Stagflation risks grow if Trump tariffs stick | Australian Markets

The US and broader international economic system risk a descent into stagflation – a period of slowing financial growth with persistently high inflation – if the Trump Administration’s favoured tariff regime stays in place, warns a main cross-asset analyst.

The profitable imposition of tariffs, at the moment below momentary interdiction, would lead to rising unemployment and slower financial growth, along with greater inflation, stated Lukasz de Pourbaix, a cross-asset specialist at Fidelity International, based mostly in Australia.

He warns that, ought to US tariffs settle greater, the nation may fall into a stagflationary setting, with rising costs and lowered financial growth.

Trump’s tariffs impose between an 11% to a more than 100% impost on overseas items introduced into the US.

The US economic system, whereas performing barely higher than initial estimates, has nonetheless contracted by an annualised fee of 0.2% in Q1 of this yr, the primary quarterly contraction in three years.

Curiously, imports of items and providers soared by more than 42%, information from the US Bureau of Economic Analysis confirmed, as companies and customers rushed to stockpile items earlier than the complete power of the duties hit finish customers.

Consumer spending nonetheless slowed to 1.2% – its weakest tempo since Q2 2023.

This momentum for US financial growth now seems to be easing, stated de Pourbaix.

“In terms of consumer sentiment and trade, the US was doing much better six months ago, but that has really narrowed now, with Europe doing much better,” de Pourbaix stated.

Should tariffs average, nevertheless, inflation “may settle down and… enter a period of reflation”, he stated.

For now, he cautions that it’s nonetheless too early to inform the complete influence of the tariffs and whether or not the worldwide economic system will succumb to a period of stagflation.

As it stands, Trump’s favoured tariff settings stay in legal limbo. Last week, the US Court of International Trade, which adjudicates in issues referring to international trade, ruled that the tariffs weren’t legal.

A subsequent federal appeals court docket choice, prosecuted by the Trump administration, briefly paused the trade court docket’s choice.

As such, there stays vital uncertainty in markets round whether or not these tariffs will likely be imposed and at what degree.

“At the moment, we are seeing global trade slow down, but the tariffs are a moving target,” de Pourbaix stated.

“The US trade tariffs could create the conditions necessary for stagflation in the US economy, that is, persistent inflation alongside weak economic growth and rising unemployment. The longer these trade tariffs remain in place, the more likely the US economy will experience stagflation,” he added.

Fidelity says it and others will intently observe the US labour market within the coming months for any indicators of slowing.

It added: “The US Federal Reserve has held interest rates steady this year in the US, given the solid US economic backdrop and uncertainty about policy changes from the Trump administration, such as tariffs, and their potential impact on the global economy.”

Australia out of the fray – for now

For de Pourbaix, Australia is faring much better than different international locations bearing the brunt of Trump’s tariff gambit, with the health of our economic system far more intently tied to the fortunes of China than the US.

“For Australia, a lot is dependent upon what occurs in China in phrases of our useful resource exports.

“There are still concerns about China’s economic growth such as poor consumer sentiment and the property market, but those situations are starting to improve, though China isn’t out of the woods yet. So, Australia is travelling along reasonably well.”

He notes “emerging positive signs from China” that might help average financial efficiency for Australia, whereas additional easing of rates of interest may additional buffer the native economic system.

“Economic growth too will likely be aided by official fee cuts and inflation moderating in direction of the central bank’s two to a few per cent goal band.

“Possibly, we will see one more interest rate cut by the end of this year, which will further support Australia’s economic growth.”