‘Liberation Day’ arrives after RBA holds

This week saw the Trump administration announce a near-universal tariff of 10 per cent on imports into the United States, plus higher ‘reciprocal’ tariffs (that aren’t really reciprocal in any normal understanding of the word) of up to 50 per cent on countries that the administration deems to be running unacceptably high bilateral trade surpluses.

When implemented alongside other recent trade policy initiatives, this week’s measures will return US protection to near-Nineteenth Century levels. They are likely to push down US and global growth, drive up US prices, threaten business and consumer confidence, further increase economic uncertainty, and further undermine whatever yet remains of the old WTO-based international trading system.

Earlier this week, the RBA’s new Monetary Policy Board decided to leave the cash rate target unchanged at 4.1 per cent. The decision to hold had been widely anticipated by economists and markets, as flagged in last week’s note, and was also consistent with the very cautious rhetoric that had been deployed by Martin Place following February’s 25bp rate cut, which had all but ruled out any additional cuts in the near term. In line with that sentiment, Governor Bullock confirmed in her press conference that the Board did not even formally discuss the case for a potential rate cut at its meeting.

Unlike this week’s monetary policy meeting, however, expectations for the upcoming 19-20 May meeting are much less settled. Not only do we have a federal election between now and then, plus some key data releases (March quarter inflation and wage numbers as well as two more monthly updates on the labour market), but the international economic shocks currently originating from the United States continue to complicate life for Australia’s central bank. In its pre- ‘Liberation Day’ musings, the RBA reckoned that the implications of more US tariffs for activity were clear: growth would be weaker than it otherwise would have been. But it was feeling much less confident about the consequences for inflation. Post-Liberation Day, that uncertainty wasn’t shared by financial markets, where the initial reaction has been to assume that the adverse consequences of Trump 2.0 for global growth mean that tariffs will push inflation risk here in Australia down, not up. At the time of writing, market odds for a rate cut next month had jumped to a near-certainty.

More on the tariffs and on the RBA below, along with the usual roundup of other data releases and of interesting reading and listening.

‘Liberation Day’ and the end of the old global trading order.

The Trump administration in the United States announced its ‘Liberation Day’ (an interesting name for a multi-billion dollar tax hike) tariff measures.  

Using his authority under the 1977 International Emergency Economic Powers Act (IEEPA), President Trump said that the United States would impose a ten per cent tariff on all countries with effect from 5 April 2025. In addition, it would also impose an ‘individualized reciprocal higher tariff on the countries with which the United States has the largest trade deficits’ that would take effect a few days later, on 9 April. Trump’s IEEPA Order also allows the president to ‘increase the tariff if trading partners retaliate or decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters.’

Some imports are not subject to these new measures including products already subject to existing tariffs (steel and aluminium products, autos and auto parts, bullion, and energy and ‘certain other minerals that are not available in the United States’ as well as those covered under the arrangements relating to trade with Canada and Mexico).

The ’individualized reciprocal higher tariffs’ range up to 50 per cent and include tariffs of 50 per cent on Lesotho(!), 49 per cent on Cambodia, 46 per cent on Vietnam, 36 per cent on Thailand, 34 per cent on China (on top of the 20 per cent tariffs recently imposed by the administration), 32 per cent on Indonesia and Taiwan, 26 per cent on India, 25 per cent on South Korea, 24 per cent on Japan and Malaysia, and 20 per cent on the European Union. Australia, New Zealand, and the United Kingdom are among those economies only subject to the minimum ten per cent universal rate.

According to the administration, these rates are based on the tariffs that each country imposes on US products plus non-tariff barriers, which the United States has then ‘generously’ adjusted downwards to give so-called ‘discounted reciprocal tariffs.’ But the numbers claimed as tariffs (for example, 39 per cent for the EU) have no obvious relationship to the actual tariffs imposed on US imports. This FT piece reckons that what the administration appears to have done instead is take the US bilateral goods trade deficit with the relevant country, divide it by the total value of goods imported from that country, and then divide that ratio by two to produce a ‘reciprocal’ tariff rate. That is, the tariff rate was determined purely by the size of the bilateral trade deficit rather than by any actual tariff or other barriers.

Estimates by the Yale Budget Lab suggest that the 2 April tariff measures are the equivalent of a rise in the effective US tariff rate by 11.5 percentage points. Along with the other tariff increases announced by Trump 2.0, that takes the average effective US tariff rate up to 22.5 per cent – the highest rate since 1909. So, we are almost back to 19^th Century tariff levels. And note that some other estimates are even higher than this.

Assuming no policy response from the US Fed, the Yale Budget Lab estimates that this would imply a rise in consumer prices of 1.3 per cent in the short run. Add in all other tariff announcements made to date, and that increase in prices goes up to 2.3 per cent (equivalent to a US$3,800 loss of purchasing power, per US household).

If they were to remain in place as announced, the Yale estimate reckons that the 2 April tariffs alone would raise US$1.4 trillion in revenue excluding any offsetting dynamic effects on US output growth. Including the latter would reduce that number by around US$366 billion. Factor in all tariff measures announced to date, and those numbers increase to US$3.1 trillion with a dynamic offset of $582 billion.

At the time of writing, much remains uncertain about the implications of the 2 April announcement. Most obviously, the nature and extent of any retaliation by the impacted economies remains to be seen. Some trade partners (like Australia) are likely to swallow the increases and avoid a direct trade policy response. Others are unlikely to be as forbearing. Will the EU retaliate and extend the trade conflict to services, for example? At the same time, the announcement is likely to spur a dramatic increase in lobbying and special pleading on the part of the affected countries themselves and by some US importers, introducing the possibility of some negotiated concessions. Again, it is hard to know how that will play out and how quickly US policy might adjust in response, especially given the rapid swings associated with previous trade policy moves such as the Mexico-Canada measures.

Still, we can make some initial observations.

The scale of the shock to global trade policy is substantial. Granted, according to WTO statistics, the United States ‘only’ accounts for around 13 per cent of world merchandise imports (almost 16 per cent excluding intra-EU trade). But that still makes it the world’s single largest goods importer, ahead of second-place China (10.6 per cent). And the United States has just pushed its average tariff rate to above the levels it imposed during the 1930s and the Great Depression.

Next, recall that we’re not done yet. As already noted, there is the likelihood of retaliatory measures from at least some US trading partners. And the Trump administration itself has indicated additional trade policy measures (pharmaceuticals, timber and lumber, copper) are incoming.

Assuming that these latest measures are sustained, the macroeconomic implications for the US and global economies in terms of growth and inflation are likely to be both negative and substantial. As we have noted before, the risk is that they trigger a stagflationary shock (activity down, inflation up) to the international economic environment. They will also exacerbate the existing and still-growing uncertainty shock. (An optimistic take here would be that – now that ‘Liberation Day’ has arrived – uncertainty will fall since we know the worst. But for the reasons just given above, that looks unlikely.)

Another interesting feature of the measures is that they serve to undermine some of the logic of ‘China+1’ style models, at least in terms of maintaining access to the US market. Key winners under that model had included Vietnam (just given a 46 per cent ‘reciprocal’ tariff), Thailand (36 per cent), India (26 per cent) and Malaysia (24 per cent) - all of which are now subject to hefty tariff rates of their own.

Finally, in the case of Australia, and again as we have noted before, the direct economic implications of these latest measures are likely to be limited given our relatively modest trade exposure to the United States. That said, we will still suffer from the uncertainty shock and any induced risk aversion for households and firms. The conventional wisdom remains that the indirect implications could be much more substantial. They will depend in large part on the way in which Beijing chooses to respond now that our largest trading partner is facing total new tariffs of more than 50 per cent on its exports to the United States. An offsetting package of domestic stimulus measures might serve to offer a degree of protection not just to the Chinese economy, for example, but potentially lift demand for Australian exports. At the same time, a diversion of discounted Chinese imports from the US into our market could likewise have helpful implications for our inflation outlook.

Finaly, this week’s announcement hammers another (final?) nail into the coffin of the WTO-led international trading order. Trump 1.0 had already inflicted severe damage on the latter by blocking new appointments to the WTO’s appeals court and thereby rendering the dispute settlements system dysfunctional. Trump 2.0 has taken things much further: following on from news reports last week that the United States would pause its funding for the WTO, this week’s ‘reciprocal’ tariff measures are a body blow to the ‘most-favoured nation’ (MFN) principle that has been foundational for the world trading system since the WTO’s predecessor, the GATT, was established in 1948.

The RBA left the cash rate target unchanged at 4.1 per cent following this week’s meeting.

The RBA Monetary Policy Board left the cash rate target unchanged at 4.1 per cent following its meeting this week. The accompanying statement delivered three main messages.

• First, the Board recognises that underlying inflation continues to moderate but still thinks that inflationary pressures persist and reckons there remain ‘risks on both sides’ going forward.
• Second, it remains uncertain about the domestic economic outlook, citing a mix of signals including conflicting indications on prospects for private demand, a tight labour market, slowing wage growth, and persistently weak productivity outcomes. The statement also throws in that old favourite, uncertainties regarding monetary policy lags (a theme we also spent quite a bit of time on during the later phase of the tightening cycle).
• Third, Martin Place remains even more unsure about the international outlook thanks to the impact of US tariff policy and the presence of ‘pronounced’ geopolitical uncertainties. (Recall that the meeting proceeded the last Trump 2.0 tariff measures). The RBA’s view is that the global macro effect of tariffs is highly likely be adverse for global activity but have ambiguous effects on inflation, which the statement cautioned ‘could move in either direction.’

The press conference that followed the policy announcement reinforced these three points, with the Governor indicating – unsurprisingly! – that the substantial changes since February had come in terms of the international environment. Here, the RBA is clear that tariffs and trade wars are bad for the global growth outlook and bad for Australia’s medium-term economic prospects. But the RBA is less confident on the implications for inflation. The worst-case scenario here would involve simultaneous downward pressure on activity and upward pressure on inflation. Such a stagflationary shock would present Martin Place with a very unpleasant policy dilemma.

That said, the Governor did stress that, all things considered, Australia and the central bank were relatively well-placed to handle adverse external shocks given the strength of the domestic labour market, the availability of some significant monetary policy ammunition due to a 4.1 per cent cash rate, and the ability of the Australian dollar to perform its usual role of external shock absorber.

The next RBA Monetary Policy Board meeting is scheduled for 19-20 May. Before then, we will have one major new update on inflation in the form of the March quarter 2025 CPI (due 30 April), two updates on the labour market in the form of the March 2025 (due 17 April) and April 2025 (due 15 May) labour force releases, and one update on wages in the form of the March quarter 2025 WPI (due 14 May).

What else happened on the Australian data front this week?

Total job vacancies in the Australian economy stood at 328,900 (seasonally adjusted) in February 2025. That was down 4.5 per cent over the quarter from November 2024 and 9.3 per cent lower than the number of vacancies reported in February 2024. According to the ABS, vacancies are now down 30.7 per cent (a fall of 146,000 vacancies) from their peak in May 2022 but nevertheless remain 44.5 per cent higher than their pre-COVID-19 level. The Bureau said that the number of private sector vacancies fell 5.4 per cent over the quarter to be down 9.6 per cent over the year, while public sector vacancies were up three per cent in quarterly terms but 6.6 per cent lower on an annual basis.

The CoreLogic national Home Value Index (HVI) rose 0.4 per cent over the month in March 2025 to be up 3.4 per cent over the year. That marked a second consecutive increase in the HVI following three previous monthly declines. National home values rose to new record highs last month. The combined capitals index also rose 0.4 per cent in monthly terms and was up 5.3 per cent on an annual basis, with every capital city except Hobart reporting an increase in March. CoreLogic pointed to February’s rate cut as likely the key driver behind higher home values. Meanwhile, it said housing affordability remained stretched with value to income ratios and home loan serviceability measures still around record highs of their own. Rental values were likewise at record highs in March, with the national rental index rising 0.6 per cent over the month, in line with the February 2025 increase. Although dwelling rents rose across every capital city last month, in annual terms rental growth has now slowed markedly: down from a peak of 9.7 per cent in November 2021 to 3.8 per cent last month, the softest rise recorded since March 2021.

According to the ABS, the number of total dwelling units approved in February 2025 fell 0.3 per cent over the month (seasonally adjusted) to 16,606. That was still 25.7 per cent higher than approvals in February last year. Approvals for private sector houses were up one per cent month-on-month and 5.2 per cent higher year-on-year, at 9,203. Approvals for private sector dwellings excluding houses were down 1.5 per cent in monthly terms (retreating from a two-year high in January 2025) but 73.1 per cent higher in annual terms, at 7,113.

The ABS said retail trade turnover rose by 0.2 per cent over the month (seasonally adjusted) in February 2025 and was 3.6 per cent higher over the year from February 2024. As with the January 2025 result, food-related spending drove retail turnover in February, as expenditure on both food retailing and on cafes, restaurants and takeaway food services rose for a second consecutive month. The Bureau also noted that, following promotion-based growth in the final quarter of last year, spending on household goods has moderated since the start of this year in line with lower discretionary spending.

The ANZ-Roy Morgan Consumer Confidence Index rose by 1.1 points to 85.3 in the week ending 30 March 2025. There were strong increases in the ‘short-term economic confidence’ (up four points) and the ‘current financial conditions’ (up 4.6 points) subindices following last week’s budget. Weekly inflation expectations fell by 0.2 percentage points to 4.7 per cent.

Australia’s seasonally adjusted balance on goods trade fell $2.2 billion in February 2025 to just shy of $3 billion. The ABS said that goods exports fell $1.6 billion (down 3.6 per cent), reflecting a decline in non-monetary gold. Goods imports were up $0.6 billion, driven by capital goods.

Other things to note . . .

• The RBA has released the April 2025 edition of its Financial Stability Review (FSR). The headline assessment of the FSR is that ‘risks to the Australian financial system from lending to households, businesses and commercial real estate have remained contained.’ While budget pressures are judged to remain ‘pervasive’ across the community, the FSR reckons they have eased for some, that the share of borrowers experiencing severe financial stress remains small, and that after some earlier increases, the share of households that have fallen behind on their mortgages looks to have stabilised at pre-pandemic levels while almost all home owners now have home values that exceed their mortgage balances.
• The April 2025 version of the RBA Chart Pack is available.
• One last bit of RBA linkage: A speech from Assistant Governor (Financial) Christopher Kent explains updates to the RBA’s monetary policy implementation system.
• The latest Quarterly Productivity Bulletin cautions that Australia’s current productivity problems may be part of a long-term trend, given that our labour productivity has not significantly improved in more than a decade.
• The Parliamentary Budget Office (PBO)’s guide to last week’s budget (pdf).
• On the collapse of tobacco excise revenue.
• A new OECD report on drivers of trust in Australian Public Institutions.
• New ABS data on personal fraud shows that scams and card fraud are on the rise: more than two million Australians experienced card fraud in 2023-24 while 675,000 responded to a scam.
• In the AFR, John Kehoe warns that this will be a demoralising election campaign for those interested in serious economic policy.
• Also from the AFR, Chanticleer channels Bank of America strategist Michael Hartnett to highlight five big inflection points for markets: the end of big government spending in the United States; the emergence of cracks in the US tech story; the start of EU fiscal stimulus; the end of Japanese deflation; and the return of the Chinese consumer.
• The Economist magazine asks, can the world’s free-traders withstand Trump 2.0?
• The WSJ on the end of the cheap stuff era.
• A look at the shifting dynamics of the global LNG market that asks, could all that is liquified melt into air?
• Three columns from VoxEU: Distinguishing between good and bad housing expansions, on the Nordic model and income equality; and does more AI mean longer workdays?
• The latest IMF country report on Japan.
• Somehow I missed this one last week, but Barry Eichengreen had an essay in the FT on the future of the greenback.
• An essay from Harpers on injecting soft skills into the (US) labour force.
• Are we ready for the next pandemic? Lessons from COVID, five years on.
• The These Times podcast has produced two recent episodes on the multipolar world order.
• The Joe Walker podcast talks to Lowy’s Sam Roggeveen about the implications for Australia of Asia’s changing security order.