US election - Implications for Australia
There is a risk that some of president-elect Trump’s policy proposals have an adverse effect on the US economy and on the global economy.
Donald Trump has been elected the 47th President of the United States. The Republican Party has won control of the Senate and is on-track to maintain or expand a majority in the House of Representatives.
The most significant policy proposals outlined by the Trump campaign relate to higher import tariffs, corporate and personal income tax cuts, immigration, climate change and energy, and foreign policy.
In the immediate aftermath of the election, US stock prices have risen, the US dollar has strengthened, and yields on 10-year Treasuries have climbed. Economic growth in the US economy could accelerate in the short term on the back of greater certainty, rising confidence, and proposed deregulation and tax cuts.
However, several factors may potentially slow US economic growth in the medium to long term. These include higher government debt, increased trade frictions, labour market shortages, higher inflation, and general uncertainty.
Donald Trump has proposed a universal tariff of 20% on all imports into the US, and a tariff of at least 60% on goods imported from China. If implemented as proposed, the average US tariff rate will increase sharply (see Chart 1). Higher tariffs, which could become a reality as early as the second quarter of 2025, are likely to weigh on US producers and consumers by increasing prices and slowing domestic demand. Weaker demand for imports is expected to strengthen the US dollar.
Trump has also proposed extending corporate and individual tax cuts due to expire in 2025, alongside further cuts for US manufacturers. Tax cuts would be a powerful short term economic stimulant but are also likely to add to US federal government debt. Higher national debt is expected to slow economic growth in the medium to long term by crowding-out private investment, limiting further public investment, and by putting long-term upward pressure on taxes.
Trump’s campaign also proposed the deportation of millions of undocumented immigrants, a withdrawal from The Paris Agreement (for a second time), and trimming incentives that encourage the green transition. All these proposals may be highly disruptive to the US economy which may become more susceptible to the risks of climate change and economic shocks.
Chart 1: Average US import tariff rate, 1930-2025
Source: U.S. International Trade Commission, Tax Foundation
What does this mean for Australia’s economy?
The implications for Australia are likely to be through trade and exchange rate channels.
A third of Australia’s exports go to China, and a US-imposed 60% tariff on Chinese goods could exacerbate a structural slowdown there. Slower growth in China is likely to weigh on economic growth in Australia. Subdued demand for iron ore and other raw materials may lead to a deterioration of Australia’s terms of trade.
Tariffs, expansionary fiscal policy, and deregulation will push US interest rates up and strengthen the US dollar relative to the Australian dollar in the short term. A weaker terms of trade via lower prices for key Australian commodities such as iron ore would add to downward pressure on the Australian dollar.
The impact of Trump’s presidency on inflation and short-term interest rates in Australia remains uncertain. A weaker Australian dollar and an inflationary impulse from the US is likely to be counterbalanced by a deflationary impulse from China. Long-term Australian interest rates may be pushed up by higher yields on US 10-year Treasuries, but this is also likely to be counterbalanced by expectations for slower growth.
Much will depend upon how policy proposals are enacted in the US. However, one thing is for sure: uncertainty and volatility are likely to be key words while discussing the global economy in 2025.
This newsletter was distributed on 12th November 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Lester Gunnion, Manager at Deloitte Access Economics
Click on the links below to read our previous Weekly Economic Briefings:
- Reserve Bank holds cash rate steady amid uncertainty over underlying inflation (5 Nov)
- Headline inflation back in target but underlying price growth remains sticky (31 Oct)
- Deloitte Access Economics Business Outlook: Supply stumbles (23 Oct)
- China risks a protracted slowdown without significant stimulus (17 Oct)
