Cliff Notes: Known and Unknown Risks

Australian Economic Momentum

Recent economic data from Australia indicates a continuation of growth, albeit with some deceleration in key sectors. The nation's GDP expanded by 0.8% in the fourth quarter, slightly below expectations but still contributing to a robust annual growth rate of 2.6%. This figure marks the strongest annual performance since the first quarter of 2023, underlining the economy's underlying resilience.

Chief Economist Luci Ellis's analysis points to consumer spending as an area of concern, with a modest increase of only 0.3% in Q4. This subdued growth may be attributed to temporary factors, including milder weather conditions and government electricity rebates that impacted utility expenditures. Furthermore, discrepancies between official statistics and alternative estimates of offshore spending suggest potential revisions in future data releases. Despite these concerns, the outlook for consumer spending remains relatively stable, supported by rising disposable incomes and accumulated savings that buffer against increased interest rates and tax obligations.

The housing market continues to exhibit positive momentum, with national home prices rising by 0.6% in February. However, affordability constraints are particularly evident in major metropolitan areas such as Sydney and Melbourne. While dwelling approvals experienced a decline of 7.2% in January, a substantial pipeline of projects is expected to alleviate supply shortages over the medium term.

Global Economic Signals and Geopolitical Risks

Beyond domestic demand, inventory accumulation contributed positively to growth in Q4, adding 0.3 percentage points, while net exports had a slightly negative impact, detracting 0.1 percentage points. The current account deficit widened to $22.1 billion in Q4, the largest in a decade, driven by increased import volumes and price effects. This trend appears to have persisted into January.

Geopolitical instability in the Middle East remains a significant concern, with potential disruptions to energy supplies via the Strait of Hormuz and broader impacts on sea and air freight. The US government has offered to provide security and insurance for ships traversing the Strait, aiming to mitigate transit risks. Initial estimates suggest that escalating conflict scenarios could have considerable economic repercussions for countries including Australia and New Zealand.

In the United States, the ISM services PMI offered a positive signal, rising 2.3 points to 56.1, the highest level since mid-2022. New orders increased substantially, while employment gains were more moderate. The prices paid component indicated easing cost pressures. The manufacturing sector, however, remains subdued, with new orders slowing and employment remaining below 50. Cost pressures in manufacturing are rising, reaching the highest level since mid-2022.

Asian Economic Outlook and Monetary Policy

In Asia, China's National People's Congress signaled a shift towards prioritizing quality growth and stability. The overall growth target was adjusted to a range of 4.5-5%, and the central government fiscal target was maintained at 4% of GDP. Key priorities include enhancing domestic industries and technologies, supported by a 7.0% annual increase in research and development spending. Stabilizing the housing market remains a key objective, and proactive stimulus measures are anticipated to achieve the growth target.

Japanese financial statement data for Q4 2025 suggests that economic conditions may warrant another interest rate hike by the Bank of Japan in 2026. Profitability has increased significantly, driven by the services sector and the post-COVID tourism boom. Investment growth is also strong, particularly in the services sector, driven by efforts to address labor shortages.