Global uncertainty is the biggest threat to Treasurer’s plan

The Trump administration’s erratic approach to trade policy has started a tit-for-tat trade war involving the world’s biggest economic players. Picture: AFP

The big threat to the Australian government’s 2025-2026 budget is not that key measures might fail to pass parliament, or that pre-election spending sweeteners could keep interest rates higher for longer, but rather the rapidly deteriorating outlook for the world economy.

With a May federal election expected to be called within days, tax cuts, politics and cost-of-living relief for households were the main talking points in the budget delivered by the federal Treasurer Jim Chalmers on Tuesday.

But all that could fade to the background sooner than most realise.

The Trump administration’s erratic approach to trade policy since January has kicked off a tit-for-tat trade war involving the world’s biggest economic players, rattling global supply chains, roiling financial markets and sharply raising the risk of recession in the US – by far the biggest engine of global growth.

The speed and scale of policy changes coming from the White House have already lowered expectations for world growth, something that will surely be felt in Australia, a major exporter of commodities.

The old cliche that if the US catches cold, then Australia risks catching flu, still holds true. And it’s especially true if China is caught up in the malaise, which seems unavoidable.

President Donald Trump has moved quickly to enact tariffs targeting Canada, Mexico and China, and any manufacturers of steel and aluminium, which includes Australia.

It’s widely expected that more action will be announced by Washington in early April as Trump seeks to reshape the world’s economic order more to the US’s advantage.

And if Australia’s budget says anything about that growing threat, its forecasts for rising net debt and ongoing budget deficits suggests reduced scope for the government in Canberra to respond with buckets of fiscal stimulus in the event of another international downturn.

The world growth outlook for this year has already been downgraded by the Paris-based Organisation for Economic Co-operation and Development and Wall Street banking giant Goldman Sachs.

It’s worth bearing in mind that the downgrades are in response to what has come from Washington since the inauguration of Trump in late January, and more is likely in the pipeline.

The language being used by the economic forecasting community is also alarming. They aren’t holding back.

“The world economy looks increasingly fragile, and it would not take much to tip it over,” said Stefan Angrick, senior economist at Moody’s Analytics, in a recent note.

“The US is slowing. Europe is weak. China’s growth is underwhelming despite meeting targets,” he added.

Moody’s Analytics is forecasting that world growth will slow to 2.4 per cent in both 2025 and 2026, down from 2.7 per cent in 2024. In a separate report, Fitch Ratings described the policy changes coming from the White House as breathtaking.

“The new US administration has started a global trade war that will reduce US and world growth, push up US inflation and delay Federal Reserve rate cuts,” Fitch said.

The ratings agency has cut its US growth forecast for 2025 to 1.7 per cent from 2.1 per cent, a level well down from growth rates of closer to 3 per cent in both 2023 and 2024.

World growth is set to slow to 2.3 per cent in 2025, well below trend and down from 2.9 per cent in 2024, Fitch said.

The war in Ukraine and attempts to end it have also prompted a radical reassessment of post-war military alliances, all of which is weighing on business confidence and the outlook for investment.

If firms around the world require anything it’s a sense of long-term certainty. Without it, hiring plans dry up and the acquisition of new plant machinery stalls.

The changes brought by Washington risk the return of stagflation, where inflation rises even as economic growth slows.

It is a toxic mix that every central bank around the world may soon have to grapple with, forcing each to consider whether fighting inflation trumps the need to defend employment.

Most, if not all, will choose the inflation fight, potentially driving up interest rates again.

The truly sad thing is that the US economy entered 2025 in relatively good shape.

Share prices were rising, inflation was falling, the Federal Reserve was cutting interest rates and the job market was relatively robust.

That has been replaced by a trade war, the trashing of relations with Canada – a friend and strategic partner to the US – the shuttering of federal agencies, and a battered equities market.

“It’s too early to call the all clear as there is much more to go on tariffs with April 2 being the big day and (European countries looking) like being big targets; reciprocal tariffs being very complex, arbitrary and irrational,” said Shane Oliver, chief economist at AMP.

“The real risk for Australia remains the impact of a global trade war resulting in weaker global growth and hence less demand for our exports,” he added.

Chalmers will understand the full weight of the changes happening globally, but instead of battening down the hatches, the budget has still been framed to bolster Labor’s chances of re-election.

Elsewhere, the Reserve Bank will be weighing the mix of additions to spending and a fresh round of income tax cuts in mid-2026 against the dimming global outlook.

There’s a lot more to be worried about than just the sugary sweeteners included in Labor’s pitch for another term.

Dow Jones Newswires