The Forward View – Australia: November 2016

The impact of the win in the U.S. Presidential election by Mr Trump is at this stage highly uncertain

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Initial thoughts on the potential implications of the US Presidential election

 These forecasts contained within this document were finalised prior to the US election, and do not incorporate the impact on financial markets, the global economy or Australian economy from the result. The impact of the win in the U.S. Presidential election by Mr Trump is at this stage highly uncertain. What Mr Trump’s priorities are, how he will interact with the Congress and other nations, is all up in the air. Some key issues that we will be monitoring are:

  • The degree of volatility in markets. Financial markets experienced large moves as it became more apparent that Mr Trump would win but then reversed course. Persistent bouts of volatility would have implications  for Federal Reserve monetary policy as they typically push back any planned rate hikes in that environment. Uncertainty can also affect business investment decisions and consumer confidence. At this stage we are leaving our call for a Fed rate hike in December unchanged.
  • The likelihood of greater fiscal stimulus (and public debt) as Mr Trump’s plans included significant tax cuts and public spending proposals, with limited budgetary savings. How the Republican congress – which has in the past tried to curb the budget deficit – will react is unclear, although the proposed tax cuts would have strong appeal.
  • What measures are implemented to curb what the President-elect sees as “unfair” trade, particularly in relation to China and NAFTA. These could include declaring China to be a “currency manipulator” “on day one” and a 45% tariff on US imports of Chinese goods. The risk is that this could trigger a trade war.
  • How aggressive are the steps taken to reduce ‘illegal’ immigration (building a wall on the border with Mexico), and to deport existing unauthorised immigrants residing in the US. This has the potential to lower US growth potential and be inflationary if it were to lead to wage pressures.
  • Fiscal stimulus in an economy close to full employment is likely to be inflationary and suggests a risk that the US Federal Reserve may eventually have to increase rates more aggressively. This, coupled with higher public debt, could see long-term bond yields move higher.

For Australia specifically, perhaps the biggest threat to the Australian economy in the wake of the election is the implication for trade policy. In particular, Mr Trump’s criticisms of China and his warning that a 45% tariff could be imposed on imports of Chinese goods raises the risk of a US-China trade war if the latter retaliated. China is easily Australia’s biggest export market but the US is the biggest foreign investor here and the third biggest export market. Australia would face an unenviable position if trade tensions arose between such important economic partners as China and the US. Additionally, the future of broader trade pacts, including the TPP, are now under threat.

On alert

  • Our real GDP forecasts have been revised slightly, mainly due to lower starting point for Q3 2016 with partial data suggesting a large subtraction from net exports. We now expect real GDP growth of 2.8% in 2016, 2.7% in 2017 and 2.6% in 2018. The unemployment rate is expected to hover between 5.5% and 5¾% through the forecast horizon. These forecasts are somewhat more cautious than the RBA, especially in 2018.
  • We are monitoring the loss of momentum in some key high frequency indicators, including the pullback in business conditions, capacity utilisation and employment growth. In particular we note the softening of these in NSW and services, areas which hitherto have been key sources of strength. At this stage, the deterioration is not yet enough to warrant a significant change in the outlook, but a continuation of these downward trends could signal an earlier turn in the non-mining economy than expected.
  • Recent exponential growth in coking coal prices has raised our 2016-17 forecasts for the terms of trade and nominal income in recent months. While this may lure back some idle mine capacity in Queensland, it is unlikely to stimulate additional investment amidst low exploration rates and our expectation that such high prices are unsustainable.
  • These forecasts were finalised prior to the US election, and do not incorporate the impact on financial markets, the global economy or Australian economy from the result.
  • Our Spotlight article this month explores the surge in LNG exports underway, and our expectation for prices.

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