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Australia’s economic future at risk: The impacts of a potential Trade War

27 November, 2024

Australia’s fiscal outlook has recently taken a sharp turn for the worse, with Deloitte Access Economics warning that the country’s budget deficit could swell to $33.5 billion by May 2025.

This represents a significant deterioration from the $15.8 billion surplus projected for 2023-24. 

The root of this growing fiscal gap? A looming slump in mining revenues as global commodity prices fall. What makes the situation even more alarming is that there’s little indication this trend will reverse anytime soon. This economic turbulence, combined with Australia’s heavy reliance on volatile global markets, paints a troubling picture for the future.

While much of the immediate concern stems from falling commodity prices, the situation could be exacerbated by a potential trade war. Should the United States, under a possible second term of Donald Trump, implement tariffs on Australian imports, the effects on the economy could be devastating. With China facing up to 60% higher prices on U.S. goods, Australia could see its exports to both nations suffer, further weakening an already fragile economy.

In this context, Australia’s budget deficits could worsen, and its exposure to global commodity price fluctuations could make a bad situation worse. Deloitte’s report highlights that Australia’s economy is more vulnerable to such price swings than most other developed nations, owing to the nation’s dependence on mineral exports. The deterioration of the budget’s underlying cash balance, as detailed in the Intergenerational Report (IGR), suggests that without cyclical commodity booms, Australia is unlikely to return to surplus for decades.

Australia is also grappling with long-term structural issues. Despite a revenue boost from commodity prices in recent years, both major political parties have failed to make meaningful progress on fiscal reform. Deloitte’s Cathryn Lee notes that the budget is in “deep deficit” and will struggle to recover unless structural changes are made. She also points out that the country’s productivity growth is stagnating, and income inequality is widening, exacerbating social divides.

Australia is clearly at a crossroads. While the government has made progress in areas like aged care reform and productivity initiatives, these measures may not be enough to shield the country from the impacts of a trade war. If Australia’s economic structure doesn’t evolve, its position on the global stage will continue to weaken, making it increasingly vulnerable to both external shocks and internal challenges. 

The question remains: can Australia weather this storm, or will it fall victim to a perfect storm of declining commodity prices, a possible trade war, and a lack of meaningful economic reform? Only time will tell, but one thing is certain – the stakes have never been higher.

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