MNI: Australian GDP To Weather Tariffs, May Cut Chance Rises

Australia’s economy could benefit initially from increased U.S. trade barriers should China and other regional trade partners stimulate their economies, but the longer-term impact will rest on the Australian dollar, its relationship with the terms of trade and the permanence of the American duties, economists told MNI, adding the chaos will likely bring forward Reserve Bank of Australia rate cuts.  

“In previous periods, when the U.S. has created a shock for the rest of the world, Asia has stimulated their domestic economies in response and Australia has actually come out of it looking better than if the U.S. hadn't had a downturn,” said Huw McKay, visiting fellow at the Australian National University and BHP Billiton's top economist from 2016-2024 based in Singapore.

“But China’s ability to offset any shock will be less on this occasion than in any previous episode this century given where its own economy is cyclically and structurally. This time, the gunpowder is a little bit damp.”

On Saturday, Beijing imposed a 34% tariff on imported U.S. goods, retaliating against the identical tariff the U.S. had placed on Chinese products last week. (See MNI EM: China To Hit Back Against US, Seek Europe Ties - Advisors)

TARIFF DURATION

RBA and Treasury modelling had shown only a 0.2-percentage-point hit to GDP driven by U.S. tariffs, though smaller levies had been assumed, noted Andrew Barker, senior economist at the Committee for Economic Development of Australia, and a former economist at the Organisation for Economic Co-operation and Development and at the Productivity Commission. However, recent computable general equilibrium modelling showed Australia's real GDP could see an initial 0.07% bump driven by the U.S. tariffs and proportional responses, while American GDP will shrink 1.45%, he added.  

The impact on global growth and the degree of Asian stimulus will depend on the permanence of the U.S. tariffs, he argued. “If they're more permanent, then we can't just have fiscal stimulus offsetting a permanent effect, and it will have negative effects on growth in our key trading partners, including China," he said. "Then there are genuine negative effects on Australia."

Bilateral goods trade flows, upon which the tariffs had been based, will not change overnight, he continued. "There's also a lot of uncertainty about how other countries will respond, and even about the legal validity within the U.S.”

Trump’s tariffs will likely drive deeper cooperation between regional trading partners and Australia should look to its fast-growing southeast Asian neighbours to insulate itself from decreasing globalisation and avoid retaliation, he added, noting the government’s response to date, focused on limited antidumping measures and advancing market diversification, seemed measured. 

RBA RESPONSE

Barker noted heightened uncertainty, particularly on the duration of the tariffs, will weigh on investment, which will negatively impact demand and bring forward interest-rate cuts. "The next RBA decision and Statement on Monetary Policy in May will be an interesting one," he said.

Markets have now priced in a 3.66% cash rate from the present 4.10% level at the next May 20 board meeting and a 2.89% rate by December.    

McKay said the RBA will find these conditions challenging, as its interest-rate tool is not equipped to handle supply-side driven shocks, while the currency and commodity prices are already well out of alignment in levels terms.

“Ideally, the RBA would have been pursuing a strong currency for most of the 2020s to offset imported inflation shocks and calibrate to the very high level of commodity prices," he said, arguing that monetary policy had weakened the currency, overstimulated corporate profitability, fed public coffers, and enabled government spending. "Unwinding these positions from the current starting point is an unenviable task for both monetary and fiscal policy decisionmakers.”