Uncertainty about Trump's tariffs has contributed to weaker outlook for Australia's economy, RBA official says

Australia Broadcast Center

2 days ago

Australia's economy will experience weaker growth, lower inflation and a slightly weaker labour market as a consequence of US President Donald Trump's tariffs, an RBA official says.
Sarah Hunter, an assistant governor at the Reserve Bank, said the uncertainty caused by Mr Trump's tariffs — with their constantly shifting rules and levels — was also making it harder to forecast where the global economy was heading.
She said Australia's economy, at this point, probably would not suffer a material direct negative impact from the tariffs.
But the uncertainty sparked by the tariffs would hurt Australia, and our economy would be hit in other indirect ways, she said.
She said that explained why the RBA revised its official forecasts recently to anticipate weaker growth, lower inflation and a slightly higher unemployment rate over the next 12 months.
"Global uncertainty may weigh substantially on domestic activity if uncertainty remains elevated," she warned.
She said the RBA Board's decision to cut interest rates last month was also informed by this analysis of the problems that flowed from heightened uncertainty in the global economy.
She made her comments in a speech to the Economic Society of Australia Queensland on Tuesday afternoon.
Ms Hunter said uncertainty was "a bit of a slippery concept" and there were lots of ways to try to measure it.
She said one way — the economic policy uncertainty index (EPU) — was based on the number of news articles that mentioned policy uncertainty.
Another way — the volatility index (VIX) — was a measure that captured how uncertain financial markets were about near-term equity prices.
But she said both of those indices saw a sharp rise in uncertainty after Donald Trump's tariff announcement in April, although the VIX has declined in recent weeks.
See the graph below.
And she said there was "ample evidence" that higher uncertainty could lead to declines in investment, output and employment and Australia was not immune from that dynamic.
"Typically, higher uncertainty leads firms to delay decisions that are costly to reverse, like investment and hiring," she said.
"This makes sense intuitively because there is value in waiting to see how things are playing out before making a decision that is (at least partially) non-reversible.
"Some studies find higher uncertainty also has a measurable impact on household consumption, but this is typically more modest.
"Research suggests that the negative impacts of higher policy uncertainty — including trade policy — are largest for businesses, as they typically pull back on investment," she said.
She said that if we saw businesses and households responding as they had in the past, then the current level of uncertainty "will weigh materially on global activity".
"But the unpredictability and unprecedented nature of the current situation makes it hard to be precise on the size of the impact," she warned.
She said at this stage, the RBA's "baseline scenario" for its official forecasts assumed that the prevailing level of global uncertainty would have a "relatively modest drag" on Australia's economy.
But she said if a global trade war erupted, we could see a "substantial pull-back in activity" in Australia.
Overall, Ms Hunter said the RBA would monitor carefully how things unfolded in coming months.
She said the RBA's economists would be watching "key transmission channels" through which the United States' proposed trade tariffs would impact Australia's economy, in their different ways.
She said those channels included:
And she emphasised how difficult it had become to produce forecasts of economic activity in such a febrile environment.
"How will the current unpredictable and uncertain global environment transmit through to the Australian economy?" she asked.
"The short answer is, we can't be completely sure.
"The broad-based nature of the proposed US tariffs, retaliation from major partners and other policy shifts all have the potential to structurally alter the world economy.
"[Our] baseline forecast is for recent global developments to contribute to slower economic growth in Australia and a slightly weaker labour market.
"We also anticipate that, overall, the price of tradable goods will be slightly dampened.
"Together, these two outcomes mean that inflation is forecast to be a little lower than at the February Statement on Monetary Policy, settling around the midpoint of the 2-3 per cent target range.
"This forecast is based on several judgments and assumptions about the potency of the transmission channels I have discussed today," she said.