Australia’s global economic outlook under threat from Donald Trump’s looming tariff war
Labor is trying to put a positive spin on the Australian economy, but a closer read of the budget reveals a litany of risks to our growth.
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The government is painting a rosy picture on the outlook for the Australian economy, but a closer read of the budget papers reveals a litany of risks which could upset what are already, at best, only modestly bullish projections for economic growth.
Treasurer Jim Chalmers on Tuesday proclaimed the Australian economy was now “heading in the right direction’’, but the analysis contained in the budget papers provides a more sobering view on the outlook, as the United States’ looming trade war threatens to put a dent in global growth.
The ongoing war in Ukraine, a slowing Chinese economy, and resurgent tensions in the Middle East also all contribute to a “clouded” outlook for the global economy, the budget papers say, with global projections predicting “the longest stretch of below-average growth since the early 1990s’’.
While US President Donald Trump appears to be determined to push ahead with his plan for broad-based 25 per cent tariffs as soon as next week, the potential for onerous tariffs on Australian goods such as steel and aluminium only got a passing mention in Mr Chalmers’ Budget speech.
And while Mr Chalmers on Tuesday sought to put a positive spin on an economy which is forecast to grow at rates well below the long-term average, analysts have warned that most if not all of the growth the national economy has booked in the recent past has been down to government spending.
Mr Chalmers said that overall, despite various economic headwinds, the Australian economy was “turning the corner’’.
“Inflation is down, incomes are rising, unemployment is low, interest rates are coming down, debt is down, and growth is picking up momentum,’’ Mr Chalmers said in his Budget speech, delivered on Tuesday.
“On all these fronts, our economy and our Budget are in better shape than they were three years ago.
“Growth is forecast to pick up from 1.5 per cent this year to 2.5 per cent in 2026–27.
“Unemployment is now projected to peak lower, at 4.25 per cent. Employment and real wage growth this year will be stronger, and participation will stay near its record high for longer.
“Inflation is coming down faster as well.’’
But while tariffs are only mentioned once, and in an offhand manner, in the Treasurer’s speech, the Budget documents foreshadow that the impact of President Trump’s disruption of the global economy via his proposed tariffs could be significant.
“The escalation of global trade tensions has contributed to significant market volatility and made the international outlook more uncertain,’’ the budget documents state.
“Tariffs and other trade barriers could weigh on global growth by disrupting trade and investment flows, driving up costs for businesses and consumers. The related policy uncertainty may exacerbate the risks to business investment, employment and household spending.’’
Any slowdown in global growth would also spill over into lower demand for Australian commodities, which have been the saviour of the federal budget in recent years due to large revenue inflows from iron ore sales.
If the US does impose tariffs, the economies of the US, Australia and China will all suffer, and that effect will be amplified if retaliatory tariffs are imposed, the budget documents state.
In Australia inflation is now expected to fall to 2.5 per cent by the middle of this year, down from 3.8 per cent last financial year, and 25 basis points lower than expected at the end of 2024.
Inflation is forecast to remain around that level over the next four years after a slight increase to 3 per cent next financial year, giving the Reserve Bank of Australia leeway to continue to cut official interest rates.
Wages are expected to grow faster than inflation over the next four years, while the unemployment rate is expected to stay steady at 4.25 per cent out to the middle of 2029.
Morgan Stanley analysts have warned that one of the main issues with the Australian economy is that government spending has been the main driver of growth in recent times.
“Over the past year, government spending has contributed over 100 per cent of economic growth, and about 70 per cent of jobs growth,’’ they said.
“It is important to emphasise that the degree of support that the Government is providing to economic growth is unsustainable.’’
The Budget documents confirm this, saying, “Public final demand helped ensure the economy continued to grow over the past two years’’.
Westpac economists said that while the RBA will take the Budget into account, it is unlikely to significantly influence interest rate decision.
“We continue to expect three more rate cuts this year, bringing the policy rate to 3.35 per cent by end-year,’’ they said.
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