Economic uncertainty is a poison for investors, business, consumers and policymakers – and could be a godsend for ailing incumbents.
The plunge in local share and currency markets due to Donald Trump’s ill-conceived tariff assault has led to traders pricing in a flurry of Reserve Bank interest rate cuts amid fears of a global recession.
The US President’s trade furies will stop companies investing and shoppers spending, push up consumer and producer prices, bust up global supply chains, clip growth and put people out of work.
On the eve of further value destruction, and maybe a global recession, it’s a singular feat of idiotic authorship: The Art of the Dill.
Although our exporters are facing a 10 per cent impost on their US sales, the second-round effects as countries retaliate will ramp up the risks to inflation, growth, jobs, profits, tax revenue and retirement savings.
Jim Chalmers spoke in sorrow about Trump’s “ill-considered and unwarranted” tariffs, but did not miss the opportunity to put the boot into his political opponents or point out to voters that markets were now primed for four rate cuts this year.
Monday’s pre-election economic and fiscal outlook, prepared by Treasury and the Department of Finance, revealed the only shift in the policy baseline since the budget a fortnight ago is America’s trade shock. “This escalation in trade hostilities has created significant economic uncertainty and exacerbates the risks to the economic and fiscal outlook,” the PEFO notes.
Treasury estimates that post-tariffs, the US economy will be permanently smaller by 0.8 percentage points, while the initial hit to inflation there will be 1.4 percentage points.
Economists have ratcheted up their expectations of a US recession.
“We face a highly uncertain outlook with elevated risks of both higher unemployment and higher inflation,” US Federal Reserve chairman Jerome Powell said on Friday, prompting a rebuke from Trump.
Analysis by Treasury of the US tariffs announced last week, and China’s responses, shows only a modest direct impact on our economy.
A mere 4.6 per cent of our goods exports go to the US.
Real GDP this year is expected to fall by 0.1 per cent and inflation to increase by 0.2 percentage points in 2025, with trade-exposed areas such as agriculture, energy, mining and durable manufacturing most affected.
National Australia Bank chief economist Sally Auld says “there is ample scope for policy stimulus to provide support for households and businesses if the global economy enters recession”.
NAB expects the RBA to cut its cash rate by 25 basis points in May, and a further 75 basis points by next February.
Auld adds there’s a risk the central bank “may need to take policy settings to an expansionary footing”.
Treasury forecasts a pick-up in growth next financial year, driven by consumer spending and public demand, and only a slight rise in the jobless rate.
“Given the increase in tariffs announced last week was larger than expected, there is now more uncertainty around the outlook for economic activity, commodity prices and inflation,” the PEFO notes.
“Over the past few days, there have been significant falls in oil prices and a depreciation of the Australian dollar.
“Both developments would have implications for activity and inflation if they were to persist.”
Budgets, too. If commodity prices tank, Canberra’s bottom line will sink further into the red.
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