Full extent of Trump's tariff slap on economy revealed

Australia's economy will take an $8 billion dollar hit in 2025 as a result of Donald Trump's tariffs, the Reserve Bank estimates in updated economic forecasts.

Inflation is also expected to come in lower than it otherwise would have, the RBA's Statement on Monetary Policy revealed.

The central bank's quarterly assessment of the state of the economy, released on Tuesday alongside a 25 basis point cut to the cash rate, is the first since the US president's imposition of wide-ranging tariffs on April 2.

Uncertainty remained pervasive despite a recent reduction in trade tensions between the US and China, RBA staff noted in the document.

"Financial conditions could tighten sharply again if expectations for significantly lower tariffs than originally announced following negotiations do not materialise, and the outlook for trade policies remains very uncertain," the statement read.

Previously, the bank's forecasts had Australia's economy peaking at 2.4 per cent annual growth by the end of 2025, but the growth forecast for this year has been shaved by 0.3 percentage points.

GDP growth is now expected to reach a high of 2.2 per cent midway through 2026.

China's GDP is predicted to grow at a slower rate than previously anticipated, but much depends on how much stimulus Chinese authorities decide to tip into the economy to reach their five per cent growth target.

The IMF slashed Australia's GDP growth forecast for 2025 to 1.6 per cent in April.

In the RBA's baseline forecast, trimmed mean inflation is expected to hit 2.6 per cent by the middle of the year, down from 2.7 per cent previously.

Unemployment is expected to lift to 4.3 per cent by the end of 2025, higher than the 4.2 per cent previously forecast.

But the bank is keeping an open mind as to how trade tensions play out, also taking into account optimistic and pessimistic alternatives.

In its 'trade war' scenario - in which all countries, including Australia, retaliate with higher tariffs - Australian GDP growth would be three per cent lower than the baseline and unemployment would skyrocket to nearly six per cent.

Underlying inflation would slow to about two per cent by the end of 2026, assuming rates fall in line with market expectations.

Meanwhile, a 'trade peace' scenario, in which successful trade negotiations reduce US tariffs back to 2024 levels, would result in higher domestic economic growth and the unemployment rate sticking around the current 4.1 per cent level.

Inflation would be at the higher end of the RBA's 2-3 per cent target range in this scenario.

Despite the 90-day truce in trade hostilities, US tariffs on China remain at the highest level since the 1930s and uncertainty will remain elevated, given the temporary nature of the pause.

Businesses the bank interviewed as part of its liaison program indicated elevated uncertainty about the economic outlook, although the share of firms intending to keep their headcount stable in the year ahead has remained the same.

The bank said it was too early to tell whether the decline in the US dollar indicated a lasting view that US assets had lost safe-haven status or could be explained by more conventional factors, such as investors rebalancing their portfolios.

Recent flooding and Cyclone Alfred also lowered GDP growth by around 0.1-0.2 percentage points in the March quarter, the RBA estimates.