Key takeaways:

• RBA rate cut imminent: With inflation coming in lower than expected in May, the Reserve Bank of Australia is set to cut interest rates by 0.25% in July. This would be the third rate cut in 2025, likely bringing the cash rate to 3.1%–3.35% by year-end to support slowing business activity and relieve cost pressures.
• Oil price volatility driven by Middle East conflict: Brent crude spiked to nearly USD $80/barrel in June amid Iran-Israel hostilities but quickly fell back to around $68 as geopolitical tensions de-escalated. Despite short-term shocks, prices finished the month largely unchanged from May, providing some relief to businesses heavily impacted by energy costs.
• Business conditions worsen despite low unemployment: The unemployment rate held steady at a low 4.1%, supporting consumer confidence. However, the NAB business conditions index dropped to post-GFC lows (excluding the COVID pandemic), with retail and manufacturing sectors under significant pressure.
• Insolvencies plateau but remain elevated: Business failures and B2B payment defaults have stabilised but at high levels. CreditorWatch attributes this to mid-2024 tax cuts and government cost-of-living support. Further benefits are expected from upcoming rate cuts, which could help offset ongoing tariff and cost pressures.

Bottom line:

Tariff-related uncertainties and gyrations in markets took a back seat to a significant step up in geopolitical tensions and military conflict in the Middle East in June. Like the April tariff announcements, which were relatively quickly reversed or paused temporarily, the hostilities between Iran and Israel also relatively quickly de-escalated into a ceasefire following the US‘s targeted attacks on Iran’s nuclear facilities.

The oil price – which along with other energy prices such as gas and electricity has been a key source of pressure on businesses in this cycle – was most impacted, though prices are ending the month almost unchanged from May at US$68 a barrel, down from a short-lived intra-month high near US$80 a barrel. Perhaps even more surprisingly, the US stock market was trading at a record high near month end, despite the significant increase in tensions.

Key takeaways:

• Labour market remains strong: The unemployment rate held steady at a very low 4.1% in May, and underemployment dropped to 5.9% – 0.8 percentage points lower than a year ago – indicating continued labour market strength despite a small fall in employment (-2,000) after a large April gain (+87,000).
• Hours worked suggest economic resilience: Total hours worked rose 3.1% year-on-year, which typically aligns with 2–2.5% real GDP growth, suggesting the broader economy is not as weak as some indicators imply.
• Forward-looking risks emerging: Survey data – such as higher unemployment expectations in the Consumer Confidence survey and weaker employment intentions in the NAB Business Survey – suggest possible softening ahead, although job ad volumes have not dropped significantly yet.
• RBA likely to cut rates further: The Reserve Bank is expected to reduce interest rates in July and August to support growth and avoid an unnecessary rise in unemployment, which has been crucial in maintaining credit quality despite cost-of-living pressures.

Bottom line:

The good news again is the unemployment rate remained very low at 4.1% in May. While employment fell 2,000, this followed an outsized gain of 87,000 in April, so should be assessed in that context. Other indicators remained favourable with the underemployment rate remaining a very low 5.9% (0.8% lower than a year earlier) and hours worked some 3.1% higher y/y (not something that is consistent with a weak economy).

Of course these figures are backward looking, reflecting economic conditions of a few months ago. The rise in unemployment expectations in the Consumer Confidence survey and weaker employment intentions in the NAB Business Survey bear watching though have yet to manifest themselves in any sharp drop in job advertising.

The RBA became more concerned about the growth outlook and revised up its unemployment forecasts a little in mid-May reflecting concerns about negative impacts from tariffs. The forecasts assume two further interest rate cuts, without which even weaker growth and unemployment outcomes would result.

I’m still expecting the Board to reduce interest rates further in July and August to ensure it does not get behind the economy, which would result in an unnecessary rise in unemployment given inflation is forecast to be close to target. Low unemployment has been an important positive supporting credit quality in this cycle in the face of significant cost pressures on consumers and businesses.

Detail:

• The unemployment rate was unchanged at a still very low 4.1% in May. As in the US – but different to other countries – the unemployment rate has been remarkably stable near what’s likely to be an at or slightly below full employment level.

CreditorWatch, has released the May results for its Business Risk Index (BRI), revealing the worst could be over for Australian businesses, with key data hinting at a brighter outlook.

Creditorwatch’s May data shows an easing in two key measures of business stress, insolvencies and B2B payment defaults, suggesting the July 2024 tax cuts, recent interest rate reductions, slower inflation and fiscal support measures are beginning to alleviate some pressures on Australian businesses.

Insolvencies are down 0.9% from April to May and have now dropped 12% from their November peak. B2B payment defaults dipped 11.8% in May and are down 18.3% from their peak in December.

As CreditorWatch has been noting in recent months, insolvencies and trade payment defaults have levelled out, albeit at quite elevated levels. This suggests some of the pressures on businesses from higher costs and constrained consumer spending may be beginning to be balanced out by the favourable impacts of last year’s income tax cuts, other cost-of-living support measures, the start of interest rate relief and a slower rate of cost increases.

That’s a helpful backdrop as businesses negotiate the additional uncertainties emanating from US trade and tariff policies.

Easing insolvency trends have been evident in the two previously most challenged sectors: Accommodation and Food Services (Hospitality) and Construction – but Manufacturing and Wholesale Trade have also stabilised or declined somewhat. These favourable trends have more than outweighed rising insolvencies being recorded in Administration and Support Services; Healthcare and Social Assistance; Professional, Scientific and Technical Services; Retail Trade; Transportation, Postal and Warehousing; and Rental, Hiring and Real Estate.