News How Trump's Presidency could impact our economy

How Trump's Presidency could impact our economy

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With Trump’s inauguration poised to disrupt the global economy, an expert in macroeconomics shares his insights on the key factors business leaders should be paying attention to in 2025.

The global economy is in for a turbulent year.

With Donald Trump’s inauguration on January 20 there is much trepidation about how the actions of the new administration will reverberate across the globe.

The policies of one of Australia’s dominant trading partners and strongest political allies will affect everything from trade deals and the price of oil to domestic inflation.

Here’s what leaders should pay close attention to this year.

A US trade war with China

A major concern for Australia is the potential escalation of the US-China trade war.

A US-China trade conflict would see increased tariffs, raising costs for goods imported into the US.

During his presidential campaign, Trump proposed an across-the-board tariff of 45 per cent on Chinese imports. While Australia isn't directly involved in this bilateral trade agreement, we could feel the indirect economic consequences.

Higher prices on a range of goods in the US could reduce overall spending, ultimately affecting demand for Australian exports.

The potential for retaliatory tariffs is also high, with China unlikely to passively accept US tariffs without imposing its own.

Political pressure may also mount on Australia due to our relationships with both the US and China and trade tensions could lead to a fall in stock prices in Australia, reducing household wealth and corporate investment.

But it’s not all bad news.

If, like Biden, Trump taxes sectors such as steel and aluminium from China, there could be an opportunity for Australia to increase exports of iron ore (a key input into steel) as well as aluminium and other critical minerals to the US.

However, the RBA suggests with China’s steel exports to the US less than 2%, this benefit would be small.

The ripple effects of the war in Ukraine

The war in Ukraine continues to have a significant impact on the global economy with Russia and Ukraine both major suppliers of key commodities, particularly energy and agricultural products.

For Australia, a large producer of wheat, this disruption has seen Australia experience an increased demand and surging prices, as countries shifted demand away from Russia and Ukraine.

Throughout his Presidential Campaign, Trump was outspoken about the involvement of his administration in the war in Ukraine declaring he would be able to “solve” the war “very quickly” once in office.

So, what would this mean for the Australian markets?

If the war ends and countries decide to remove trade embargoes with Russia, this could lead to lower commodity prices, particularly energy commodities like oil and natural gas.

It would also affect agricultural commodities including grains, such as wheat, and fertilisers.

Russia is also a major oil producer.

An end to trade restrictions on Russia could mean lower fuel prices which would benefit Australian consumers and help ease inflation.

Inflation and interest rate outlook for Australia

The Reserve Bank of Australia’s decision regarding interest rates will be a crucial factor for businesses in 2025.

With inflation now at 2.8% within the target range of 2-3%, there's speculation the RBA may lower interest rates, but it is unclear when and by how much.

With Trump’s inauguration likely to have spillover effects that could contribute to domestic inflation, the RBA board is likely to want to keep the cash rate lever available until there is more clarity.

Ultimately the RBA is aiming for a "soft landing," where inflation is managed without creating a sharp rise in unemployment and inducing a severe recession.

The most recent figures show that the labour market is doing better than expected, with the December figures sitting at 4.0% - the Reserve Bank of Australia had originally forecasted it to be sitting at 4.3%.

Therefore, even though inflation is under control, the RBA may choose to hold interest rates steady at its February meeting, opting for a "wait and see" approach as the full effects of 2024’s economic activity and Trump’s inauguration become clearer.

That way the RBA still have room to move if it needs to stimulate more activity in the economy. If the bank pulls the lever and reduce interest rates too soon, it might be detrimental to the economy.

The role of uncertainty on consumer behaviour

With businesses facing high uncertainty about the economic outlook, they are also more likely to opt for a “wait and see” approach and delay investment decisions until conditions are clearer.

Consumers tend to respond to uncertainty by increasing their savings and reducing consumption, so they have a buffer in case they lose a job.

This pattern of precautionary savings leads to lower overall demand, which in turn may further depress economic activity and growth.

Political instability, trade tensions, commodity price fluctuations, and inflationary pressures are all factors business leaders should monitor closely this year. Business leaders should stay agile and prepared to respond to shifting conditions. Strategic decision-making and paying close attention to these global economic indicators will be key to successfully navigating uncertainty this year.

Dr Jamie L. Cross is an Assistant Professor of Econometrics & Statistics at the Melbourne Business School, University of Melbourne. He teaches Predictive Analytics in the Master of Business Analytics at Melbourne Business School.

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