US–China ties stabilise, but economic risks are building

Recent talks between the United States and China have helped stabilise relations, but only at the margins, with deeper geopolitical tensions and economic risks continuing to build, Commonwealth Bank economists say.

Trade truce holds, but rivalry continues

CBA Senior Geoeconomics Analyst Madison Cartwright said outcomes from the latest US–China summit were limited, focused on preserving stability rather than delivering breakthroughs.

“They certainly weren’t historic,” he said.

“These were very small scale trade arrangements… about maintaining that trade truce.”

Speaking on the latest episode of the CommBank View: Economics & Markets podcast, Cartwright said that while agreements were reached on some exports, the broader relationship remains largely unchanged.

“We haven’t got much change in the trade relationship.” he said.

More complex issues, including critical minerals - where China dominates the global market - were left unresolved.

Taiwan remains a central tension

Taiwan continues to sit at the centre of the US–China relationship, with recent rhetoric reflecting long-standing positions rather than escalation.

“It was a very clear reminder… that Taiwan remains the centre of their bilateral relations with the United States.”

While near-term sentiment has steadied, the underlying dynamic has not shifted. “This is fairly standard dialogue that we’ve come to expect from them,” Cartwright said.

Ceasefire risks grow as Iran tensions linger

Beyond US–China relations, conflict in the Middle East remains a key source of uncertainty.

“We do not believe that the ceasefire is sustainable, ultimately,” Cartwright said. “The dynamics… underpinning it will cause instability and it will eventually make the ceasefire collapse.”

While there are signs of movement in negotiations, “the agreement can only be reached if the United States makes some sort of concessions to Iran”, he said.

“The problem is the progress is very slow.”

As talks continue, both sides are trying to strengthen their bargaining positions, raising the risk of renewed disruption.

“Both sides are losing patience… and they’re trying to do things to increase their leverage in negotiations,” he said.

China is expected to remain engaged, but its role is limited.

“It’s not going to come to the rescue and it’s not going to solve this problem for the United States,” he said.

Economic impact contained, for now

Also speaking on the latest episode of the CommBank View: Economics & Markets podcast, CBA Head of FX, International Economics & Geo-Economics Joe Capurso said the global economy has so far absorbed the initial impact of the energy shock.

“You might be surprised to hear that… the economic impact has actually been pretty small,” he said.

This reflects both strong starting conditions and the drawdown of existing energy reserves.

“That is because of a very large inventory drawdown of their oil and petroleum product supplies,” he said.

But the buffer will not last indefinitely.

“We would expect to see a greater negative impact over the next few months if the Strait of Hormuz does not reopen soon.”

Inflation pressures building

Inflation is already showing through as the main transmission channel.

“You certainly see that in economies like Australia that had elevated inflation going into the energy shock,” Capurso said.

“High oil prices immediately go through to high petrol prices… you’ve seen some spillover to other prices such as airfares.”

If those pressures broaden, central banks are likely to respond.

“That’s really going to worry central banks… and central banks will tighten in response,” he said.

China slowdown adds to global headwinds

China’s economy continues to show a split between weak domestic demand and stronger external sectors.

“We’re still seeing weakness in domestic demand and strength in industrial production and exports,” Capurso said.

Consumer activity remains subdued.

“Consumer spending was really, really weak. It barely grew in the 12 months to April.”

Investment is also under pressure, particularly in infrastructure.

“The weakest part of Chinese investment has been infrastructure spending… it actually fell.”

While some policy support is likely, authorities are expected to remain measured.

“They have been reluctant to release a big budget bazooka,” he said.

Over time, structural challenges are expected to weigh on growth.

“Potential economic growth is declining over time,” he said

You can read the full report here.