Donald Trump is trashing the Australian economy

A shockwave from Washington has shaken Australia’s once-stable economy, forcing policymakers to make do with rising inflation, slowing growth and a tightening financial squeeze, writes Stephen Koukoulas.

Amid the economic turmoil in Australia in recent months, even talk about recession In some circles, it is important to determine where these frictions and economic pain points come from. Once this is done it will become clearer to work out what can be done to solve the problems.

It is worth noting that the Australian economy, which forms the basic background of the current economic debate, ended 2025 in extremely bad shape. positive note:

Annual economic growth was healthy at 2.6%.
The unemployment rate was at the lowest level in history at 4.1 percent.
Consumer sentiment and business confidence were optimistic about conditions in the economy.
Inflation was slowly rising, but at a comfortable level and there was nothing particularly alarming about the inflation outlook.
Interest rates were held tightly steady and there was a well-thought-out debate about whether the next move would be up or down.
Wages were rising in real terms and productivity was rising.

President Trump is coming

Less than six months later, the Australian economy is being pushed around painfully.

Almost all of the worsening can be attributed to the decisions of US President Donald Trump.

Most obviously, global oil prices have soared as President Trump launched the US-Israeli war against an otherwise largely inactive Iran. increased by approximately 75%and supplies of oil and fertilizer, among other goods, were severely disrupted.

In just a few months, the animal spirits of the global business and consumer sectors have been shattered.

The latest consensus forecast among economists in Australia is that annual GDP growth will drift towards 1 to 1.5%, with household spending under the most downward pressure.

Reserve Bank “nightmare“It’s a decision about whether to continue to raise interest rates to combat inflation, with the cost of a steep economic slowdown, faltering business and rising unemployment, or to leave interest rates steady to protect employment but for the cost of inflation to remain high for longer.”

In any case, it is almost certain that the unemployment rate will jump towards 5% as the economic downturn occurs, with inflation remaining above the target level for a year or more, directly driven by high oil prices and second-round effects on transport logistics.

But Trump’s destructive economic tentacles go beyond the obvious impact of the conflict in the Middle East.

The US budget position is close to disaster.

According to USA Congressional Budget OfficeThe budget deficit has risen further to US$1.8 trillion (AU$2.5 trillion) in 2025 and will rise to US$2.2 trillion (AU$3.6 trillion) in 2030 on the current policy path set by Trump. As a percentage of GDP, deficits will be between 5.6 and 6.7% of GDP each year over the next decade. This would cause government debt to rise to 120% of GDP, causing investors to worry about the sustainability of the US budget.

These evil numbers.

Some of this anxiety has manifested itself in the sell-off in the bond market, which has seen yields on 30-year government bonds. rise to 5%. These US bond sales were reflected in the Australian interest rate market, including higher yields on Australian bonds, consistent with the inflationary effects of the global oil price shock. This has seen the Government’s interest costs rise strongly despite the two policies. budget surpluses and the smaller deficits incurred under the Albanian Government.

The shock in oil prices caused the Albanian government to give up 2.5 billion dollars consumption income Because it provides relief in the cost of living through a cut in oil consumption tax.

There are other areas where the Trump taint has seeped into the Australian economy.

The weakening of the US dollar as global investors sell US assets means the Australian dollar has risen to around 72 US cents, from lows of 60 cents before the Trump Presidency. This restricts the earnings of Australian exporters and makes it difficult for local companies to compete with importers.

Rising geopolitical tensions have led the Australian government to further escalate tensions defense spending. This is understandable, but it means that in a period when the budget is being repaired, otherwise scarce funds cannot be redirected to other areas of the economy.

While many of the economic problems facing the Australian economy can be traced back to US policy issues, domestic policymakers need to address these issues.

This means there will be a complicated way for the RBA to deal with interest rates, while the Federal Budget on 12 May will need to undertake the multi-faceted task of helping to reduce inflation, maintaining full employment, repairing the Budget while realigning parts of the economy that will increase productivity.

There will be a tough road ahead, not only for the economy but also for the policymakers tasked with steering Australia through these difficult times directly linked to Donald Trump’s train crash.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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