While business conditions eased in April, consumer confidence is yet to recover to levels reached before the US Liberation Day tariff announcements, economic data has shown.

The Westpac-Melbourne Institute found that consumer sentiment climbed marginally in May but fell short of the optimism levels reached before sweeping tariffs were announced in early April, indicating that tariffs could pose ongoing headwinds to domestic consumer confidence.

Business conditions eased slightly in April, driven by weaker profitability, NAB’s Monthly Business Survey found. Business confidence improved but still remained in negative territory.

“Both business conditions and confidence remain weak relative to average levels, highlighting the risk that the economy is struggling to maintain the pick up in momentum we saw in the last quarter of 2024,” NAB chief economist Sally Auld said.

“We will continue to monitor how business sentiment develops in coming months in light of heightened global uncertainty and domestic developments.”

On Monday, global markets celebrated an announcement that the US and China would slash tariffs on each other for 90 days. However, economists warned that tariffs were still higher than usual and would continue to weigh on global growth.

Oxford Economics said that the tariff pause had prompted them to nudge up their GDP forecasts for China, the US and the global economy, but they anticipated that growth would remain weaker than predicted before US President Donald Trump’s Liberation Day tariff announcements.

Commonwealth Bank economists predicted that the direct and indirect impacts of the US-China trade deal would be minimal for the Australian economy. Regardless, consumer sentiment readings indicated that Australians were wary of tariff developments.

The Westpac-Melbourne Institute Consumer Sentiment Index rose by 2.2 per cent to 92.1 in May. This result was 3.9 per cent below March levels and firmly pessimistic overall, indicating that sentiments were yet to rebound to their pre-tariff levels.

While international uncertainty weighed on consumers, the survey found that Australians were feeling better about spending as inflation moderated and cost-of-living concerns eased, with the ‘time to buy a major household item’ improving by 21.9 per cent compared to a year ago.

Wage growth also outpaced inflation in the 12 months to March, indicating that consumers have started to claw back some spending power. Wages rose by 3.4 per cent in the year to March while core inflation rose by 2.9 per cent, ABS data showed.

“Today’s wage data is the clearest sign yet that working people are getting ahead after a decade of wage suppression and global inflation,” Australian Council of Trade Unions president Michele O’Neil said on Wednesday.

Westpac survey responses also indicated that the decisive federal election result had slightly buoyed consumer sentiments in April.

On the business side, April’s fall in business conditions was driven by a sharp decline in capital expenditure, slumping profitability and softer forward orders, NAB said.

Weaker profitability is aligned with higher purchase cost growth and weaker trading conditions in April, Auld explained.

Soft consumer and business conditions in Australia’s economy could further cement the case for another interest rate cut in May. The RBA said it expected to see a consumer recovery throughout 2025, but noted that significant global uncertainty could complicate the picture.

“The recovery in consumption appears to be underway, but there are material uncertainties around the scale and timing of that recovery,” the RBA noted in February.

All four major banks predict that the RBA will cut the cash rate by at least 25 basis points during its May 19-20 meeting, which would take the interest rate to 3.85 per cent.

“Current policy settings are still weighing on the consumer, as shown by both pessimistic sentiment reads and slow growth in spending,” Westpac said. “As such, some further easing in these restrictive settings is appropriate, particularly given the more unsettled and threatening global backdrop.”