Inflation may become stickier and global economic growth could slow down if the US trade tariffs are imposed, but it is too early to tell whether the world will enter a period of stagflation, according to Lukasz de Pourbaix, cross-asset specialist at Fidelity International.
Following last week’s events around the Court of International Trade ruling that the US tariffs were illegal, and then a US appeals court pausing the trade court’s decision, there is still a level of uncertainty in markets around whether these tariffs will be imposed and at what level.
If imposed, US trade tariffs could lead to rising unemployment and slower economic growth, in addition to higher inflation, said de Pourbaix. The global economic scenario is constantly shifting and the risk of stagflation largely depends on where US tariffs settle.
“If we do get a scenario where US tariffs settle higher, we could certainly see a stagflationary environment where we see rising price and a reduction in economic growth if US tariffs remain high. However, if tariffs do moderate, then inflation may settle down and we enter a period of reflation. A lot will depend on where US tariffs settle,” said de Pourbaix.
“At the moment, we are seeing global trade slow down, but the tariffs are a moving target. 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 said.
According to de Pourbaix, hard data is key to an analysis of the risk of stagflation, a scenario in which inflation rises and economic growth falls. The US labour market will be closely watched in the coming months for any signs of slowing. 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.
However, while the US economy has been strong, the momentum for growth may be easing, said 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,” he said.
Turning to Australia, the nation is doing much better compared to others following the imposition of US tariffs. Australia isn’t as exposed to US trade, rather more closely tied to the Chinese economy.
“For Australia, much depends on what happens in China in terms of our 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.
“We have seen emerging positive signs from China potentially aiding Australia's moderate economic performance. Economic growth too will be aided by official rate cuts and inflation moderating towards the central bank’s two to three per cent target band. Possibly, we will see one more interest rate cut by the end of this year, which will further support Australia’s economic growth.
“Right now, the Australian market is awaiting new data on inflation that will inform when the next RBA interest rate cut is likely to occur,” said de Pourbaix.
