I began my career in financial markets in 1987, so it’s fair to say I’ve seen my share of wild rides in those markets and the real economy, but nothing comes even close to what we are witnessing today. This is not because of the scale of the volatility and damage caused to date – there has certainly been a lot worse over the Dow Jones’s long history.
Rather, what sets this period apart is that markets are responding to deliberate decisions made by the president of the world’s largest economy, who appears to understand neither the basic economic principles of trade, nor those of good policymaking process.
The US bond market sell-off was a massive vote of no confidence in the president’s signature economic policy. US bonds have been seen as a safe haven for decades, typically rallying in times of uncertainty, so the plunge in bond prices this week was telling us that trust in the US economy had been substantially eroded.
When the world’s most powerful man says he is coming up with policy in the early morning that is “written from the heart” because people “were getting yippy” we should all be very concerned. All the more so because it was a decision that countermanded another that went into effect less than 24 hours before.
Of course, everyone is now asking: what happens from here?
Firstly, we still don’t know what the ultimate level of tariffs will be when the dust finally settles – assuming that it will settle at some point, which looks a fairly big assumption with this erratic president. Firstly, Trump has announced a “pause”, not a reversal. And, secondly, any relief that the pause might have engendered is today being rapidly eroded as the bilateral trade war with Chine escalates, with tariffs now set at 145% on Australia’s major trading partner.
There are plenty of economic models that can tell us what the ultimate fallout from tariffs will be at a given level. Even with the tariffs set at “liberation day” levels, the cost to the Australian economy was not seen to be large. GDP is expected to be about 0.25% lower this year according eminent economist Warwick McKibbin’s model. For comparison, this is pretty much the same effect as the federal treasury said we should expect in the March quarter from ex-Tropical Cyclone Alfred. The same model suggests the economy will be almost half a percentage point lower as a result of tariffs over the longer term. So, it’s not good, but we’re not talking recession.
However, those forecasts were made when China was facing just 54% tariffs from the US, so we can expect the hit – should tariffs imposed on China remain at the latest 145% rate – to China and Australia to be larger. Our economy was forecast by Treasury in the budget papers to grow by a tepid 2.25% in 2025. Knocking even a quarter of a percentage point of that growth estimate does not augur well for households that have seen living standards eroded for several consecutive years.
But here’s the thing about these forecasts. McKibbin observed that, even while he’s not expecting a recession, that could change in the face of evaporating confidence. Earlier this week, we saw the April Westpac-Melbourne Institute Consumer Sentiment Index fall 6%, a six-month low. Critically, the survey was taken over a few days, and sentiment was a whopping 10% lower in those surveyed after “liberation day”.
We have yet to see the impact on business confidence, which was at subdued levels even before the most recent chaos. Uncertainty is the enemy of investment, and it would be remarkable if the current uncertainty did not lead to at least a pause on investment and hiring decisions for many corporations. The extent of that pause will be critical for our economic decision makers.
Indeed, for policymakers, this is a devilishly tricky time, and perhaps brings back memories of the early days of the pandemic, when, like today, it was unclear what we were dealing with and just how bad things would get. As in those days, our most senior economic policymakers have been gathering to discuss options and scenarios.
The good news is that Australia has plenty of monetary and fiscal fire power available to mitigate against a downturn. The federal budget may be back in the red, but the government has plenty of borrowing power if need be. Similarly, the Reserve Bank has plenty of scope to lower interest rates.
Unlike financial markets, however, our financial regulators are not yet panicking. The RBA governor, for example, has said it’s too early for a large or “out-of-session” interest rate cut, although a standard (25 basis points) cut is now seen by markets as a fait accompli for the May meeting, and more will be needed to avoid a return to the economic doldrums of the past year.
At this point, however, the only thing that can be said with any certainty is that we are now on a rollercoaster ride that none of us are enjoying.
#Australia #economic #rollercoaster #Donald #Trump #Nicki #Hutley
