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.

In summary:

Trade war volatility with temporary relief: After April’s turmoil caused by new US-China tariffs, May saw a temporary de-escalation with pauses and exemptions. However, uncertainty remains, with a critical deadline looming on July 9 for tariff reinstatements and a potential 50% US tariff on EU goods if no deal is struck.

Australian economy bracing for slower growth: While Australia was heading for a soft economic landing, US trade policies are expected to slow global growth, impacting local exporters. Still, low unemployment (4.1%) and RBA rate cuts are cushioning the blow for consumers and businesses.

B2B credit risk elevated but stable: CreditorWatch’s B2B invoice defaults remain elevated but steady, particularly in construction and hospitality. Ongoing monitoring is vital to spot any shifts as businesses adapt to the evolving global economic climate.

In detail:

Where April was all about the imposition of – and financial market reactions to – President Trump’s higher than expected reciprocal tariffs and the subsequent escalating US-China trade war, May was the complete reverse, with financial markets figuratively cheering the temporary pauses and exemptions provided to reciprocal tariffs and the significant de-escalation of US-China bilateral tariffs.

At least for 90 days! July the 9^th is now the next focus date, which is when many of the bilateral tariffs are due to be reinstated, and by which date the EU and the US will need to have sorted out a trade deal, otherwise a 50% US tariff is threatened to be imposed on European goods.

Markets are increasingly assuming that Trump’s negotiating strategy of first announcing very high rates of tariffs and then backing off, will continue, creating volatility upon announcement, but then retracement. To me, the key is still to try and work out the end point of the tariff ‘game’. The assumption I’m working with is that the world ends up with 10% tariffs on most countries and somewhat higher tariff rates on perceived trade ‘transgressors’ and selected products such as steel, autos and pharmaceuticals.

Tariffs are a tax on US consumers (and other countries’ consumers too, to the extent their governments retaliate). Taxes are contractionary, acting to slow growth. Tariffs act like a sales tax and also raise consumer prices. And when you’re as big as the US economy, this economic self-harm tends to inflict harm on other economies too.

The Australian – and global economies – were progressing well towards rare, soft landings. Inflation was moderating, allowing central banks to cut interest rates, supporting economic growth and in turn, ongoing low unemployment – positive for both businesses and consumers. Mr Trump’s tariff policies suggest the landing will be somewhat bumpier, but if mostly 10% tariff rates are the outcome, a US recession should be avoided.

On the plus side, the President is also managing to extract some freer trade commitments and interest rates are likely to ultimately end up lower in this environment. US interest rate reductions however will be delayed as the Federal Reserve first seeks reassurance that US inflation pressures remain constrained to a one-off tariff related increase and do not flow into generalised higher inflation.

This backdrop for Australian businesses is obviously less than helpful, especially for any business manufacturing in Australia or Asia and exporting to the US. At the same time, there are opportunities to develop new export markets in Asia – and especially China – given higher rates of US tariffs in place and likely.

As the Australian economy and businesses confront this uncertain and likely somewhat slower growth outlook, one piece of good news is that unemployment remains very low, with the unemployment rate unchanged at 4.1% in April. Low unemployment helps underpin consumer spending and debt repayment, which prevents a more significant credit cycle. At the same time, the RBA’s second interest rate cut – enacted in mid-May after further progress was revealed in reducing inflation – should also help ease some pressure on businesses and consumers alike in the months ahead, with the likelihood of another couple of interest rate cuts before the end of the year.

CreditorWatch is still expecting pressures on consumers and businesses to remain elevated in the coming six months as slower global growth, slower population growth and the still high cost of living and cost of doing business remain. It’s important to remember that just because inflation has moderated, it unfortunately doesn’t mean prices have fallen!

The trend for CreditorWatch’s proprietary B2B invoice defaults series – and for insolvency data released by ASIC – have continued to track sideways at elevated levels, in recent months. There has also been some levelling out in trends for insolvencies in construction and hospitality, two of the most challenged sectors over the past 12 to 18 months. Continuing to monitor the trend in B2B invoice defaults will be important to detect any noticeable shifts in credit trends in the months ahead as businesses and the economy adjust to President Trump’s new world.