Financial markets around the world have been slammed by the Trump adminstration’s sweeping tariffs on its trading partners, and China’s swift retaliation.
Share markets have posted their biggest declines since the COVID pandemic hit in 2020, as fears of US recession surged. Iron ore, copper, oil, gold and the Australian dollar have all tumbled.
On Wall Street, leading indices have fallen around 10% since the tariffs were announced, while the tech-heavy Nasdaq is down 20% from its recent peak. European and Asian markets have also slumped.
In Australia, the key S&P/ASX 200 slid another 4.2% on Monday to levels last seen` in December 2023, taking its three-day losses since the announcement to more than 7%.
Why are markets reacting so badly?
Financial markets reacted so negatively because the tariffs were much larger than expected. They represent the biggest upheavalin global trade in 80 years.
Many traders were hoping the tariffs would be used mainly as a bargaining tool. But comments by US President Donald Trump that markets may need to “take medicine” seem to suggest otherwise.
The tariffs are expected to weaken economic growth in the US as consumers pare back spending on more expensive imports, while businesses shelve investment plans. Leading US bank JP Morgan has put the chance of a US recession as high as 60%.
This comes at a time when the US economy was already looking fragile. The highly regarded GDPNow model developed by the Atlanta Federal Reserve Bank indicates US March quarter GDP will fall 2.8%, and that was before the tariff announcement.
Worries about global growth
Fears of a recession in the United States and the potential for a global downturn has led to a broad sell-off in commodity prices, including iron ore, copper and oil. Further, the Australian dollar, which is seen as a barometer for risk, has fallen below 60 US cents in local trading – its lowest level since 2009.
While the direct impact of tariffs on Australia is expected to be modest (with around 6% of our exports going to US), the indirect impact could be substantial. China, Japan and South Korea together take more than 50% of Australia’s exports, and all have been hit with significantly higher tariffs.
Treasurer Jim Chalmers said on Monday that the direct impact on the Australian economy would be “manageable”.
The full effect on Australia will depend on how other countries respond, and whether we can redirect trade to other markets.
The rapid decline in the Australian dollar will help offset some of the negative effects associated with a global downturn and the fall in commodity prices.
We can also expect some interest-rate relief. Economists are now predicting three further interest rate cuts by the Reserve Bank, starting in May. This brings economists into line with financial market forecasts.
