Westpac’s March 2025 Market Outlook

In the latest edition of the Westpac Market Outlook for March 2025, significant shifts in the global economic landscape have been observed. The recent implementation of the ‘Trump tariff war’ and the subsequent rift between the US and its allies have led to a period of uncertainty and confusion in markets worldwide. The US Federal government’s efforts to reduce its size have added to the turbulence, resulting in a negative sentiment among consumers and a significant drop in the S&P500 index.

Real-time indicators point to a potential contraction in US economic activity, which, while possibly overstated, raises concerns about the overall impact on global trade patterns and confidence levels. This shift in the economic landscape has prompted revised expectations for the Federal Open Market Committee (FOMC) from high inflation risks to weaker growth prospects. Consequently, further interest rate cuts are anticipated sooner than previously forecasted, leading to a notable depreciation of the US dollar.

While the US grapples with its trade disputes, other countries have responded with increased defense spending in Europe and a commitment to supporting domestic demand in China. Australia and New Zealand have remained on the periphery of these developments and have not been directly targeted by US tariff measures. Locally, moderating inflation levels are expected to pave the way for additional interest rate cuts throughout 2025.

In a volatile environment characterized by ongoing disruptions, positive news is expected to be short-lived as uncertainty prevails. The Australian economy, in particular, experienced modest growth in the December quarter, but still falls below long-term growth trends due to challenges with productivity and private sector investments. February saw a decline in commodity prices, with iron ore, thermal coal, and crude oil all experiencing drops.

In the global foreign exchange markets, there has been a reversal in sentiments towards the US dollar, with uncertainties surrounding its future performance. New Zealand has shown signs of economic improvement, largely due to favorable export commodity prices and improved financial conditions. Recent events in the US, China, and other regions have intensified market concerns and underscore the need for a cautious approach to economic policies.

Thematic trends post-pandemic indicate rising long yields in developed markets, driven by inflation risks and evolving debt environments. Government deficits and quantitative tightening by central banks have led to an abundance of bonds, resulting in higher borrowing costs for governments. This shift underscores the importance of a prudent approach to spending and economic management in the face of evolving economic uncertainties.