Navigating Tariffs and Economic Uncertainty
Recent weeks have seen significant market turbulence following the announcement of new tariffs by the US. These changes have been swift and substantial leaving many investors concerned.
In essence, tariffs are taxes on imported goods, designed to make foreign products more expensive and encourage the onshoring of manufacturing to the US and the purchase of locally made items. For example, a Chinese-made appliance that previously cost US$100 now costs US$145. Including wholesale and retail profit margins, the consumer price could rise from US$130 to US$200. A similar US-made appliance that cost US$140 to produce and retailed for US$168 now appears more competitive.
Taxes ultimately affect consumers by making everyday items more expensive. This dampens consumer spending and slows economic growth. The US has raised its average tariff rate from 2.5% to over 22%, the highest level in more than a century.
The tariff hikes effectively act as a $700 billion tax increase on US households and businesses. For every 10% increase in tariffs, inflation could rise by around 1%, potentially pushing US inflation above 4%. Economists estimate that US GDP growth could be cut by 1.5% this year, increasing recession risk. Australia’s GDP is exposed to the health of the global economy and if global trade slows, Australia will feel the effects.
Current market volatility indicates a higher chance of a US recession. If conditions improve, like a reduction in tariffs or better-than-expected economic growth, share markets could rebound. Conversely, deepening recession fears could lead to further declines in US share markets, affecting other markets as well.
Locally, there is some good news as inflation is easing, with recent data showing underlying inflation tracking below 3%, within the RBA’s target range. This provides room for interest rate cuts if needed.
In these uncertain times, it’s crucial to maintain a diversified portfolio with high-quality investments and a long-term perspective. Boris’s article in our newsletter talks to how we structure portfolios to better protect our clients in turbulent times.
We continue to monitor markets closely and will make adjustments as new risks and opportunities arise.
Momir Vuksa SMSF Specialist Advisor™/ SSA®
Representative (No 1306168)
