Australia in positive territory, the US not so much

Mike Taylor

Managing Editor and Publisher

30 June 2025

Australia has emerged positively in the latest analysis from Schroders which is pointing to the global economy avoiding a recession but the US economy heading into difficult times.

Schroders head of fixed income, Kellie Wood noted that the global economy started 2025 in a strong position and that while the threat of US tariffs, trade policy and general uncertainty will weigh on growth, it is probably not enough to tip the global economy into recession.

However, she noted that Trump euphoria has well and truly disappeared, with whiplash tariff policy and an unsustainable US fiscal deficit, where debt to GDP is expected to spiral to all times in in coming decades.

“An increased US tariff regime is here to stay, and the economic damage is in train. Our baseline assumes that the US effective tariff rate on average settles around 8-12%. This is still a substantial increase compared to pre-Liberation Day, where the effective US tariff rate was 3%,” the analysis said.

“The trade shock will hit economies simultaneously, generally pushing economies below potential growth.”

“While global inflation will moderate, the US differs versus the rest of the world because of tariffs. In the US, the fall in inflation towards target is interrupted by the passthrough from tariffs and a level shift up in prices. US growth will slow towards trend, but inflation is likely to reaccelerate putting the US Federal Reserve in a difficult position, unable to ease policy to support growth as inflation rises.”

The analysis said that monetary policy is now a balancing act in which central banks will need to respond to slower growth and softer inflation, with the exception of the US Federal Reserve.

“Disinflation will continue globally with weaker demand, currency appreciation and lower oil prices driving inflation lower. This will see most central banks continue to ease policy back to more neutral levels to support growth rates.”

It said that In Australia, the Reserve Bank of Australia (RBA) is set to deliver a soft landing as inflation has continued to moderate and the labour market remains resilient.

“The RBA lowered the cash rate in May to 3.85% and have lowered their estimate of the neutral cash rate to 3%. Their revised forecasts acknowledged the balance of risks are tilted to the downside, due to weaker consumption and uncertainty around global trade. Given the cash rate remains in restrictive territory, there’s plenty of ammunition to respond to weaker growth.

“Furthermore, while Australia’s fiscal position has deteriorated over recent years, it remains relatively healthy, which provides policy flexibility to support growth in a deeper growth slowdown. This means we view the likelihood of an Australian recession as low,” the analysis said.