Trade war rattles pre-election economic outlook

Treasury admits that escalating trade hostilities and risks to the economy are "more significant than expected" as it releases its Pre-election Economic and Fiscal Outlook (PEFO).

While the government's Budget figures have not changed since they were announced on March 25, the PEFO report factored in the effects of the US tariffs introduced last week that threaten to undermine its projections.

"The potential magnitude and persistence of the economic effects of these announcements has resulted in greater-than-usual uncertainty around the outlook," Treasury said.

On April 3, US President Donald Trump slapped a slew of tariffs on goods imported into the US, ranging from 10% to 50%.

The next day, China announced countermeasures, including imposing a 34% tariff on all goods imported from the US.

Most Australian-originating goods imported to the US were hit with a 10% tariff effective April 5.

Treasury flagged that economic activity, commodity prices and inflation are particularly at risk of destabilisation.

"Over the past few days, there have been significant falls in oil prices and a depreciation of the Australian dollar. Both developments would have implications for activity and inflation if they were to persist," the report said.

"In addition, there have been significant falls in other commodity prices in recent days. If these lower commodity prices were to persist, this would have implications for nominal GDP and revenue."

Australia exported US$13.4 billion worth of goods to the US in 2023, according to the Observatory of Economic Complexity. The majority amounted to US$2.9 billion in the form of meats, such as sheep, goat and bovine. About US$1.7 billion was exported pharmaceutical products like vaccines.

The Labor government said the US accounted for 4.6% of Australia's goods exports in 2024 and that particular sectors will be more affected by the tariffs than others.

"The indirect effects on Australian exports through our other major trading partners, particularly China, will be larger. Ongoing uncertainty in relation to trade hostilities and associated volatility in financial markets will weaken consumer and business confidence, which will have implications for consumption and business investment, including in Australia," the paper read.

Treasury and the finance minister must jointly release a PEFO within 10 days of the issue of the writs for a federal election, which was on March 31.

The report's purpose is to take into account all government decisions and all other factors that may have a material effect on the country's economic and fiscal outlook that were in existence before the issue of the writs for the election.

Treasury said at the time the election writs were issued, the economic and fiscal outlook had not materially changed from that published in the 2025-26 Budget.

On Budget night, Treasury announced the underlying cash balance is expected to be a deficit of $27.9 billion, which equates to 1% of GDP in 2024-25.