2 weeks Ago By Shane Wright, David Crowe
Donald Trump’s tariff war is set to cost Australia billions of dollars in lost economic growth at the same time it deepens federal debt, as a crucial budget update highlights the danger to the nation from the global trade confrontation. The budget update will heighten the election row over the response to the US president and his tariffs, as experts forecast a recession in major economies, and investors brace for a heavy selling on the Australian sharemarket on Monday. The economic shock comes as Prime Minister Anthony Albanese and Opposition Leader Peter Dutton fight over the best way to persuade Trump to ease the 10 per cent tariff he placed on Australia, including whether to use the defence alliance as leverage.
As one economist predicted the Reserve Bank of Australia would decide on a super-sized cut to interest rates in response to Trump and the fears for growth, others warned that the winner of the May 3 federal election would have to deal with the economic fallout and continued budget deficits. The heads of the treasury and finance departments are due to release their independent report on the nation’s finances, known as the Pre-Election Economic and Fiscal Outlook, in the first days of this week in accordance with federal law that seeks to enshrine “budget honesty” in election campaigns. The update should confirm the budget numbers released by Treasurer Jim Chalmers a fortnight ago, including a $42.
1 billion deficit in the coming financial year, but the document also offers an opportunity for senior officials to reflect on recent events and the potential hit to growth. Gross government debt is expected to reach a record $1 trillion by the middle of 2026. Albanese and Dutton have ruled out making concessions to Trump on Australian policies such as , but they have split over whether to negotiate around the defence relationship to secure changes to the 10 per cent tariffs.
“It is a long and abiding relationship, and the core of an arrangement between us and the United States in resolving this matter will centre around the defence relationship,” Dutton said last Thursday. Albanese ruled that out on Friday, saying: “What we don’t do is, under pressure, make comments about defence being on the table.” Former prime minister John Howard warned against linking tariffs with defence, the US was Australia’s major security partner and adding: “We should never treat that with contempt that using it as a bargaining chip would represent.
” On Sunday, J.P. Morgan changed its forecast for the US, expecting the world’s largest economy to contract by 0.
3 per cent through 2025. Barclays economists said on Sunday they expected both a recession in the US and across Europe, while they downgraded their expectations for China with growth there of 4 per cent. Chalmers’ budget forecast the US economy to grow by 2 per cent this year and next, and for China to expand by 4.
75 per cent. Futures markets point to the ASX200 falling 4 per cent, or more than $100 billion in value, when it opens on Monday. It lost 3.
9 per cent in the two days of trading after Trump’s tariff announcement. Iron ore futures prices fell below $US100 a tonne at the weekend, while the prices of the other key metals such as copper and aluminium also eased on expectations of lower demand. Monash University economist and former RBA economist Zac Gross said the Australian economy and the federal budget were at particular risk because of their heavy reliance on the strength of China’s economy.
There was little chance the budget or economy could escape from the pain unleashed by Trump’s trade war. “China is a big economy with a lot of manufacturing. These tariffs are going to reduce the demand for steel and coal, and that is going to have an impact on Australia and the federal budget,” Gross said.
“What really sinks or swims the budget is the iron ore price. The tariffs on China are so large, and it will affect prices for iron ore and our entire terms of trade, so there will be a hit to the budget.” AMP chief economist Shane Oliver said American households faced a $US600 billion ($982 billion) increase in their tax levels because of the higher tariffs, cutting growth by a percentage point and lifting US inflation by a similar level.
“Global growth could be pushed towards 2 per cent (from 3 per cent currently) depending on how significant retaliation is and how countries like China respond with policy stimulus,” he said. Betashares chief economist David Bassanese said the RBA could be forced into a 0.35-percentage point cut to official interest rates at its May meeting because of the impact of Trump’s trade war.
A 0.35-percentage point reduction would save $140 a month in repayments on a $600,000 mortgage. Bassanese said the March quarter consumer price index to be released in the final week of the election campaign is likely to show underlying inflation at 2.
8 per cent, which would be its lowest level since late 2021. “The net effect of a global trade war could be lower local inflation as many countries look to other markets such as our own to replace the exports they currently sell to the United States,” he said. “That said, Australia will be negatively impacted by a general weakening in global economic activity, especially in the United States.
” In the budget, Treasury noted if the US imposed a 25 per cent tariff on all imports of durable manufacturing goods – effectively what Trump announced last week – it would reduce Australian economic output by a “modest” amount by 2030. But the indirect impact was estimated at four times as large because Australia depends so heavily on China..
