Economic Update - April 2025

Liberation Day lived up to the hype and then some. Reading from the Stephen Miran and Peter Navarro playbook, President Trump hit most countries in the World with higher than expected tariffs. Global stock markets plunged, including Australia’s. China retaliated and the US retaliated back.

In this new World of tariffs by fiat, some tariffs have now been paused and some exceptions have been made. But overall, the IMF and economists are now expecting US and global growth to tumble. Inflation is still falling in Australia but Australia is watching the US and China.  

“It was whiplash after whiplash after whiplash,” Dave Lutz, macro strategist, macro strategist, JonesTrading.

“The global economic system that has operated for the past 80 years is being reset.” Pierre-Olivier Gourinchas, IMF, chief economist.

What happened in Australia?

Australia only received a 10% reciprocal tariff on liberation day. Like the UK, Australia did not retaliate. However, the greater fear is the impact on Australia’s largest trading partner China.

China’s ambassador to Australia suggested that Australia and China should work together to strengthen the international trading system in response to “US bullying”. However, Prime Minister Albanese and the defence minister responded that Australia would be pursuing its own interest rather than “making common cause with China". Australia’s recent trade dispute with China only ended in December.    

The RBA’s preferred inflation measure, the trimmed mean, fell within the RBA’s target range (2% to 3%) for the first time in over 3 years (see chart below). It fell from 3.3% in the December quarter to 2.9% in the March quarter on an annual basis. CPI was flat at 2.4%.

Services inflation remains high but continues to fall and is now down to 3.7% on an annual basis, which will be welcomed by the RBA. Goods inflation increased slightly to 1.3%, mostly driven by a reduction in overall government electricity subsidies.

In other welcome news, job vacancies continue to fall. However, it is clear that the labour market is still tight compared to pre-pandemic (see chart below).

Apart from inflation and US tariffs, local attention was captured by the federal election. While Australian voters were preoccupied with a choice between nuclear and renewable power and differences in housing policies, S&P warned that whoever wins government would need to watch their spending or risk Australia’s prized AAA sovereign credit rating.

What happened around the world?

USA

Uncertainty and disbelief has marked the market’s mood since Liberation day. Higher than expected reciprocal tariffs on many nations based on an erroneous calculation and misconception of the trade deficit has been punctuated by bravado, backtracks, retaliation against China, and attacks on Federal Reserve Jerome Powell. US average-effective tariffs are now at their highest in over a century, including higher than during the Smoot-Hawley era!

“You’re not supposed to criticize the Fed, you’re supposed to let him do his own thing but I know much more than he does about interest rates.” President Trump on Fed Chair Jerome Powell.

Trump 2.0 is not the president that Wall Street expected. However, the “Trump put” did finally kick in when US 10-year treasury yields began to rise instead of fall in response to market turmoil.

“You can do a lot of things, but when the bond market tells you you're wrong, then you've got a problem." Kathy Jones, Charles Schwab, chief rates strategist.

The rising yields, falling dollar, and stocks (a triple yasu) also saw much navel-gazing over American economic exceptionalism. It is clear what the Europeans think, as they led the way in exiting from US stocks (see chart below).

Warnings from Big Box retailers of soon to be empty shelves, have also got the administration’s attention. Containers from China arriving in Californian ports have already plummeted (see chart below). In response, Trump confirmed that he has been talking with Xi Jinping (denied by China) while Treasury Secretary Scott Bessent reassured markets that the US would not keep the tariffs on China so high for too long. However, trade deals take time.

Economists have responded to the tariffs by revising down US economic growth forecasts and revising up the odds of a recession (see chart below). Jerome Powell is now unlikely to cut rates anytime soon despite pressure from Trump. Political pressure and the tariffs have now turned the soft landing into a tight rope with a likely hard fall.

The start of earnings season has seen some high profile companies call out expected tariff impacts. General Motors says it could cost them USD $5 billion this year while Proctor and Gamble said it could cost them up to USD 1.5 billion. Stronger than expected earnings and forecasts from Meta and Microsoft reassured markets, at least with respect to Big Tech.  

March quarter GDP came in negative as a ramp-up in imports prior to Liberation Day led to a record goods trade deficit and pushed down growth (see chart below). The real economic impact is, however, yet to come.

China

While hoping for the best, China had been planning for Trump’s tariffs. However, they did not expect the tariffs to be so high. Despite this, China is standing firm. They have retaliated against the US with tariffs of their own and are demanding mutual respect in any negotiations.

“'Let he who tied the bell on the tiger take it off'. A Chinese proverb recently quoted by the Chinese Ministry of Commerce.

While data earlier in the month still looked rosy, official manufacturing PMI for April came in at the lowest levels since December 2023 (see chart below). 

“It’s definitely worse than expected. It shows tariffs started to bite,” Robin Xing, Morgan Stanley, chief China economist.

The government is now looking at extra measures to help exporting countries and to boost domestic consumption. Calls for more stimulus will continue.

EU

Euro area inflation fell to 2.2% in March on an annual basis while GDP increased by 0.4% in the March quarter on a quarterly basis. Ireland leads the way while Germany and France moved back into positive growth (see chart below).

Given continuing progress on inflation and the risks from US tariffs and its trade war with China, the ECB decided to cut interest rates by a further 25 bps in April.

“The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions.” ECB,  Monetary Policy Decision press releases, 17 April, 2025.

Japan

The BoJ kept rates on hold at its meeting in late April. The BoJ believes that exports and growth will slow in response to US tariffs but is hopeful that there will be a moderate global economic recovery later in the year - future rate rises may have to wait until then. Despite a recent spike in Tokyo’s inflation, the BoJ believes that underlying inflation is still below its target of 2% and will now take even longer to reach its target.

Liberation day saw an increase in investment inflows into Japan (see chart below) and that combined with the outflow from the US, has pushed up the Yen relative to the USD.

UK

CPI fell again in March, from 2.8% in February to 2.6%. This will be welcomed by the BoE who will likely cut rates again sooner than expected with signs that tailwinds from US tariffs are adding to softening domestic economic activity (see chart below).

“Although domestic demand remains soft, overseas demand is especially weak. New export business fell at the quickest pace for nearly five years” Rob Dobson, S&P Global Market Intelligence, director.

New Zealand

Inflation increased from 2.2% in the December quarter to 2.5% in March. However, with economic activity still subdued and with the uncertainty over US tariffs, the Reserve Bank of New Zealand decided to cut the cash rate by a further 25 bps in April.

“With CPI inflation close to the mid-point of the target range, significant spare capacity in the economy, and a weaker activity outlook stemming from global trade policy, the Committee agreed that a further reduction in the OCR was appropriate.” RBNZ, Monetary Policy Statement, 9 April, 2025.

 What this means for Australian Private Debt

After markets reacted and somewhat recovered to the latest tirade of US tariffs, the World now waits to see the economic impact of the tariffs. This is assuming the US administration does not baulk at emptying Walmart shelves and backtracks again. Notwithstanding, Australia remains in a good position with trimmed mean inflation falling into the RBA’s target range. Like the rest of the world, Australia will of course be hoping that China and the US begin trade negotiations soon.