The recent US presidential election result means that Australia’s strongest ally will remain at the forefront of attention for some time yet.
In terms of economic implications, there is genuine uncertainty as to what, and how, President-elect Trump’s will deliver from his policy platform over time.
One of Australia’s only 10 free trade agreements is with the US, a country that is also Australia’s third-largest two-way trading partner in goods and services – worth $65 billion.
Trump has certainly presented an ambitious economic growth target – lifting America’s growth rate to 4% per annum. From a post-GFC average GDP growth rate of 2.2% per annum, this is clearly a large step up.
More broadly, Trump is inheriting a US economy which is in reasonably good shape. The current unemployment rate of 4.9% is relatively low, and there are indicators that wages growth is starting to lift. That’s not to say there isn’t a significant amount of underemployment and victims of structural change beyond the unemployed, but the overall landscape has reasonable momentum and is probably as good as it has been post-GFC.
In terms of implications of Trump’s election for Australia, a lot of attention is on the trade front:
- Moves to reduce trade barriers through the Trans Pacific Partnership are probably now off the table
- More significantly in the short term, a punitive tariff on Chinese goods heading to the US could see Australia receive a lot of collateral damage
- Australia is part of the supply chain supporting Chinese production, and if China’s industrial production falls, so too will its demand for commodities
- That could then have flow-on effects such as lowering interest rates and the value of the $A.
Investment flows are another area of potential change. The US is Australia’s largest source of overseas investment, accounting for 27% (some $758 billion) of the stock of foreign investment:
- Will there be more attractive options for those investment dollar in the US, particularly if Trump loosens the purse strings with a massive infrastructure program or introduces a big corporate tax cut?
- But businesses also like certainty. And at this stage, there is anything but. This may see more footloose capital heading out of the US, and Australia potentially an attractive destination.
Immigration is another key area to watch:
- At the margin there may be opportunity for Australia to pick up some skilled emigrants from the US who can’t stomach to live in Donald Trump’s America (and the inquiries have already started)
- More broadly, Trump’s strategy to deport undocumented immigrants, if enforced on a broad enough scale, may significantly harm the US economy, particularly if it came at a time when demand was being stimulated by additional government spending. That could flow on to Australia via slower global economic growth and/or higher inflation.
Key signposts for Australian economic watchers over the coming months:
- The US Fed – it was ready to lift interest rates in December, which then would have put some downward pressure on the $A/$US. But will it now hold fire to wait and see what Trump has in store?
- Tariffs – will President Trump raise them on Day 1 as promised, and to what extent? And how will China or other targets react?
- US government spending – will it ramp up with a significant infrastructure program? Will Congress agree to it?
- Business and consumer confidence – although volatile and subjective indicators, they are often a signpost for actual investment and purchasing decisions 3-6 months later
- China’s industrial production – China’s demand for Australia’s raw materials may fall if higher tariffs mean the US purchases fewer TVs, fridges and washing machines.
Overall, for the global economy, and for Australia, it’s a matter of ‘stay tuned’.
The biggest developments, and indeed economic risks, may not come via economic channels, but on the geopolitical front, particularly if the US does take a more isolationist path.
David Rumbens is a Deloitte Access Economics partner and co-author of our Weekly Economic Briefing.