Australia may dodge global trade war recession but Chalmers flags ‘substantial' risks to growth
A global trade war will not drive Australia's economy into recession, new Treasury modelling suggests, even as Jim Chalmers says he is realistic about 'substantial' risks to growth from Donald Trump's sweeping new tariffs.
The treasurer sought to soothe Australians rattled by Monday's dramatic share market plunge – the worst in five years – saying the country was 'better placed and better prepared' than others to weather the coming storm.
As fears grow that America will suffer a deep downturn that could reverberate around the world, Chalmers unveiled updated departmental modelling that showed the trade shock would trim just 0.1% off Australia's economic growth in 2025 and add 0.2 percentage points to inflation.
'We expect more manageable impacts on the Australian economy, but we still do expect Australian GDP to take a hit and we expect there to be an impact on prices here as well,' he said on Monday.
'I can assure people that in a world of volatility and uncertainty, Australia is better placed and better prepared than our peers.'
In contrast, the US economy would be 0.8% smaller by the start of 2027, with most of the damage in this year, the modelling showed; and Americans would suffer a 1.4-ppt spike in inflation this year. China would also be hit hard, with the economy 0.6% smaller than otherwise.
'This is one of the many reasons that we describe the tariff decision to be ill-considered and unwarranted,' Chalmers said.
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The official modelling reflected sanguine forecasts in Treasury's pre-election budget update, which revealed no change in Australia's economic outlook since the 25 March budget.
While Australia's economy was expected to continue to grow, the Pre-election Economic and Fiscal Outlook (PEFO) document highlighted that 'the increase in tariffs announced over the past few days have been more significant than expected'.
'The potential magnitude and persistence of the economic effects of these announcements has resulted in greater-than-usual uncertainty around the outlook,' PEFO said.
Investors, however, were less assured.
The Australian dollar briefly dipped below 60 US cents on Monday, after dropping 3 US cents late last week – including its biggest single-day drop in over 15 years.
Reflecting the potential for local fall-out from Trump's one-man war on the global trading system, financial markets were now, according to ANZ, pricing in four rate cuts over the coming four Reserve Bank board meetings.
That included the chance of a double rate cut of half a percentage point on 20 May.
As JP Morgan lifted its estimated chance of a US recession to 60%, the director of the ANU's Centre for Applied Macroeconomic Analysis, Warwick McKibbin, agreed that Australia could navigate a worst-case trade war scenario relatively unscathed.
'While the 'liberation day' tariffs are damaging to the world economy, Australia is impacted relatively less than other countries, except for sectors exposed to China such as mining,' McKibbin told Guardian Australia.
'Just as Australia escaped a recession during the Asian financial crisis, Australia's economic and policy flexibility, such as the capacity of RBA to respond, puts Australia in a better position than many countries,' he said.
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As China and the EU threatened to follow Canada and retaliate against Trump's so-called 'reciprocal tariff', due to kick in on 9 April, McKibbin modelled the impact of a trade war on a range of countries.
The yet-to-be-released analysis shows Australian growth would be about 0.2 percentage points lower this year under this worst-case trade scenario, before rebounding in 2026.
As in the Treasury modelling, the impact on inflation would be negligible.
McKibbin, who travelled to Washington DC to do the economic modelling for the Peterson Institute for International Economics, said 'the flexibility of the exchange rate and capacity to expand exports into the rest of the world minimises the losses'.
'The Australian government not responding with additional tariffs is the right response. It is better to focus on open and expanded trade with the other 80% of the world economy.'
The modelling – which reflected more of a worst-case scenario than the Treasury analysis – showed the hit to the US from a global trade shock would be severe.
Assuming the rest of the world retaliates against Trump's reciprocal tariffs, McKibbin's modelling finds American consumers will suffer a nearly 3ppt spike in inflation this year.
There will be a 0.6ppt hit to US economic growth in 2025, extending to 1.6ppts next year. By that time the American economy will be 2% smaller, the analysis shows, despite a series of deep rate cuts by the US Federal Reserve.
While McKibbin's modelling shows Australia escaping unscathed, preliminary modelling by KPMG showed a much larger hit to our economy from a global trade war – highlighting the inherent uncertainty in modelling.
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