Economic Crossroads: US, China And Australia
The world’s two biggest economies, the US and China, are at a turning point and Australia is feeling the ripple effects. In 2025, the US is slowing down, China is battling trade tensions, and Australia is waiting on signs of steady growth.
We break down what’s happening in each country, how it’s affecting financial markets, and what it could mean for Australians this year.
The United States (US)
The US economy experienced a notable slowdown in the first quarter of 2025.
The latest GDP data showed the economy contracted at an annual rate of -0.3%.
Businesses stockpiling goods (which increased import volumes) ahead of the implementation of President Trump’s tariff policy was one of the reasons for the contraction in GDP.
The other was a decline in Government spending. Mr Trump’s tariffs are deflationary for the world and inflationary for the US.
China
It is no surprise that China announced a new stimulus package including interest rate cuts and a significant liquidity injection. The Government looks to boost an economy that has been hit by the collapse in the property market and trade war with the US.
China’s factory activity contracted at its fastest pace in 16 months in April following the frontloading of orders to beat the tariffs.
Trade talks between the US and China have driven market optimism over the past few weeks and sentiment has turned positive. The US-China deal has 30% import taxes on Chinese goods, which could still stem trade flow. The trade announcement with the UK has disappointed many in the market. It kept the 10% tariff on imports into the US up from 3.4%. The EU hasn’t even begun negotiations with the US.
Australia
In Australia, the election has come and gone fairly uneventfully for financial markets.
Here’s a snapshot of Australia’s current economic outlook:
- GDP Growth (1.1%): Economic growth remains below trend, reflecting cautious consumer spending and global uncertainties.
- Inflation (2.4%): Headline inflation has returned to the RBA’s 2–3% target range, indicating easing cost-of-living pressures.
- Unemployment (4.0%): The labour market remains resilient, with the unemployment rate stable and below long-term averages.
- Wage Growth (3.2%): Wages are growing modestly above inflation, suggesting stabilising real incomes.
- Cash Rate (3.85%): The RBA has reduced the official cash rate to 3.85%, marking the second cut this year, aiming to support economic activity. This is the first time the cash rate has been under 4% since May 2023.
Outlook for the rest of 2025:
- Economic Activity: Growth is expected to pick up modestly, supported by public spending and a slight improvement in net exports.
- Inflation: While currently within the target range, inflation may experience temporary increases. This is due to the scheduled end of certain cost-of-living support measures.
- Monetary Policy: Further rate cuts are possible but will depend on economic data, particularly inflation and employment figures.
- Housing and Investment: Lower interest rates may stimulate housing market activity and business investment. This is contingent on improved consumer and investor confidence.
What’s next?
The outlook for financial markets remains one of uncertainty reflected by the increase in volatility.
Tight policy, lingering inflation risks and tariff-related drag still weighs on markets.
What seems to have been achieved so far is a whole lot of volatility. There has also been a realisation that the US needs China as much as China needs the US.
Australian companies have lowered their outlooks and full-year forecasts. This signals slower earnings growth for the rest of this year and possibly into next year.
This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your business adviser.
