Modelling from the Treasury department on the impact of Trump’s tariff lunacy suggests that Australia will come through relatively unaffected.

The Treasury thinks the USA is about to experience some serious economic pain – with the real size of its economy being 0.8% smaller by 2027 than it would have been had Trump just decided to keep things as is and just gone golfing (instead of wrecking everything and then still go golfing). Treasury also estimates that inflation in the USA will be 1.4%pts higher than if everyone had let Trump keep sleeping rather than wake him up and let him talk.

China as well is going to struggle more than otherwise would be the case – it’s economy is expected to be about around 0.6% smaller.

Against that Treasury expects Australia’s economy will be much less affected. Prices will be about 0.2% pts higher (ie a bit but not much) and this will only be temporary. Our economy will be 0.1% smaller in real terms than it otherwise would be. This to be honest, is basically a rounding error.

The main reason we are not so affected is because only around 4.5% of all Australia’s exports go to the USA. Treasury notes that some sectors here will be more affected than others – agriculture, energy, mining and durable manufacturing the most, because they are mostly affected by world prices and whether or not the world economy is doing ok.

Pretty much all the impact comes from China, Japan, Korea and India likely wanting less of our stuff (because those economies will be hurt more from the tariffs than we are).

The other reason why we might get through this ok is our flexible exchange rate. As Matt Grudnoff pointed out earlier – a lower exchange rate makes our exports cheaper. So the impact of the tariffs will likely be lessened because the value of our dollar will likely fall (this has already happened today).  

This does seem like good news, and it does reinforce that we should not be panicking, nor feeling any great need to do a deal with the USA on our tariffs.

But should things turn out worse – especially for China –  then it will be tougher for Australia to avoid pain. And crucially it would not matter who wins the election. This is a Trump recession. All that matters is how the Australians government responds. Should the global economy all go to hell, no doubt both sides of politics will rediscover that budget deficits can actually be very good things that help the economy keep going when the economic tsunami from places on the other side of the Pacific hits our shores.