Treasury may be underestimating the threat posed by Donald Trump’s trade war, after the International Monetary Fund slashed its outlook for Australia’s economic growth in 2025.
Australia’s annual output will be $13bn lower in 2025 than predicted in January, the IMF’s latest forecasts revealed, with real GDP growth predicted to drop to 1.6%, from 2.1%.
The grim outlook from the Washington-based body contrasts with Treasury’s sanguine assessment of only “modest” economic damage from the rise in global protectionism. It also suggests that whoever forms government after 3 May could be forced to respond to a drastically weaker economy than anticipated.
The 25 March budget forecast Australia’s economy would grow by 2.25% in 2025 – substantially more than the IMF expected.
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The pre-election fiscal outlook (Pefo) was released on 7 April, the Monday after Trump’s “liberation day” trade announcements, but did not flag any substantial changes to the budget estimates.
On the same day as Pefo, Jim Chalmers released updated Treasury modelling which showed only a “modest” impact on Australia from US tariffs, even as the local share market plunged and financial markets around the world convulsed.
The IMF’s World Economic Outlook, however, implied Treasury officials may have been too sanguine about the risks.
It lent credence to the Coalition’s claims that a failure to properly account for the economic fallout from tariffs may lead to major budget downgrades, especially if prices for key commodities – iron ore and coal – fall more quickly than expected.
In a statement, Chalmers said the IMF report “confirms that trade tensions are weighing heavily on the global outlook and putting upward pressure on inflation around the world”.
“We’re not immune from the turmoil in the global economy but the progress we’ve made together puts us in good stead,” he said.
“Under the Albanese government, inflation is down substantially, real wages are up, unemployment is low, growth is rebounding solidly and interest rates have started to come down.”
That “solid rebound”, however, may be in jeopardy.
The new outlook also foreshadowed a major growth downgrade in the Reserve Bank’s next set of economic forecasts, which will be released in tandem with the next monetary board policy meeting on 19-20 May.
The IMF’s chief economist, Pierre-Olivier Gourinchas, said the US president’s increase of import duties represented a “major shock”, and that it was difficult to judge the severity of the consequences.
“The global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era,” Gourinchas said.
“Existing rules are challenged while new ones are yet to emerge,” he said, warning of a collapse in mutually beneficial international arrangements as countries are pushed to a zero-sum world of “winners and losers”.
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The IMF slashed its forecasts for real GDP growth in the US from 2.7% in 2025, to 1.8%.
Even as activity slows, the IMF lifted its American inflation forecast for this year by one percentage point to 3% – well above the US Federal Reserve’s target of 2%.
Gourinchas said central bankers faced a tricky task balancing the inflationary pressures from tariffs – which would demand higher interest rates than otherwise – with slower growth, which would demand the opposite.
And after Trump doubled down on his attacks on the chair of the US Federal Reserve Bank – calling Jerome Powell a “major loser” for not lowering interest rates – the IMF’s top economist responded.
“Monetary policy credibility will be important in all cases, and central bank independence remains a cornerstone,” he said.
China, which is a target of US import duties of more than 100%, will grow by 4% in 2024, down from 4.6%.
China last month recommitted to a 5% annual economic growth target for this year, underpinning expectations of further rounds of public stimulus aimed at shoring up activity.
Global growth will be substantially lower in 2025, according to the IMF, although not so low as to constitute a worldwide recession.
“Growth prospects could, however, immediately improve if countries ease their current trade policy stance and forge new trade agreements,” Gourinchas said.
Even as the IMF’s top economist called on countries to step back from the brink of a global trade war, he said “we should ask ourselves why our global system warrants remapping – and recognize that decades of deepening trade ties fostered rapid but uneven economic growth”.
