The economic consequences of Trump’s tariffs are set to hit in the second half of this year, in the aftermath of our federal election.
There could be a strong triple whammy effect, on house prices, inflation and unemployment.
Depending on your personal circumstances the news isn’t likely to be good. But first, let’s look at the silver lining.
Treasurer Jim Chalmers highlighted the likelihood that the Reserve Bank could soon start cutting interest rates in response to the effect tariffs would have on businesses.
The market is pricing in a mega 50 basis point cut at the next RBA meeting on May 20.
On face value, that’s great news for homeowners struggling to pay the mortgage. But the flow-on effect from that is alarming.
Lower interest rates are likely to fuel higher house prices, shutting more Australians out of the housing market.
And interest rates – a key tool to control inflation – could plunge at the same time inflation rises. That’s a diabolical mixture.
Australians have suffered enough from inflation… A global trade war risks making it worse for all of us
The RBA might have little choice but to dump rates hard and fast to stave off a recession as economic growth collapses.
But Trump’s tariffs and the resulting trade wars could well have an inflationary effect on goods and services.
Inflation exacerbates cost of living challenges, as Australians know only too well after suffering through many years of rising prices.
Meanwhile, the danger of a global recession coupled with lower economic growth courtesy of the tariffs is an uptick in unemployment. In other words: job losses.
It would not be just a minor adjustment, but massive shifts because of whole industries getting caught up in trade wars.
Australia is exposed to the impacts of trade wars because we are a trading nation, heavily dependent on our exports for economic growth and to maintain national prosperity.
While Chalmers wants to focus on lower mortgages for home owners by discussing likely rate cuts, this papers over the bigger conversation Australia needs to have.
If inflation does move north at the same time that house prices rise and unemployment starts to rise, the Australian economy will be in dire trouble. Whether we avoid a technical recession or not.
A global recession coupled with lower economic growth courtesy of the tariffs would spark an uptick of unemployment. In other words, job losses
And the crisis will hit at a time when the budget is broken. Structural deficits lined up for the coming ten years guarantee that if the governnent wants to soften the economic effects of slowing growth with stimulus spending it will add to debt levels that have grown at record pace across the OECD over the past 10 years.
Our politicians’ collective failure to reform the economy when they had the chance leaves Australians exposed to the effects of Trump’s tariffs in a way that we might not have been if both major parties had done their jobs and maintained the reforming records of the Hawke, Keating and Howard governments.
While rising house prices will eventually fall if unemployment rises sharply, that will only leave a swathe of mortgage holders out in the cold.
And new home buyers looking for bargains might not be able to take advantage of any correction in the medium term because their risk profiles might prevent banks lending to them.
That’s especially if stubbornly high inflation eventually forces the RBA to start raising rates again once the economic doldrums start to pass.
It’s a dangerous economic period that is ahead of us and unfortunately neither major party has covered itself in glory over recent years so that voters can be confident they are up to the challenge of steering a pathway through the impending doom.
