JACKSON HEWETT: US recession fears amid Donald Trump tariff turbulence and what it would mean for Australia

Anyone with a passing interest in stock markets has twigged by now that something is going very wrong with sentiment in America.

Spooked by a White House that is delivering more tariff twists and turns than a Tesla with an out of control autopilot, the main stock index — the S&P500 — has gone into what is technically known as ‘correction’ mode – that is a decline of more than 10 per cent from the peak.

The companies with sky-high valuations have been copping it in the neck – think Tesla and NVIDIA – but more worrying is the selloff in consumer discretionary names.

Overnight in the US names like Home Depot got whacked 4 per cent and Best Buy fell almost 3 per cent. Auto dealerships fell 5 per cent and were probably not helped by the news the percentage of Americans who are more than 60 days late on their car loans recently hit a record high.

Dollar Tree, a discount store with 20,000 branches across the US and in parts of Mexico warned investors last night their customers’ financial situation had worsened over the last year with many reporting they only have enough money for basic essentials and have had to sacrifice even on necessities. These are the poorest Americans, for whom America is most definitely not great again.

At the end of last year, 55 per cent of Americans expected the stock market to go up in 2025, the highest reading in 40 years and well above the long-term average of 36 per cent. The median balance of an American’s investment portfolio was $US250,000 ($400,000) at the end of last year, and that same investor is now staring at a $US25,000 haircut and the prospect of that balance continuing to fall. Unlike Australia, where the average punter takes only a passing glance at their annual superannuation statement, the wealth effect of losing $25k in a little over month tends to encourage one to tighten the purse strings.

And that is happening at the personal level and in business. This week alone Delta Airline shares plunged more than 20 per cent after it warned the market “increased macro uncertainty” was harming sales for both vacation and corporate customers.

Under the previous Trump administration, market falls of this magnitude would have prompted a course correction but this time the White House is staffed with ideologues - mostly multimillionaires and billionaires - who are immune to the pain of economic contraction.

They appear to be on a messianic mission to “detox” the American economy, as hedge fund investor turned Treasury Secretary Scott Bessent declared it. Commerce Secretary Howard Lutnick - net worth $US1.5-2 billion - said President Trump’s economic policies are “worth it” even if they lead to a recession.

The administration has three key aims with its current policies:

1. Get the deficit down by slashing government spending, including eliminating jobs and cutting payments;

2. Rebuilding the manufacturing base to a level last seen during the Second World War so that it remains the world’s dominant military force; and

3. Rewrite the global trading rules to rectify what it sees as exploitation by other countries, mostly China. “The fundamental fact that the global trading system has failed our country. It has not faltered because free trade doesn’t work. It has failed because free trade doesn’t exist,” Trump 1.0 trade representer Robert Lighthizer wrote in The New York Times.

The way to achieve all of those aims is via tariffs: Increase levies on imports, onshoring of manufacturing from low wage countries, and using its might to tip the balance of trade back in its favour.

So the US administration is not for turning, and even if it was, it would do so in way that serves its long term interests - not the global economy.

The stay on auto tariffs is a great example. Trump has been told by carmakers that to apply a tariff on cars whose parts cross the border multiple times would be ruinous. So he paused them. But there is likely no doubt that each of those carmakers have been told they will need to bring their plants back into the United States.

Canada and Europe have responded with tariffs of their own, meaning the worse possible outcome — tit-for-tat reciprocation — is underway.

That will put the squeeze on American consumers who will be paying higher prices for almost everything, and businesses, who will be facing the prospect of higher input costs, reduced domestic demand and, for the exporters, hostile international markets.

The problem will be compounded by the enormous uncertainty facing businesses who will be unwilling to make investment decisions, or hire new staff until such time as things settle. Given the whirlwind of the last six weeks, uncertainty is a feature of this administration, not a bug.

US investment bank JP Morgan this week upped its forecast for a US recession to 40 per cent from 30 per cent.

Westpac chief economist Luci Ellis doesn’t think the US will go into recession but she does see the outlook for slower global growth as a result of Trump’s policies.

Saul Eslake, an independent economist who spent a long career at ANZ, said Australia had managed to get avoid being hit by previous US downturns.

“Just because the US has a recession doesn’t mean we do. The US has had three recessions this century, and two of them, the tech wreck in 2000 and the GFC in 2008/9 we didn’t have one, whereas, of course, the COVID recession, everyone in the world had one,” he said.

With the exception of COVID, Australia remained recession free thanks to interest rate cuts and increased government spending.

But in this instance, the global fallout is a far greater threat, exacerbated by recessions in both Canada and Mexico — highly reliant on US markets — but more importantly the impact of our main trading partners China, Japan and South Korea.

“If the US does go into a recession, the key point is lots of other countries will be going into recession too. It will be very difficult for Australia to be exempt from any more than we’re exempt from steel and aluminium tariffs,” he said.

China, which accounts for 36 per cent of Australian exports, equivalent to 8.5 per cent of national GDP, would be unlikely to bail Australia out as it had during the financial crisis, when it had a budget surplus to pay for stimulus that boosted iron ore, coal and gas revenues.

“China’s economy in particular, is not well placed to weather shocks. At the moment, they’re still dealing with the bursting of their property bubble. They’ve got negative inflation. They’ve got deflation.

“The Chinese are not going to be doing that (kind of stimulus) this time around,” Mr Eslake said.

The other danger, Mr Eslake said was the fact that Chinese demand also set the prices for iron ore and coal that went to Japan and South Korea, countries that would also be tariff-hit, meaning that diversifying income was unlikely.

Australian exports to the US are relatively small, less than 1 per cent of GDP, so the fallout from a straightened US consumer will likely be most felt by the meat industry which exports more than $1b of sheepmeat and another $1b of beef to the US. For beef, the US is about 30 per cent of the export market, while China takes another 30 per cent. Any slowdown in either of those countries will hurt cattle farmers here.

Canola is another area where tariffs, which still may be applied on April 2 are already hurting. The 25 per cent tariff on Canadian canola has sent producers looking for new markets, particularly China. In just two weeks, the price of canola has dropped $50 a tonne, hurting Australian exporters.

A global recession may put the Reserve Bank on a faster path for interest rate cuts. Currently banks are forecasting another cut in May, with Morgan Stanley forecasting three more in 2026.

If the US economy starts to crack, that forecast will very likely change.