Australia’s Consumer and Business Sentiment – Mixed Signals Amid Fragile Recovery (May 2025)

Rebound Amid Market Recovery & Political Clarity

Australia’s mixed consumer and business sentiment in May 2025 reflects a fragile economic recovery shaped by easing inflation, lower interest rates, and improved political clarity, offset by persistent structural and global challenges. The Reserve Bank of Australia’s February rate cut helped stabilize household confidence, particularly in spending and employment expectations, as borrowing costs fell and cost-of-living pressures moderated. Inflation has returned to the RBA’s 2–3% target range, further supporting sentiment. However, price pressures are re-emerging—purchase and retail costs have begun rising again—keeping businesses wary about profitability and future investment. The decisive federal election outcome in early May provided a short-term confidence boost by reducing political uncertainty, especially among consumers. Yet, business confidence remains negative, with forward orders flat, capital spending down sharply, and conditions deteriorating in key sectors like mining and transport. These weaknesses suggest a broader hesitancy among firms to expand, despite a stable labor market and easing cost conditions. Additionally, external risks such as U.S. tariff disputes and global supply chain uncertainty continue to weigh on the outlook, contributing to caution in both household and corporate decision-making. Overall, while the Australian economy shows early signs of stabilizing, the sentiment data highlights that the post-tightening recovery is uneven and vulnerable to both domestic constraints and global headwinds.

Australia’s Westpac-Melbourne Institute Consumer Sentiment Index rose by 2.2% month-on-month to 92.1 in May 2025, partially rebounding from a sharp 6.0% drop in April. This marks the third increase in 2025, driven by recovering financial markets and political clarity following the federal election. While the index remains below the neutral level of 100, indicating overall consumer pessimism, several sub-indices pointed to cautious optimism. The ‘family finances compared to a year ago’ component surged 7.0% to 75.1, though expectations for family finances over the next 12 months dipped slightly by 0.8% to 100.7. Short-term economic outlook improved by 2.8% to 93.0, and the five-year outlook edged up marginally by 0.2% to 98.6. The ‘time to buy a major household item’ sub-index rose 3.5% to 93.2, suggesting an increased willingness to spend. Unemployment expectations also eased, falling 2.1% to 121.3, which remains below the long-run average of 129 and indicates rising confidence in the job market. Mathew Hassan, Head of Australian Macro-Forecasting at Westpac, noted that all inflation measures are now within the Reserve Bank of Australia’s 2–3% target band. However, he also cautioned that current monetary policy settings continue to weigh on consumer sentiment. While inflation and interest rate stability have improved the broader outlook, persistent geopolitical risks and underlying financial concerns still temper consumer enthusiasm.

Australia’s NAB Business Confidence Index rose to -1 in April 2025 from a marginally revised -2 in March, marking its highest level since January. While sentiment remains in negative territory, the modest improvement reflects a partial rebound, particularly in manufacturing, along with smaller gains in wholesale, construction, and finance, property and business services. However, business conditions softened, falling to 2 from 3 the previous month, driven by declines in profitability (down to -4 from -2) and sales (down to 5 from 7), while employment held steady at 4. Conditions deteriorated notably in mining and in transport & utilities sectors. Forward-looking indicators were less encouraging, with forward orders stable at -3 and capital expenditure dropping sharply to 1 from 6. Capacity utilization also slipped to 81.4% from 82.8%, indicating that businesses may be operating with increasing slack. Cost pressures persisted: purchase cost growth accelerated to 1.7% from 1.4%, labour costs held at 1.6%, and both product and retail price inflation quickened, with the latter rising from 0.9% to 1.4%. NAB Chief Economist Sally Auld emphasized that both confidence and business conditions remain weak overall, underlining the risk that the Australian economy may be losing the momentum it exhibited in late 2024. The divergence between sectors and the weakness in capital spending and forward orders suggest businesses remain cautious amid persistent inflation and global uncertainties.