Trump tariffs ‘as big an inflation threat as COVID-19’

Donald Trump’s tariffs are as big a risk of higher inflation as the supply chain disruptions that drove up prices during COVID, one of the world’s most important financial institutions has warned amid signs Australian businesses are already paying the price of the US president’s economic plan.

As new figures show federal government debt is billions of dollars lower than feared just a few months ago, the Bank for International Settlements has used its closely watched annual report to argue interest rate cuts may need to be slowed or put on hold if Trump’s tariff agenda leads to an inflation outbreak.

While the huge tariffs promised by the president in his “liberation day” announcement in early April have subsided, many American tariffs are due to rise sharply from July 9.

The BIS, the central bank to the world’s central banks, said the soft global economic landing hoped for at the start of the year now seemed “more elusive” as long-established trade relationships had begun to fray.

It said economic fragmentation and protectionism would exacerbate a decades-long slowdown in economic and productivity growth as tariffs pose a risk of repeating the price pressures endured by most countries out of the pandemic.

“The global economy is not a collection of islands; it consists of a dense web of interconnections among suppliers, customers, consumers and the financial intermediaries that knit them together,” it said.

“As the pandemic-era inflation experience made clear, disrupting supply chains could once more lead to upside surprises in inflation. Such a jolt to inflation could rekindle inflation expectations that remain sensitive after the COVID-19-related inflation experience.”

Most central banks have been cutting official interest rates through the past year. The Reserve Bank has cut rates twice since February with financial markets expecting another three cuts, which would take the cash rate down to 3.1 per cent, by December.

But the BIS said the impact of any tariff increases would require central banks to weigh the risk between short-term inflation against the impact of interest rate changes on the economy.

“In choosing the extent and pace of ongoing monetary easing – or whether to pause it altogether – central banks must carefully balance the need to cushion the impact on output and employment against the risk that the expected one-off rise in prices morphs into persistently higher inflation,” it said.

BIS general manager Agustin Carstens said the global economic landscape was being reshaped in part by the uncertainty and unpredictability caused by the trade disruptions unleashed by the United States.

“Policymakers must act decisively on multiple fronts to ensure price stability and promote sustainable economic growth while preserving economic and financial stability,” he said.

There are already signs overseas of the financial hit caused by Trump’s tariff agenda. Canada’s economy contracted in April as its close trade links to the US were disrupted while data released last week revealed American GDP fell by 0.5 per cent through the first three months of 2025.

While the Australian economy grew through the March quarter, this pre-dated Trump’s liberation day announcements. But there are signs that a rise in American tariffs is already starting to affect local firms.

A survey by MYOB to be released this week shows Trump’s tariffs have been felt by 17 per cent of small and mid-sized businesses.

About 41 per cent of those surveyed said they believed the tariffs would destabilise the global economy, with more than a third expecting the imposts to both lift business costs and inflation.

While 45 per cent said they expected the economy to decline this year, 64 per cent said their financial position was either good or excellent.

MYOB chief executive officer Paul Robson said the results highlighted the impact of events playing out on the other side of the globe.

“While global policy decisions may feel distant, Australian SMEs are alive to potential local impacts and are pivoting their way around them,” he said.

“The key consideration for impacted SMEs is the cumulative effect of both tariffs and interest rates on the cost of doing business. Supply chain disruption is another concern for this community, given the diverse industry portfolio this sector covers.”

The turmoil in supply chains, driven in part by Trump’s tariff agenda, has resulted in 17 per cent of surveyed businesses saying they plan to shift where they source their products or services. Just one in 10 expects an increase in customer demand.

This impact is not showing up yet in the federal budget, which Treasurer Jim Chalmers forecast in March would show $940 billion in gross debt by the end of the current financial year before climbing to $1.02 trillion by the end of 2025-26.

But total government debt will end 2024-25 at $928.6 billion due to a better budget bottom line.

Chalmers had forecast a deficit $27.6 billion, but in the financial year to the end of May, the deficit was just $5.5 billion due to higher-than-expected company and personal income tax collections. On a pro rata basis, the government had expected the deficit to be at $20.2 billion by the end of May.

The government believes the full-year deficit will increase to more than $10 billion as payments, held up in part by the May election, start to flow to states and taxpayers. Even at that level, Chalmers is on track to again fall short of his budget gross government debt forecast.

But debt levels are ramping up much quicker among the nation’s states and territories.

Ratings’ agency S&P Global estimates that the states and territories had gross debt of $266.3 billion in 2019 with that on track to reach $900 billion by 2029 – a 238 per cent increase. Over the same period, federal gross debt is forecast to grow by 126 per cent.

Victoria is on track to have the highest debt of any state or territory at $274.1 billion, a 397 per cent increase. The largest jump in debt is expected to be endured by Tasmania, climbing by 627 per cent to $23.4 billion.

NSW ($252.3 billion) and Queensland ($205.7 billion) will also have high debt levels.

S&P analyst Martin Foo said with global interest rates climbing, most governments would soon face tough spending choices.

“Interest costs are among the states’ fastest-rising expense lines and threaten to crowd out other fiscal priorities,” he said.

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