In his latest commentary, GSFM investment specialist Stephen Miller said while recent signs of de-escalation between the US and China may slightly reduce the risk, the broader impact of fractured trade relations and “stagflation-lite” conditions will leave central banks, including the Reserve Bank (RBA), scrambling to soften the blow.
While US President Donald Trump appears to be softening his stance on tariffs, including those imposed on China, in Miller’s opinion, the willingness of some countries to “do deals” with the US will merely 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,” Miller said.
“For one thing, higher prices and lower activity growth relative to the pre-existing baseline (prior to the Trump ascendancy) will still result. That certain countries and trading blocs – China, the EU and Canada – may still retaliate only compounds the likely global stagflation-lite consequences. Such measures put the global economy in circular firing squad mode.”
Turning to the “erratic character” with which Trump’s proposals have been implemented, Miller said “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,” he said.
Miller opined that the fact that tariffs will mean an “exacerbation of the short-term “stickiness” in inflation” will only limit the extent to which some central banks 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 investment specialist said.
“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.”
Locally, Miller noted that Australia’s “eschewal of retaliatory tariff measures” 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,” he said.
“I think it is likely in that context that the RBA will cut the policy rate in May.”
In fact, Miller said there are indicators that the RBA is already “over-achieving” on inflation.
“That fact combined with the likelihood of global recession may well see the policy rate with a ‘2’ handle by year-end,” he said.
“A cooling of trade tensions with China might mean that policy rate reductions are of a lesser magnitude, but they are still coming. That may sound like good news. The bad news is, we’ll need it.”
The International Monetary Fund (IMF) issued a sobering assessment of the global economic landscape in its latest World Economic Outlook earlier this week, dramatically revised after Trump’s 2 April announcement of sweeping tariff measures.
“This April 2025 World Economic Outlook was put together under exceptional circumstances,” said Pierre-Olivier Gourinchas, economic counsellor at the IMF, speaking ahead of the global gathering of finance ministers in Washington.
“The April 2 Rose Garden announcement forced us to jettison our projections – nearly finalised at that point – and compress a production cycle that usually takes more than two months into less than 10 days.”
According to the IMF, global tariff rates are at “centennial highs” and will push global growth down to 2.8 per cent this year and 3 per cent next year.
However, unlike Miller, the IMF believes the global economy is still not in recession territory, though it noted risks have significantly risen.
“While we are not projecting a global downturn, the risks it may happen this year have increased substantially, from 17 per cent projected back in October to 30 per cent now,” Gourinchas said. “An escalation of trade tensions would further depress growth.”
