Complacency risk for economy as tariff wars re-emerge
The Australian economy has survived the threat of a tariff meltdown in 2025 but faces the risk of a correction if complacency sets in.
The resilience of the domestic and global economy despite trade disruptions was the main theme this year.
Oxford Economics Australia’s Harry Murphy Cruise said just as forecasters were caught off guard by the resilience of the Australian consumer and a resurgence of inflation in the second half of 2025, worsening trade and geopolitical tensions could also catch them off guard.
As 2025 progressed, investors and firms became increasingly risk averse, as reflected in record high stock prices and low risk premiums.
While the base case scenario is not an outright trade war, Mr Murphy Cruise has warned that tariffs are going nowhere, and Donald Trump’s recent threats to European countries if the US is blocked from buying Greenland have shown tensions rising again.
“The risk is that further tariffs and geopolitical tensions could snowball,” he told AAP.
“Things are going well, but we cannot remain complacent.”
Add to this the risk that the AI euphoria that fueled bull runs on Wall Street and the ASX may end and markets could be on the path to a painful correction.
But Mr Murphy Cruise said the Australian economy was heading into 2026 in a good position.
Pointing to the possibility that the Central Bank may have to increase interest rates to curb demand, he said, “The risk is very good.”
In an Oxford Economics Australia report published on Monday, Mr Murphy Cruise predicted headline inflation would fall to 2.8 per cent by the end of the year, within the Reserve Bank’s two to three per cent target range.
The central bank’s latest forecasts see the trimmed average moving towards 2.7 per cent by December 2026, but these were last updated in November, before the monthly figure peaked at 3.3 per cent.
The economist predicted that the unemployment rate will rise from the current 4.3 percent to 4.6 percent by mid-2026.
Although money markets are pricing in at least one rate hike in 2026, Mr Murphy Cruise believes the labor market deterioration would have the equivalent effect of raising the cash rate by 25 basis points, eliminating the need for the Reserve Bank to increase borrowing costs.
He said the decline in consumer confidence in surveys published after the rise in inflation showed that the revival would probably be short-lived.
AMP chief economist Shane Oliver also said market rate hike expectations appeared too hawkish.
“Economic data released so far this year is mixed, with stronger building approvals and household spending, but weak consumer confidence and new business openings,” he wrote in a research note.
“December quarter inflation data to be announced at the end of this month will be important for the next few months.”
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