SKILLSOOP Economic Report May 2025

• • Supply Chain Commodity Inputs & Trends
• • Australian Economy – Economic Metrics & Analysis
• • Japan’s Economy – Trends/Considerations
• • China’s Economy – Trends/Considerations
• • US Trade War & Economy – Analysis

Australia

The recent appreciation of the Australian dollar (AUD) against the US dollar is primarily driven by the latter’s economic instability, as the United States continues to isolate itself from key global partners in Asia and Europe. However, this perceived strength of the AUD is largely illusory. When measured against tangible assets such as land, real estate, and gold, the currency is in fact weakening in real terms. Official figures place Australia’s inflation rate at 2.4%. Yet, recent surveys suggest that the cost of a standard basket of consumer goods has risen by 64% over the past three years, highlighting significant discrepancies in how the Consumer Price Index (CPI) is calculated and questioning its accuracy as a measure of cost-of-living changes.

Australia’s annual GDP growth currently stands at 1.3%, with the total GDP valued at AUD $1,728 billion. Sectoral contributions show a rise in government spending, utilities, and agriculture, whereas mining, construction, and manufacturing are experiencing a downturn. Labour market dynamics further underscore economic headwinds. Labour costs are increasing amid declining productivity, job vacancies are falling, and wage growth continues to stagnate in the private sector. These indicators collectively point to a challenging economic environment, despite superficial currency strength.

Import prices have also been on an upward trend, although this may moderate if the current strength of the Australian dollar persists—likely, given the continued engineered weakening of the US dollar. Meanwhile, the Reserve Bank of Australia (RBA) has maintained the official cash rate at 4.1%. Notably, the RBA’s balance sheet has expanded, potentially signalling a return to quantitative easing practices, such as bond purchases, aimed at managing yield volatility amid heightened global debt market turbulence.

Australia has, for a long time run an account deficit, a long-standing structural feature of its economy,  meaning the nation remains a net borrower. This deficit is calculated through the sum of net exports, primary income (which includes returns on labour and capital), and secondary income (mainly interbank transfers between residents and non-residents). While persistent, this borrowing position becomes more precarious under deteriorating global financial conditions.

On the domestic front, leading indicators point to a slowing economy. The Manufacturing Purchasing Managers’ Index (PMI) has resumed its downward trajectory, paralleled by a decline in the services sector and a notable drop in capacity utilisation. This metric—reflecting how effectively businesses deploy resources—suggests overinvestment relative to prevailing demand, potentially prompting structural adjustments across key sectors. According to observations by SKILLSOOP, these shifts are already underway in both manufacturing and mining operations. The broader business environment is also under strain. Corporate bankruptcies are rising sharply, while sentiment among small businesses and consumers continues to erode. Overall, the trends reflect a fragile economic backdrop that may require careful policy calibration in the months ahead.

Japan

Japan is currently grappling with mounting debt challenges, exacerbated by a strengthening Yen. The United States is reportedly aiming to stabilize the USD/JPY exchange rate within the range of 100 to 120 to boost American export competitiveness. At its weakest point, the Yen traded at 160 to the dollar. A significant appreciation of the Yen will have adverse implications for Japanese exports, as the cost of goods increases in foreign markets—even in the absence of new tariffs—potentially raising the price of Japanese imports into the U.S. by 10% to 15%.

This currency dynamic comes at a time when global demand for imports is softening. Notably, U.S. demand for container shipping has fallen by 64%, underscoring a marked contraction in import activity and broader economic stress. For Japan, this trend could lead to significant fiscal pressure: with debt servicing already consuming approximately 10% of government revenues, any further decline in tax receipts due to economic slowdown will amplify the fiscal burden.

In addition to currency-related challenges, Japan is facing intensifying competition from China across key export markets. In March, Japanese export growth contracted by 4%, a sharp drop from the 11.4% increase recorded in February. While existing tariffs on metals such as steel and aluminium had already been factored into this downturn, the effects of new U.S. tariffs on vehicles have yet to be fully realized. See spot price in commodity charts

The situation is further compounded by declining exports to major Asian markets. Exports to China have dropped by 5%, while those to Hong Kong and Taiwan are down nearly 20%, and to South Korea by approximately 12%. Particularly concerning is the contraction in semiconductor capital equipment exports—a critical segment for Japan’s advanced manufacturing sector.

While the United States is unlikely to welcome any large-scale divestment of U.S. Treasuries by Japan, Tokyo finds itself in a precarious position. Rising interest rates and a stronger Yen increase the real value of Japan’s debt obligations. Although a significant portion of this debt is domestically held—somewhat mitigating the risk—the overall economic picture remains fragile, with limited margin for fiscal or monetary missteps.

China

Capital is increasingly moving into alternative government bonds (US pivot) and gold, signalling a shift in global financial sentiment. The world may be undergoing a process of de-dollarization, as concerns grow over the sustainability of U.S. debt. While it’s unlikely that the U.S. dollar will completely collapse, it is becoming more probable that it will serve as just one of several reserve assets in a diversified global system. The practice of borrowing money to pay for past borrowing seems to be reaching its limits, suggesting that the financial game may be up.

One pressing question is whether China is actively dumping U.S. Treasuries—a move that would reflect a broader economic decoupling between the two powers. There is little doubt that a significant economic breakup is underway. Amid rising tensions, China is using the ongoing trade war as an opportunity to strengthen its regional relationships across Asia. Although China has historically had numerous political and ideological differences with its neighbours, these may become secondary as countries seek to diversify their trade partnerships and reduce dependence on Western economies.

The China’s economy, heavily reliant on exports, faces its own set of challenges, particularly as global demand for manufactured goods declines. This downturn puts immense pressure on government finances and employment. Nevertheless, China remains in a relatively stronger position than the U.S., especially in terms of industrial production capacity and geopolitical leverage—both of which have been amplified by the alienation of U.S. allies during the Trump regime. Furthermore, China’s advancements in surveillance and technology provide the government with tools to manage social unrest more effectively.

Despite these strengths, China is not without vulnerabilities. The property market is in severe decline, mirroring some of the economic weaknesses seen in the U.S. Moreover, China, like the U.S., is adopting a more aggressive stance toward nations that engage in trade deals with its rival, adding to the global climate of economic and diplomatic tension.

US

Capital is increasingly moving into alternative government bonds (US pivot) and gold, signalling a shift in global financial sentiment. The world may be undergoing a process of de-dollarization, as concerns grow over the sustainability of U.S. debt. While it’s unlikely that the U.S. dollar will completely collapse, it is becoming more probable that it will serve as just one of several reserve assets in a diversified global system. The practice of borrowing money to pay for past borrowing seems to be reaching its limits, suggesting that the financial game may be up.

One pressing question is whether China is actively dumping U.S. Treasuries—a move that would reflect a broader economic decoupling between the two powers. There is little doubt that a significant economic breakup is underway. Amid rising tensions, China is using the ongoing trade war as an opportunity to strengthen its regional relationships across Asia. Although China has historically had numerous political and ideological differences with its neighbours, these may become secondary as countries seek to diversify their trade partnerships and reduce dependence on Western economies.

The China’s economy, heavily reliant on exports, faces its own set of challenges, particularly as global demand for manufactured goods declines. This downturn puts immense pressure on government finances and employment. Nevertheless, China remains in a relatively stronger position than the U.S., especially in terms of industrial production capacity and geopolitical leverage—both of which have been amplified by the alienation of U.S. allies during the Trump regime. Furthermore, China’s advancements in surveillance and technology provide the government with tools to manage social unrest more effectively.

Despite these strengths, China is not without vulnerabilities. The property market is in severe decline, mirroring some of the economic weaknesses seen in the U.S. Moreover, China, like the U.S., is adopting a more aggressive stance toward nations that engage in trade deals with its rival, adding to the global climate of economic and diplomatic tension.

According to Steve Hanke, a renowned American economist and professor of applied economics at Johns Hopkins University, geopolitical trust in the U.S. economy is deteriorating. Hanke argues that the United States is no longer adhering to its own legal and institutional frameworks. He highlights the unprecedented number of executive orders issued during the Trump administration as indicative of a broader regime shift—one with profound implications for both domestic governance and the international order. The West, he suggests, is under immense pressure.

One of Hanke’s most compelling observations is that the U.S. and broader Western economies are exhibiting characteristics typically associated with emerging markets. This is evidenced by declining performance in bonds, the U.S. dollar, and equities—hallmarks of financial instability. Hanke contends that the Trump administration is continuing many of the economic missteps initiated under the Biden presidency, albeit from a different ideological stance. While the Biden administration expanded credit, authorized trillions in federal spending, and forgave over 30 million student loans, Trump’s economic strategy is characterized by an aggressive retrenchment. This includes imposing tariffs, levying fines on Chinese-owned ships in U.S. ports (up to $50 per ton), and reversing student loan forgiveness to ensure those debts are repaid.

Although the reversal of some Biden-era policies may appear constructive to fiscal conservatives, the velocity of these changes is more consequential than the changes themselves. As with interest rates, it is not merely the direction but the rapid pace of movement that inflicts the most economic damage. Historically, average interest rates have hovered above 6%, shaping investment, consumption, and economic behaviour accordingly. Abrupt shifts in policy are akin to tearing off a bandage before the wound has healed.

Trump’s escalating trade war with China is also coming under scrutiny. While publicly framed as a strategic defence of American economic interests, the underlying motive is to proactively manage the decline of a global superpower, much like the late Roman Empire. U.S. policies of overleveraged consumption, rising debt, and military overreach have eroded the post-WWII global advantage. Notably, international demand for U.S. Treasuries has waned, evidenced by a recent boycott from primary dealers, who refused to absorb additional U.S. debt—an act that has contributed to rising 10-year bond yields, despite falling inflation.

Oil

Despite easing trade tensions between the U.S. and China, oil prices continue to decline, with Brent crude down 2% and U.S. oil prices plummeting 22% since their January peak. The prolonged price drop is driven by growing concerns over a global oil supply glut and recession fears exacerbated by recent trade policies. The EIA forecasts that global oil inventories will increase starting in the middle of 2025 as OPEC+ members unwind production cuts, production grows in non-OPEC countries, and oil demand growth slows. As a result, they project the Brent crude oil price will average $68 per barrel in 2025. Source EIA & Business Insider

Natural Gas

Policy uncertainties in major exporting countries, such as Australia, are causing concern among key importers like Japan. Potential shifts in export policies could impact global supply chains and pricing. While production remains robust, supply growth is not keeping pace with demand. The International Energy Agency (IEA) notes that global gas markets are set to remain tight in 2025 as demand continues to rise and supply expands more slowly than before the pandemic and energy crisis. Source EIA & Reuters

Copper

Copper prices are projected to experience moderate growth during May and June 2025, influenced by factors such as global demand, supply constraints, and macroeconomic conditions. The energy transition, including the adoption of electric vehicles and renewable energy infrastructure, is driving increased copper consumption. Global economic conditions, including industrial activity and construction, particularly in major economies like China, influence copper demand and pricing

Iron Ore

Iron ore prices are projected to remain under pressure during May and June 2025, influenced by a combination of oversupply, weakening demand, and geopolitical uncertainties. China’s property sector downturn continues to suppress steel production, leading to reduced iron ore consumption. Despite this, China’s iron ore imports are expected to reach a record high in 2025, driven by stockpiling of cheaper ore and increased supply from major producers. While some countries like India have seen growth in steel production, overall global steel output has declined, impacting iron ore demand. Sources Reuters & Discovery Alert

Aluminium

Aluminium demand is influenced by its applications in industries like transportation, packaging, and construction. While there is a general expectation of steady demand, recent adjustments in global economic growth forecasts have led to more conservative demand projections. Trade policies, particularly the imposition of tariffs, have introduced volatility into the aluminium market. For instance, recent tariff hikes have affected trade flows and could impact pricing dynamics. Aluminium prices in May and June 2025 are expected to experience moderate fluctuations within the $2,450 to $2,600 per metric ton range. Sources Reuters & ING Think