Economic instability and the Australian economy following US regulatory shock

Trump’s tariffs, twists and u-turns are testing the world order. Australia’s next government will need a new policy agenda to manage the turmoil.

Australians vote on 3 May to elect their 48th Parliament. Until quite recently, the economic narrative set to shape the preceding election campaign — for good or ill — looked assured. Politicians were destined to joust over inflation, interest rates and the dramatic cost-of-living shock that had so infuriated people everywhere that 2024 witnessed an almighty voter backlash against incumbents across the developed world.

Australia fits that pattern. Our headline inflation rate had surged to a post-pandemic high of 7.8 per cent in the December quarter of 2022 and then remained above the top of the Reserve Bank of Australia’s (RBA) 2–3 per cent target band through the June quarter of 2024. The central bank responded with a cumulative 425bp of rate increases, driving the target cash rate up to 4.35 per cent. The result was a severe squeeze on households. Real wages went backwards, and the economy fell into an extended per capita recession. The government looked in the kind of trouble that had demolished the electoral prospects of its international counterparts.

Still, enough had changed by the start of this year to make the electoral contest more competitive. Headline inflation — assisted by energy bill relief — was within the target band by the second half of 2024 and underlying inflation was hovering just above the top of it. The RBA delivered a first, albeit cautious, rate cut in February this year. The economy had exited the per capita recession and the labour market remained healthy. Australia’s central bank looked on course to deliver a soft landing.

How things change

These shifting economic fortunes appear in the AICD’s Director Sentiment Index (DSI). The H2:2024 DSI (conducted 10–20 September 2024) put overall sentiment at a post-pandemic low of –33.6. Respondents cited the cost of living (43 per cent of total mentions) and inflation and interest rates (42 per cent) as the top economic challenges facing Australian businesses; domestic economic conditions were the joint-top issue keeping directors awake at night (39 per cent of total mentions); and almost half (46 per cent) of directors judged it likely that Australia would fall into recession over the following 12 months.

Our new H1:2025 DSI (conducted 19 February–3 March 2025) shows that overall sentiment remained low earlier this year, mired deep in negative territory for a sixth consecutive survey. Even so, the index was up almost 10 points at -23.9, marking the largest gain for the DSI since 2021. That reflected double-digit increases for the economic outlook and business conditions. The share of respondents citing the cost of living (32 per cent) and inflation and high interest rates (21 per cent), while still elevated, has fallen markedly; domestic economic conditions no longer keep quite as many directors awake at night (32 per cent). Perceived recession risk has declined significantly, with the share of directors judging a recession likely over the next 12 months now closer to a quarter (26 per cent).

This, then, was the economics of the election everyone thought we were going to get. This was the campaign the major parties began fighting, pitting one side’s minor income tax cut against the other’s temporary fuel tax reduction.

Trump interjection

But the US Trump administration delivered a sequence of shocks that upended the world trading system and threatens the global economic outlook.

Those shocks began on 1 February, when the White House announced tariffs on China, Canada, and Mexico. Tariffs on China went ahead as scheduled while the implementation process for Canada and Mexico proved chaotic, marked by pauses, delays and eventually exemptions for USMCA-compliant products. On 10 February, the administration announced 25 per cent tariffs on steel and aluminium imports with effect from 12 March. On 13 February, it released a disconcerting policy memorandum on Reciprocal Trade and Tariffs. On 4 March, it increased its new tariffs on China from 10 per cent to 20 per cent.

The announcements kept coming. On 26 March, for example, the administration threatened 25 per cent tariffs on cars and car parts. More tariffs are inbound — on pharmaceutical products, on lumber, timber and copper.

Then came the big one (at least, at the time of writing). On 2 April, Trump made his “Liberation Day” announcement of a near-universal 10 per cent tariff applying to most imports into the US alongside an “individualised reciprocal higher tariff” — that isn’t really reciprocal — of up to 50 per cent on “the countries with which the United States has the largest trade deficits”.

Massive fallout

The collective impact of these measures will drive the US effective tariff rate up to (much) more than 20 per cent. That’s higher than the rate reached under the infamous 1930 Smoot-Hawley Tariff Act, which means the world’s largest importing country — with a share of about 13 per cent of global merchandise imports — is returning to near-19th century levels of protectionism. The immediate response of international financial markets — which found themselves contemplating a future of lower growth, higher prices and increased geopolitical tensions — delivered a sharp global stock market correction.

These latest developments arrived after our H1:2025 DSI survey had closed, but the results confirm directors were already concerned by the direction of events. Global economic uncertainty has jumped to the top of the list of economic challenges facing Australian businesses. Global protectionism has surged up the same rankings. According to the DSI, roughly nine out of 10 respondents judged that, even pre-Liberation Day, escalating global trade tensions were set to threaten Australian and global economic outlooks.

Set against this backdrop, the early sound and fury of the election campaign — and the political offers that accompanied it — looks to have missed the big picture. By the time this column goes to print, this policy negligence might have been corrected. Either way, whichever party wins this election will face a quite different world economy. It will require a new policy agenda to manage it.

This article first appeared under the headline 'Trouble in paradise’ in the May 2025 issue of Company Director magazine.