lowest since late 2021. The central bank’s pivot toward easing reflects its growing confidence in the inflation outlook.
3. Budget and Fiscal Support: The federal budget, which included targeted stimulus measures, bolstered household sentiment, particularly around future financial conditions.

Trade Developments and Global Risks

While domestic sentiment improved, global trade dynamics remain precarious. The IMF downgraded its 2025 global growth forecast by 0.5 percentage points, citing U.S. tariff-induced disruptions. The WTO projected a 0.2% contraction in global merchandise trade, with further declines likely if U.S. “reciprocal” tariffs proceed.

The U.S. trade war’s toll is stark: U.S. effective tariffs rose to 25–29%, while China retaliated with tariffs of up to 146% on U.S. goods. The Port of Los Angeles reported a 30% year-on-year drop in cargo volumes, underscoring the strain on global supply chains.

Inflation and the RBA’s Dilemma

Cooling inflation has given the RBA room to cut rates, but it faces a balancing act. While trimmed mean inflation at 2.9% is within the bank’s 2–3% target, wage growth remains sluggish, and consumer spending hinges on sustained confidence.

The RBA’s May cut to 3.6% (from 3.85% in April) aligns with market expectations, but further easing could depend on trade developments.

Lingering Risks

• Trade Volatility: Escalating tariffs or geopolitical shocks could quickly reverse the sentiment rebound.
• Global Growth Drag: The IMF’s 0.5% growth downgrade and WTO’s trade contraction forecast highlight risks to Australia’s export-reliant economy.
• Consumer Sentiment Duration: The Westpac index has remained below 100 for over two years—the longest streak since the early-1990s recession—suggesting underlying caution.

Investment Implications

The May rebound offers a cautiously positive outlook for sectors tied to consumer spending, such as retail and housing. However, investors should remain alert to trade-related headwinds.

• Equities: Consumer discretionary stocks (e.g., Wesfarmers, Woolworths) may benefit from improved spending intentions, but exposure to global supply chains (e.g., mining, manufacturing) carries risk.
• Bonds: RBA rate cuts could further compress yields, favoring short-duration bonds.
• Currencies: The Australian dollar’s performance will hinge on trade dynamics and global risk appetite.

Conclusion

Australian consumer confidence’s May rebound marks a critical shift, driven by reduced trade tensions and monetary easing hopes. Yet the recovery remains fragile: the Westpac index is still below pre-pandemic levels, and global trade risks loom large. Investors should prioritize defensive sectors and monitor trade negotiations closely. While the RBA’s easing cycle supports growth, the path to sustained confidence hinges on resolving trade disputes—a task that remains far from complete.

In the end, Australia’s economy is navigating a narrow path between domestic optimism and global headwinds, requiring both policymakers and investors to tread carefully.