Economic update May 2019

Trade conflict between the US and China escalated after months of seemingly progressive talks. Prime Minister Theresa May announced her resignation as the search for a new leader began. Global equity markets were mostly in the red, but Australia defied the trend to deliver positive returns.


The May Federal Election resulted in the Coalition retaining government, against many people’s expectations. The cash rate remained unchanged following the RBA’s May meeting, but in the Governor’s speech later in the month, suggested the central bank had come to accept the potential coexistence of a low unemployment rate in a low inflationary environment. This prompted economists to bring forward their forecasts to estimate a high probability a rate cut in June.

The Melbourne Institute’s inflation gauge for May was flat at 0.2%, bringing the annual rate of inflation down a touch to 1.7% from 1.8% in the month prior. Retail spending continued to drag as the annual rate of sales volumes declined to 1.1% in the March quarter from 1.6% in the December quarter of 2018. The NAB Business Survey suggested conditions have deteriorated, reading at 3 in April, down from 7 in March. This contrasts with more positive readings of consumer sentiment, lifting from 100.7 in April to 101.3 in May.

The unemployment rate inched up 0.1% to 5.2% in April, attributed to a record high participation rate of 65.8%.

Meanwhile, wage growth continued to reflect possible stagnation, with the wage price index lifting a benign 0.5% during the March quarter, bringing the annual pace to 2.3%.  

Dwelling prices registered a -0.4% decline across the capital cities in May, but the falls in Sydney (-0.5%) and Melbourne (-0.3%) have become less pronounced and have been the smallest in months. This trend of easing price declines corresponds with a recent lift in auction clearing rates and is expected to be further supported by the Federal election outcome. 


Following yet another breakdown in negotiations with China, the US President signed an order to blacklist companies deemed a national security threat, including Huawei, from doing business with US companies. China, signalling little interest in resuming trade talks, has retaliated with threats to restrict exports of rare earth minerals that are used in many consumer electronic devices, along with military, commercial and medical technologies, to the US.

In US data, the March trade deficit was reported to have slightly widened to US$50.0bn from US$49.3bn, driven by an increase in both imports (+1.1%) and exports (+1.05%). The trade gap between China was noted to have fallen to lowest levels not seen since 2016.

Weak inflation continued as core PCE, which the Federal Reserve tracks against its 2% target, was reported to have increased 1.6% on a year-on-year basis in March, the smallest rise in 14 months. In light of this, Fed officials have signalled the potential to consider a rate cut if risks to the domestic economy continue to build.

The ISM indexes for manufacturing, non-manufacturing and services were all reported to hold above 50.0, reading at 52.1, 50.9 and 56.9 in May, respectively, suggesting expansionary activity.

The unemployment rate held at a forty-nine year low of 3.6% in May, while hourly earnings inched up 0.2% bringing the annual pace down to 3.1%. According to the University of Michigan’s survey for May, consumer sentiment jumped 5.2 points to 102.4, a fifteen-year high.


China’s trade surplus narrowed in April to US$13.8bn from US$32.4bn in March off the back of stronger domestic demand underscored by a lift in imports by 4.0% in the year to April, but ultimately weaker exports. This comes at a time where China-US trade tensions have escalated alongside increased tariffs and a tech standoff.

April activity indicators were reported to be weaker following a strong March quarter, bearing in mind that data during the latter period has a tendency to be skewed due to the seasonality impact of Lunar New Year. The annual rate of industrial production fell 3.1% to 5.4% in April, as did retail sales which slowed to 7.2% from a rate of 8.7%. The Caixin PMI for manufacturing in May suggested some firming in the sector with a flat reading of 50.2 in May.

The Indian Election resulted in Narenda Modi securing a second term. He is now faced with the task of reviving the nation’s economy. This comes at a time where growth has been weak amid a slowdown in investment and lower domestic demand.

In Japan, the trade surplus narrowed to JPY 60.4bn in April. Exports continued to fall (-2.4%) as Chinese demand remained weak. Imports, on the other hand, were higher (+6.4%) in the year to April. The Nikkei manufacturing PMI retreated below the 50 mark at 49.6 in May. In the same period, industrial production was reported to have risen 0.6%, but the annual rate remains slow at 1.1%.

While Japanese household spending grew in March, labour cash earnings fell 1.9% from a year ago, which clouds the future spending outlook. Unemployment as measured by the jobless rate dropped 0.1% to 2.4% in May.


European Parliamentary elections took place mid-May which saw populist parties gain seats. The European People’s Party and the S&D Party remain the two largest in parliament. Meanwhile, tensions between the EU and Italy grew as the latter appeared prepared to break rules around debt levels and structural deficits.

On trade, the US made a decision during the month to delay auto tariffs against the EU, originally set for May 18.  

The European Commission revised down its forecast for growth in the zone this year to 1.2% from 1.3% previously. Core inflation in the region was lower at 0.8% in May after an increase in April to 1.3%. The manufacturing PMI fell for the fourth consecutive month down to 47.7 in May, indicating continued contraction in activity.

In Germany, factory orders were reported to have risen 0.6% in March, but was not enough to cover for the prior two consecutive months of contractions.

Consumer confidence in the Euro region improved from -7.3 in April to -6.5 in May, the highest in seven months, but remains in pessimistic territory. More positively, the unemployment rate in the Euro region fell to 7.6% in April from 7.7% in the month prior. 

In the UK, Prime Minister Theresa May announced her resignation as leader of the Conservative Party, with a new leader to be selected before mid-July. After many attempts to deliver a long awaited Brexit, the outcome remains uncertain while a new leader is sought.

April headline CPI lifted to 2.1% from 1.8% in March, the highest in months, underscored mainly by higher energy prices. Industrial production rose by 0.7% in March to bring the annual growth rate of production to 1.3% from 0.4% in February. The Markit services PMI was final estimate came in at 52.9 in May, but manufacturing PMI in May fell below 50 to 49.4. The UK labour market’s strength continued as the unemployment rate edged down to 3.8% in March, the lowest since 1974.

A more detailed summary is also available.

Next: Economic update - April 2019

The first quarter equity market rally continues into April in light of dovish Central Banks and improving Chinese data, while cuts to Germany’s growth forecast reverberates concerns around Eurozone weakness.

Information current as at 31 May 2019.

This article provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material.