US Tariffs: The Silent Saboteurs of Economic Optimism

The ANZ Business Outlook Survey for Q2 2025 reveals a stark reality: U.S. tariffs are eroding confidence in the global economy, with businesses grappling with rising costs, deferred investments, and the looming specter of stagflation. While confidence metrics remain resilient, the data paints a picture of an economy walking a tightrope between growth and contraction.

The Confidence Mirage

Business confidence in Australia and New Zealand held steady at +58 in March 2025, but this stability masks deeper vulnerabilities. The ANZ “past own activity” GDP indicator, a key barometer of actual economic performance, barely edged into positive territory at +1, signaling stagnation. Meanwhile, cost expectations surged to the highest levels in over a year, driven by tariff-related inflation.

Cost Pressures: The Tariff Tax

The real story lies in the numbers:
- Inflation expectations rose to 2.6% in March 2025, nearing the upper limit of central banks’ targets.
- A separate BOSS survey found 52% of businesses now cite U.S. tariffs and geopolitical risks as their top concerns—up from just 20% in mid-2024.

Businesses are pricing these tariffs as a “tax” on their operations. Input costs are rising, and firms are passing these expenses to consumers. The result? A self-fulfilling cycle of inflation and slowing growth.

Investment Hesitancy: The “Wait-and-See” Dilemma

While employment and investment plans remain stable (no outright cuts), there’s no growth in these areas either. The ANZ “expected own activity” metric, a proxy for expansion plans, oscillated between +45 and +49 in early 2025—a sign of hesitation, not confidence.

This paralysis isn’t irrational. Businesses are caught between rising costs and uncertain demand. A Macquarie University analysis notes that 62% of firms anticipate higher costs in the next 12 months, with many delaying capital expenditures until trade tensions clarify.

Stagflation Looms: The Worst of Both Worlds

The data points to a dangerous convergence:
- U.S. GDP growth was revised down to 1.5% for 2025, with tariffs contributing to 3% PCE inflation—a recipe for stagflation.
- Central banks are trapped: The RBA faces pressure to hike rates to curb inflation, even as growth slows. Businesses, however, expect rate cuts to stimulate demand.

Policy Paralysis and the Dollar’s Decline

The U.S. dollar is weakening further, reflecting reduced “economic exceptionalism” as tariffs backfire. A weaker dollar could benefit exporters in Australia and New Zealand, but only if supply chains stabilize. Meanwhile, the RBNZ’s communication strategy will be critical—businesses need clarity on how policymakers plan to navigate this minefield.

Investment Implications: Navigating the Tariff Storm

• Avoid cyclical sectors like manufacturing and retail, where tariffs directly inflate costs.
• Favor defensive stocks with pricing power, such as healthcare or utilities.
• Monitor central bank signals: A RBA rate cut could boost equities temporarily, but long-term gains hinge on resolving trade tensions.

Conclusion: The Tariff Tax Is Here to Stay

The ANZ data leaves no doubt: U.S. tariffs are a systemic drag on growth. With business confidence stuck in neutral, cost pressures surging, and investment intentions stagnant, the path to recovery requires more than monetary policy tweaks.

Key stats underscore the urgency:
- 52% of businesses now cite tariffs as their top risk—a 150% increase since 2024.
- Stagflation risks are materializing, with inflation at 2.6% and GDP growth at 1.5%—a dangerous combination for investors.

The silver lining? Flexibility. Investors who pivot to sectors insulated from tariffs (e.g., tech, healthcare) and monitor central bank actions will outperform. But until trade tensions ease, the economy will remain stuck in low gear—a reality the ANZ survey documents, but cannot fix.

In short: Tariffs are the elephant in the room, and until they’re addressed, the global economy will dance to their tune.