Former Reserve Bank deputy governor Guy Debelle once quoted Doors frontman Jim Morrison in a speech when the fallout from the global financial crisis was still front of mind:
“The future’s uncertain and the end is always near.”
In his budget speech last night, Jim Chalmers was somewhat less dramatic, but the warning was very similar.
“The global economy is volatile and unpredictable,” he cautioned.
“The 2020s have already seen a global pandemic, global inflation and the threat of a global trade war.“
Treasurer Jim Chalmers says global economic volatility is threatening Australia’s economic and budget outlook.
Almost in the same breath as Mr Chalmers trumpeted the likelihood of a soft landing for Australia’s economy in its descent from peak inflation, he warned that the global outlook could deal Australia blows on multiple fronts.
“Trade disruptions are rising, China’s growth is slowing, war is still raging in Europe, and a ceasefire in the Middle East is breaking down,” he observed.
Those blows are already landing.
Treasury says the global economy grew 3.3 per cent last year and is likely to growth by 3.25 per cent each year for the next three.
“If realised, this would represent the longest stretch of below-average growth since the early 1990s,” Budget Paper 1 warned.
But things could get even worse — Treasury warned the risks to the global outlook are currently skewed to the downside.
“The global outlook remains clouded by uneven risks in the trajectory of growth, inflation and monetary policy,” Treasury’s number-crunchers noted.
Trump tariffs create ‘significant uncertainty and volatility’
One of the biggest risks in the short-term is US president Donald Trump’s love of tariffs.
In the budget, Treasury did some modelling suggesting that a blanket 25 per cent tariff on manufactured goods coming into the US would likely take more than 0.1 of a percentage point off Australia’s economic growth, while adding that much to inflation.
In Budget Paper 1, Treasury modelled the effects of 25 per cent US tariffs on manufactured goods. (Supplied: Treasury)
That’s mostly because our key export destinations — such as China, Japan and Korea — would be hard hit on their exports to the US.
“The indirect effect of the tariffs is estimated to be nearly four times as large as the direct effect, reflecting the relative importance of affected trade flows between Australia, China, and the United States,” Treasury forecast.
However, that hit to GDP could nearly double if Australia responded with tariffs of our own.
Treasury found that retaliatory tariffs could roughly double the negative effect of the US tariffs. (Supplied: Treasury)
And Treasury warned that its modelling could significantly underestimate the economic impact from Trump’s tariffs and the global reaction to them, with China, the EU, Canada and others having already announced retaliatory measures.
“Escalating trade tensions have created significant uncertainty and volatility in global financial markets,” Budget Paper 1 noted with concern.
“These factors can compound the direct and indirect effects of tariffs on global growth captured in the scenarios above by discouraging investment and dampening consumer confidence.“
The Grattan Institute’s chief executive Aruna Sathanapally said, in a worst case scenario, an escalating trade war could rip the globalised economy apart.
“The first round effects of the tariffs isn’t the main thing to worry about — that will be annoying and unwelcome and probably some bad economic policy,” she told the ABC News budget special.
“But the effects on the global economy, and then the effects in terms of uncertainty and chaos, and what effect that has on people’s investment decisions, those things we need to be really worried about.
“And even more worrying is the international order — if it breaks down, it becomes more troubling and expensive.”
It feels like the end is nearer than usual
We’re already seeing some of those effects.
US companies have been scrambling to import just about anything and everything — from cars to copper, building materials to gold bullion — in order to beat the imposition of the import taxes.
That is boosting economic activity ahead of the tariffs, but this is just bringing forward demand that will leave an even bigger hole once the import taxes come in.
Then there’s those knock on effects to business investment and activity.
Financial news outlet Bloomberg carried a story this week of a US project waiting on the importation of pipes from Germany, where threatened levies on Chinese shipping had indefinitely delayed delivery.
That project is now stuck in limbo and could remain so for months.
Similar stories are proliferating, and businesses are likely to defer many major investment plans until they have clarity about where global trade relationships and tariffs stand.
Donald Trump is by no means the only global leader who has adopted increasingly protectionist policies in recent years.
“According to the IMF, restrictions on trade and investment have grown sixfold in the past 15 years,” Budget Paper 1 noted.
But the sheer scale and immediacy of Trump’s tariff plans threaten to dwarf even the Smoot-Hawley tariffs of Ferris Bueller fame, which infamously deepened and prolonged the Great Depression.
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Jim Morrison and Guy Debelle both may have been a bit ahead of their time. Not only is the future uncertain, but the end feels increasingly near.
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