Inflation in Australia is 'yesterday's problem' after Trump's tariffs

What impact will US President Donald Trump's new tariffs have on the global economy? What will they do to inflation and growth in Australia? 

Economists have scrambled to answer those questions, and they say the chances of interest rate cuts have increased in Australia, because concerns could soon shift to supporting economic growth. 

What impact will Trump's tariffs have on Australia's economy?

Economists say the "direct" impact of President Trump's new tariff regime on Australia's economy will be small.

That's because Australia received a tariff rate of 10 per cent, which was the smallest tariff rate applied to any country, and the US isn't a huge export market for Australia (although individual sectors of Australia's economy, such as the beef industry, will have to adjust).

They say in 2023-24, Australia exported roughly $22 billion worth of goods to the US, which was less than 5 per cent of our total goods exports.

CBA economists Kristina Clifton and Samara Hammoud estimate that a modest 0.2 per cent of Australia's nominal GDP could be at risk from Trump's tariffs over the next few years.

To put that in perspective, they say Canada's GDP could decline by 2.6 per cent over the next few years, while Mexico (-2.4 per cent) and China (-1.7 per cent) will also be hit heavily, and the Eurozone (-0.8 per cent) and Japan (-0.7 per cent) will be moderately hit.

However, economists say the "indirect" impact of Trump's new tariffs could be a problem for Australia, depending on how the tariffs disrupt trading patterns and damage global growth.

That's because the US has put large tariffs on Australia's major trading partners.

For example, it has put a 64 per cent tariff rate on Chinese imports, and a 24 per cent tariff rate on Japanese imports.

Those two countries accounted for 50 per cent of Australia's goods exports in 2023-24 (36.8 per cent of Australia's goods exports were sent to China, 14.5 per cent to Japan).

And CBA's economists say the global impact of Trump's tariffs could be large if China's economy slows in response to the tariffs, although they expect Chinese authorities to deploy additional stimulus to prevent China's economy falling short of its "around 5 per cent" GDP growth target.

A marked slowdown in China's economy will have ramifications for Australia, so we'll have to wait and see.

"The indirect impact from our trading relationships with other economies, especially China, is more uncertain and will take some time to unpack," CBA senior economist Belinda Allen said.

Is inflation now 'yesterday's problem'?

Earlier this week, when the Reserve Bank Board kept interest rates on hold, financial market pricing suggested there was a 70 per cent chance that the RBA would cut rates in May.

But after Trump's tariff plan was announced yesterday, that jumped to a 90 per cent chance.

Financial markets also think there will be another rate cut by August, and a third by November.

The odds for all three rate cuts increased noticeably yesterday, on the expectation that Trump's tariffs will slow down global growth and therefore dampen inflation (although in the US, the tariffs could cause a jump in consumer prices).

Traders are clearly betting the RBA and other central banks will have to respond to the slowdown in global growth by cutting rates.

"The RBA is expected to shift their attention to shoring up growth.

"The reason for the dramatic shift is [the] tariff announcements went far beyond what was expected, and have increased the chances of a trade war and recession in the US.

"Furthermore with goods from countries like China and Vietnam now effectively shut out of the US we expect to see a flood of cheaper goods into other Asian markets including our own," he said.

Can we avoid a global recession?

It's a fluid situation.

Economists say we'll have to see whether Donald Trump will give exemptions to individual countries, during trade negotiations in coming months, before we know what the final structure of his tariffs looks like.

But let's assume no country will get an exemption from the tariffs as they've been announced.

Ben May, the director of global macro research at Oxford Economics, says the fact that President Trump's tariffs will begin almost immediately, rather than being phased in over time, means they'll have a big negative impact on global economic activity.

He says there's a real possibility the global economy will slow markedly.

"The sudden tariff hikes may lead to more front-loaded impacts, and could lead to greater near-term supply-chain disruption, as there is less time for firms to adjust to the new environment," he said.

"In two or three years' time, US imports could fall by around 15 per cent due to discounted reciprocal tariff hikes set to take effect within a week.

"Along with ongoing uncertainty about future trade policy, this is likely to lead to a marked downgrade to our world GDP growth forecasts, with annual global growth plausibly falling below 2 per cent [this year]. 

"This would still be some way off the technical definition of a global recession — for this to happen, GDP growth would need to fall below the rate of world population growth, which is currently about 0.9 per cent in annual terms. 

"Nonetheless, it would be the weakest annual growth rate since the global financial crisis, excluding the pandemic period," he said.

Trade diversion is a risk (and opportunity) for Australia

Economists say for Australia, much will depend on how economic activity in Asia is impacted.

That's because 85 per cent of Australia's goods exports go to Asia, accounting for 18 per cent of Australia's GDP.

They say it's hard to know what will happen at this stage, and whether or not individual countries manage to negotiate exemptions with the US.

But if the tariffs remain in place indefinitely, every affected country will adjust their trading relationship with the United States, and with each other.

And countries will look for potential gains to be made from alternative trading relationships, and those new relationships will re-wire global trade.

For example, when geopolitical relations broke down between Australia and China in 2020, China imposed tariffs or other trade restrictions on a range of Australian goods including coal, timber, lobsters, barley, cotton, wine, beef and lamb.

That led to some initial pain for Australia's exporters, but Australia's exporters eventually found new markets for their goods and many of those new trading relationships have solidified, even though China has now removed those trading restrictions on Australia.

Economists say there will undoubtedly be some trade diversion in response to Trump's tariffs, and that could work in Australia's favour or against Australia's favour, depending on the situation.

Prime Minister Anthony Albanese says he won't retaliate directly against the US tariffs, but he has announced a range of policies to help Australia's exporters find new markets overseas.

These include $50 million of emergency funding for affected industries, a new Economic Resilience Program with $1 billion in zero-interest loans to help producers find new export opportunities, the strengthening of anti-dumping rules, and the establishment of a critical minerals reserve.