RBA: opting out of the circular firing squad
/By Stephen Miller – Market Strategist, GSFM
In my view the upending of the global trade system occasioned by the Trump Administration’s tariff agenda will more likely than not see a global recession by year-end.
This is despite some retreat from the Trump Administration and an alleged willingness on the part of some countries to “do deals”. Even completed deals will result in “nth best” outcomes for the architecture that underpins international trade. At best, such agreements will only mitigate rather than eradicate the “stagflation-lite’ implications of the “Liberation Day” announcement.
For one thing, higher prices and lower activity growth relative to the pre-existing baseline will still result.
That certain countries and trading blocs – China, the EU and Canada – will retaliate only compounds the likely global stagflation-lite consequences. Such measures put the global economy in circular firing squad mode.
Second, the erratic character with which the proposals have been implemented will mean that an uncertain economic environment will persist for an extended period.
Businesses will put investment plans on ice and households will likely reduce consumption expenditure and increase savings.
The fact that tariffs will (at the very least) mean an exacerbation of the short-term “stickiness” in inflation will mean that a number of central banks may be limited in how far they can reduce policy rates in response to declining economic activity growth.
Bond yields too may not be as responsive to central bank rate cuts. The already gargantuan US budget deficit requires massive bond issuance to fund it at a time when bond markets are spooked by the inflation implications of tariffs and foreign central banks are reluctant to place increasing amounts of their foreign exchange reserves in US Treasuries. Recent developments in Germany also imply a greater deficit proclivity which again will require bond issuance to fund.
Australia’s eschewal of retaliatory tariff measures (opting out of the circular firing squad) may give the RBA a less complicated path to attacking the consequences of a global trade war.
The absence of retaliatory measures will mean a mitigation of the inflation part of the global “stagflation-lite” scenario, allowing the RBA to cut rates and, if need be, cut aggressively to forestall the inevitable decline in economic growth.
I think it is likely in that context that the RBA will cut the policy rate in May. There are indications that the RBA are already “over-achieving” on inflation and that fact combined with the likelihood of global recession may well see the policy rate with a “2” handle by year-end.
That may sound like good news. The bad news is we’ll need it!
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Article prepared by: GSFM Pty Limited
Important Information
This material has been provided for general information purposes only and must not be construed as investment advice. This material has been prepared without taking account of the objectives, financial situation or needs of individuals.
