Donald Trump – a bigger problem than COVID and the GFC combined

By the Reserve Bank’s own words, Donald Trump is more of a threat to the global and domestic economy than the COVID pandemic and the global financial crisis combined.

As it cut official interest rates to a two-year low of 3.85 per cent, and paved the way for looser monetary policy in the weeks and months ahead, the RBA released its latest quarterly outlook for the economy.

Michele Bullock and the Reserve Bank are living in highly uncertain times – mostly due to one man.Credit: Marija Ercegovac

This document, which contains its key forecasts around inflation, unemployment, wages growth and household spending, is the bank’s best guess of how the economy will pan out over the coming two years.

Across 68 pages, the word “uncertain” (or “uncertainty”) was used 132 times.

In the same document a year ago, it was used just 31 times. During the depths of the pandemic in mid-2020, it was used on 52 occasions. As the world’s financial system seized up in late 2008 during the global financial crisis, it appeared just a dozen times.

Explaining the bank’s rates decision at a press conference following its monetary policy committee meeting, governor Michele Bullock said not only was the uncertainty caused by Trump and his trade war a problem, but so was his unpredictability.

In some unusually candid language, Bullock noted the huge amount of time her team of economists are spending trying to understand the geopolitical tsunami unleashed by Trump since his “liberation day” announcement of April 2.

She said her staff had spent a lot of time since the issues “exploded”.

“But we, just like everyone else, were completely blown out of the water by the scale and the scope,” she noted.

The uncertainties caused by Trump’s tariff plans are numerous. They include the strength of the American and global economy, inflation (or disinflation) caused by the tariffs, how Chinese authorities respond, whether Trump will continue with his tariff war, changes to supply chains and how consumers and businesses respond.

The monetary policy statement noted there had been changes to the ability of companies to raise debt while the cost of both private and public debt (interest on government bonds) had also been up and down. That’s not to mention the price of certain assets such as gold, cryptocurrencies and oil.

Combined, all of this contributed to lower outlooks for Australian economic growth and inflation and slightly higher-than-expected unemployment. The RBA’s more gloomy forecasts factor in an assumption of lower official interest rates.

So desperate is the Reserve for some certainty that it’s modelled various scenarios all around Trump’s tariff agenda. The most bleak has Australia in recession (although we won’t be alone, with the US doing it toughest of all).

It’s not just here that uncertainty is front and centre for a central bank.

Bank of England governor Andrew Bailey recently delivered a speech on uncertainty, a sign the issue is afflicting all central banks.Credit: Bloomberg

Just over a week ago, Bank of England governor Andrew Bailey delivered a speech entitled “Monetary Policy in Uncertain Times”. His bank’s most recent version of the RBA’s statement on monetary policy almost trebled the mentions of uncertainty.

In the United States, Fed chairman Jerome Powell is living the very definition of uncertainty. So uncertain is the outlook for the Fed that there’s been an open debate from Trump whether to sack Powell.

Oxford Economics has noted that the impact of Trump’s tariffs could end with global goods trade falling by between 3 and 10 per cent from what it had forecast before Trump’s inauguration. That’s largely in line with other forecasters. But Oxford also has a warning about the uncertainty caused by countries and companies trying to find a way around Trump’s tariff agenda.

“Crucially, the impact of higher tariffs takes between seven and 10 years to fully unfold as trade routes, production and consumption gradually adjust,” the agency’s lead economist, Daniel Harenberg, noted.

Seven to 10 years is a long period of uncertainty.

The Reserve Bank will closely monitor a range of areas to determine the tariff fallout. They include Trump’s tariffs themselves plus “associated policy indicators” such as the prices for financial assets and commodities, business and consumer sentiment, supply chains, shipping figures and trade flows.

“These indicators will be particularly important as it is likely to take some time for official economic data to show the impact of tariffs due to the usual lags in the publication of data, the potential for some demand to be brought forward and lags between when investment decisions are made and when the investment happens,” it noted.

Bullock noted that central banks had been delivered three major shocks in a short period – the global financial crisis, COVID and now Donald Trump.

“The GFC was different to the pandemic. This current shock is completely different as well. It’s coming from a completely different direction,” she said.

“I think we just have to be alert.”

That’s about the only certainty for the Reserve Bank at present.

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