Federal budget 2025: Donald Trump’s tariff war impact modest, Treasury says

Donald Trump’s impending trade war will stall Australia’s economic growth, Jim Chalmers claims, despite forecasts barely having changed since a month after the US President was elected.

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Donald Trump’s impending trade war will create a drag on Australia’s economic growth, Jim Chalmers claims, despite Treasury forecasts barely having changed since a month after the US President was elected, and modelling showing tariffs having only a “modest” impact.

The Treasurer expects a meagre 1.5 per cent economic growth this year, down from last year’s budget forecast of 2 per cent and slightly down from the mid-year forecast of 1.75 per cent in December. But next year, Australia will notch up 2.25 per cent economic growth, unchanged from the mid-year forecast.

Senior Treasury officials said expectations would have been higher for Australia’s economic growth in the absence of a Trump administration.

“It’s not only the new policy agenda from the new administration in the US that is causing global economic uncertainty – that's a big part of it obviously,” the Treasurer told The Australian.

“There is a big risk in the global economy that escalating trade tensions mean less growth and higher inflation. It’s a defining influence on the budget.”

But Treasury’s own modelling shows the impact of a first round 25 per cent manufacturing goods tariff would “lead to a reduction in the real GDP of Australia” of barely 0.1 percentage points, per year, and that “the total impact (direct plus indirect) of the tariffs on Australia’s economy by 2030 is expected to be modest”.

The indirect effect of the tariffs is estimated to be nearly four times as large as the direct effect, reflecting the relative importance of affected trade flows between Australia, China, and the US. In the situation where a retaliatory 25 per cent tariff was imposed, the impact on the Australian economy would be at worst 0.2 percentage points a year.

“The escalating trade tensions, and more broadly the global economic uncertainty, is casting a dark shadow over our budget considerations,” Dr Chalmers claimed.

But the modelling also shows hardly any impact on inflation for Australia in both tariff cases, including retaliatory tariffs and both direct and indirect effects.

Treasury has forecast a drop in inflation this year to 2.5 per cent from the mid-year budget forecast of 2.75 per cent.

Next year, when the trade war is expected to be in full bloom, the tariffs might push up prices with Australian inflation to rise 3 per cent, slightly higher than the 2.75 per cent forecast in the mid-year update.

Treasury papers said the US would experience a persistent increase in inflationary pressures because imports become more expensive, while Australia “experiences a small temporary increase in inflation related to a depreciation of the Australian dollar”.

When tariffs are imposed directly on Australian exports that can lower demand, but that can cause the Australian dollar to depreciate, which can make our exports less expensive in foreign currency terms and help exports.

However, some economists expect the bounce in inflation next year to be more likely due to the removal of the governments household energy subsidies.

The Treasurer’s forecasts for exports this year have not changed, remaining at 1 per cent growth as forecast in the mid-year budget. Next year exports slip to 2.5 per cent growth, down from the 3 per cent forecast in the mid-year budget.

Last year the government scrapped about 500 nuisance tariffs, which it expects will lower costs and improve productivity.

Treasury has also forecast that private investment across Australia will grow just 1 per cent, down from the 1.5 per cent forecast in the mid-year update, before eking out 1.5 per cent the following year, down from the 2 per cent forecast less than six months ago.