Australians are being assured the nation is well-placed to avoid a recession as the Reserve Bank expresses alarm over Donald Trump’s trade war “rollercoaster”.
Forecasts released by the Reserve Bank of Australia have painted a bleak picture of the economic blowback from a scenario in which the world descends into all-out tariff wars.
“Uncertainty” was cited 132 times in the central bank’s quarterly economic update, with forecasters forced to war-game different scenarios to help guide the board’s decision-making in an era of heightened volatility.
“It’s been a complete rollercoaster,” RBA governor Michele Bullock said of the US president’s ever-changing tariff pronouncements.
The bank had been “completely blown out of the water by the scale and the scope” of the trade shock, she said, admitting there was an outside chance Australia could tip into a recession if the bank’s worst fears came to fruition.
A burst of growth at the start of the year has all but disappeared, according to Westpac and the Melbourne Institute.
Their leading index, which indicates the likely pace of future economic activity, slowed from 0.5 per cent to 0.2 per cent in April, it revealed on Wednesday.
“The shift reflects heightened uncertainty around global trade and a less supportive commodity price backdrop,” said Westpac forecaster Matt Hassan.
“The overall picture is consistent with some stalling in what was already expected to be a gradual growth recovery for the Australian economy in 2025.”
Treasurer Jim Chalmers assured Australians that an economic downturn was unlikely.
“In fact, the revised Reserve Bank forecasts that they released yesterday have growth stronger next year than this year, and so do our own Treasury forecasts,” he told ABC News Breakfast on Wednesday.
“And so our expectation is that our economy will continue to grow and that growth will strengthen next year.”
The RBA downgraded its forecast for GDP growth this year from 2.4 per cent to 2.1 per cent – a loss of about $8 billion from the national economy.
Westpac is less optimistic, predicting historically “sub-par” annual growth of 1.9 per cent.
But that’s still a marked improvement from the 1.3 per cent the economy grew by in 2024.
Australia was in a unique position of having inflation back on target, at the same time as the economy was growing and unemployment was low, Dr Chalmers said.
“What that means is we are well placed and well prepared for this global economic uncertainty, which is coming from decisions taken in Washington DC, but also from a slowing Chinese economy and conflict in other parts of the world.”
Mortgage holders can be consoled by the promise of more rate cuts this year if the Reserve Bank’s baseline forecast is correct and inflation and the economy grow slower than previously expected.
There was little doubt about the RBA’s decision to slash the cash rate by 25 points to 3.85 per cent on Tuesday.
Markets had fully priced in the central bank’s second interest rate reduction of 2025 ahead of its board meeting, given inflation was back in its two to three per cent target band and the diminished outlook for the economy.
Futures traders grew more certain of further cuts after Ms Bullock’s revelations that the board considered a bumper 50 basis point cut.
NAB chief economist Sally Auld was alone in predicting a 50 basis point cut ahead of the meeting.
While that didn’t happen, bond yields swooned following Ms Bullock’s revelation.
The “jolt” sent through the market showed traders were surprised by the board’s dovishness, Ms Auld said.
Following the announcement, the market was pricing in almost three more cuts before the end of the year, which Ms Bullock did not push back against, unlike after the board’s first move down in February.
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