Trump tariffs could plough Australia into recession, Reserve Bank warns
A deep recession and a surge in unemployment could arise if Donald Trump’s aggressive pursuit of tariffs lead to a protracted trade war, the Reserve Bank has warned.
Australia risks entering a deep recession and the unemployment rate could surge towards 6 per cent should US President Donald Trump’s aggressive pursuit of tariffs lead to a protracted trade war, the Reserve Bank has warned.
Amid widespread fears that Mr Trump’s bombastic approach to trade policy could up-end the global economy, fresh analysis released by the central bank on Tuesday modelled the “very possible” scenario where tariffs were ratcheted up to permanently higher levels.
The modelling comes after Mr Trump temporarily backed down from the biggest imposts of his trade assault that were levied against Chinese imports earlier this month, in turn prompting Beijing to lower its reciprocal duties on US goods.
But even as the RBA said the interim easing of hostilities would help remove some of the “downside risk” to growth, its economists warned that international trade tensions could reignite, dashing its expectations of a slow recovery.
Under a “trade war” scenario where tariff rates returned to their initial levels imposed on “Liberation Day” and countries retaliated with levies of their own, the RBA’s analysis found that local GDP growth would “slow sharply” over the coming two years, with the Australian economy slumping into recession by mid-2027.
Australia’s unemployment rate – at 4.1 per cent on its most recent measure – would rise by almost another two percentage points, the analysis shows. This would represent its highest level since the depths of the coronavirus pandemic when businesses were temporarily shut. Domestic inflation also would be softer than expected, falling to just 2 per cent by 2026 and at the bottom of the RBA’s 2 to 3 per cent target band.
By contrast, the RBA’s economists also forecast a separate “trade peace” scenario whereby the Trump administration moved to successfully ink agreements and exemptions with its major trading partners, resulting in a rapid de-escalation in tensions.
For Australia, that would limit the “lasting scarring” effects on households and businesses that would have occurred from the temporary increase in tariffs and trade barriers in recent months.
Such an outcome, however, risked keeping the cash rate, currently at 3.85 per cent, higher for longer, as business investment and household consumption gathered pace, stoking demand and keeping price pressures stronger then they otherwise would be.
“In this scenario, less accommodative policy than is currently priced into market expectations for the cash rate may be required,” the RBA said.
Growth woe not all about Trump slump
The RBA has basically blamed Donald Trump for downgrades to Australia’s economic growth, business investment, household expenditure and slightly higher unemployment.
Dovish Reserve Bank tone raises hopes of more rate cuts
The Reserve Bank may end up easing too much from here, but it will be justifiable as the erratic trade policy of the Trump administration continues to be a threat to the outlook.