The U.S. markets experienced massive losses, notably with the S&P 500 seeing a staggering $5 trillion wiped from its value in just two days, exceeding losses seen at the onset of the COVID-19 pandemic in March 2020. This economic shockwave hit Australia hard, with the ASX 200 plummeting 0.9% on Thursday and an additional 2.4% on Friday, culminating in a 3.9% drop over the entire week, marking the largest decline in two years. Australians collectively endured an estimated $90 billion loss in superannuation funds due to the volatile share market.
The intense reactions across markets underscore deep concerns about these tariffs. According to Jonathan Pain, a global markets commentator from JP Consulting, the market's response has been nothing short of severe. HSBC's chief economist, Paul Bloxham, highlights the impact on local household wealth, aggravated by heavy exposure to global equities through superannuation.
The repercussions extend to projected interest rates in Australia. Futures markets have adjusted their forecasts, now predicting an additional 100 basis point reduction by the year's end. The Reserve Bank of Australia (RBA) is expected to make these cuts due to three primary factors.
Firstly, global economic growth is likely to slow, with the severity contingent on whether countries retaliate with their own tariffs. Secondly, the financial market turmoil has already eroded trillions in wealth. ANZ's economics team suggests aggressive easing by the RBA is seen as increasingly probable, with a potential 50 basis point cut in May if global growth perceptions continue to worsen.
Lastly, there's an anticipated influx of cheaper Asian goods into Australia as U.S. demand declines, affecting imported goods prices. Paul Bloxham notes that higher trade barriers redirect manufactured exports, potentially lowering Australia's imported goods inflation.
Bloxham anticipates a steady schedule of rate cuts, beginning with a 25 basis point cut in May and three subsequent reductions each quarter, pushing the cash rate to 3.1% by early 2026. Echoing this sentiment, Goldman Sachs' chief economist Andrew Boak foresees necessary downward adjustments to growth and inflation forecasts prompting a more dovish stance from the RBA.
These prospective rate cuts could be advantageous for Australians burdened by large mortgages; however, they might also prompt a 'flight to property.' This shift could spark another surge in house prices, worsening structural housing affordability, which is already nearing historic lows.
