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Key points:
- Consumer confidence rose to the highest level in three years in March, as the RBA’s mid-February interest rate reduction boosted consumers’ spirits
- Uncertainty and equity market weakness associated with President Trump’s proposed tariff policies pose the greatest near-term risk to the Australian outlook
- For Australia, the greatest impacts will likely be indirect, via slower global growth and confidence effects. For businesses that export, it is important to have diversified markets, appropriate financial buffers for unexpected developments or economic downturns, and constantly examine the productivity of your business processes and workforce.
Consumer confidence rises as RBA eases rates, ahead of Federal Election
Consumer confidence rose 4% in March after the RBA reduced the cash rate by 25bps in mid-February as expected. Consumers are now only slightly pessimistic about their overall circumstances and the outlook, as income tax cuts last year, government support and the interest rate cut have helped offset cost of living pressures a little. The latter remain very significant for households (and also for businesses impacted by many of the same cost increases) and are likely to be a major factor in the upcoming Federal Election, to be held in May. Encouragingly, expectations of unemployment, which are a leading indicator of the unemployment rate, remain very low and if anything, suggest the unemployment rate might even drop a little further in coming months from the very low current level of 4%. That’s a very good starting point for Australian consumers and businesses as international developments start to become less favourable for business.
President Trump’s US tariff policies raise concerns for Australian outlook
Share markets have been both volatile and weak in recent weeks as investors digest the potential threat to growth and profits from President Trump’s tariff policies. Both the US S&P500 and ASX200 are around 9% below their February peaks. The threat of broad-based and very high tariffs being imposed by the US on many countries and reciprocation by these countries is raising concerns of slower global economic growth and a possible US recession, the latter never a good thing for the Australian economy given important growth and financial market linkages. So far only around $1bn of Australian goods have been subject to tariffs (steel and aluminium), though it’s quite possible that meat and pharmaceutical exports may be next (worth around $4bn and $1.4bn respectively in 2024). These are still relatively small compared to the $20bn of Australian goods that China subjected to tariffs and other export controls, a few years ago. These tariffs, while very significant for the industries concerned, of course did not derail the Australian economy, and must be considered in relation to total goods exports in 2024 of over $650bn.
“The trouble with tariffs, to be succinct, is that they raise prices, slow economic growth, cut profits, increase unemployment, worsen inequality, diminish productivity and increase global tensions. Other than that, they’re fine.”
David Kelly, Chief Global Strategist, JP Morgan Asset Management
What it means for my business…
The current tariffs that have been imposed are relatively small compared to the size of global trade and world economies. Market fears are about the much higher and broader rates of tariffs being talked about as these would have more serious impacts on prices and growth if introduced. The first impact of course is the added uncertainty for consumers and businesses around the globe, which acts to slow spending and investment. For Australia, the greatest impacts will likely be indirect, via slower global growth and growth in our major Asian trading partners, given Australia is not a large exporter to the US (around $15bn of goods exports in 2024). Businesses need to follow the breadth and rate of tariffs levied reciprocally by major economies (Europe, China and North American trading blocs). The higher the tariff rates and the more goods covered, the greater the risk of weaker growth, higher unemployment and recession.
The Australian government did not respond with tariffs on China and is not expected to engage in this tariff war either. Prime Minister Albanese described US tariffs as economic self-harm. If the tariffs are large and not quickly reversed, expect potential changes in global supply chains, which may keep shipping costs high. Some Australian businesses may be able to source tariffed goods more cheaply from overseas, though the government will try to prevent this happening as it disadvantages local producers. As always, developments such as these remind of the importance of having diversified markets for those that export, having appropriate financial buffers for unexpected developments or economic downturns, and of the constant need to examine the productivity of your business processes and workforce. The scale of tariffs being discussed hopefully is unlikely to be implemented, as this would have a significant negative impact on both the US and global economy.
