Michael Blythe, Chief Economist, Commonwealth Bank
Richard Grace, Chief Currency Strategist, Commonwealth Bank
Adam Donaldson, Head of Fixed Income Research and Strategy, Commonwealth Bank
What does Trump’s win mean for corporate Australia?
US President-Elect Donald Trump’s plans to lift spending on infrastructure and to cut personal income (consumer spending accounts for 70% of US GDP) and business taxes are stimulatory for the US economy. The cut in the business tax from rates as high as 35% to a flat 15% represents a massive boost to company earnings and will likely encourage capital spending.
They are also expansionary. We estimate the tax cuts are worth US$5-7 trillion over 10 years, meaning bigger US budget deficits and higher debt/GDP ratios.
Trump’s plans to raise the minimum wage, apply duties and tariffs on ‘countries that cheat’ and the stronger economic growth resulting from the tax cuts and infrastructure spend are inflationary. US interest rates will therefore be higher than otherwise.
Implications for the US dollar, equities and capital flows
The higher company earnings resulting from the lower corporate tax rate will boost the US equity market. This will attract capital flows from various sources chasing returns. Additionally, US firms offshore will repatriate capital to take advantage of the very low corporate tax rate.
Also putting upward pressure on the US dollar is the US Federal Reserve lifting interest rates more aggressively in response to the inflationary pressure.
The US dollar will be further supported by the stronger economic growth. Once Trump takes office in January we expect the US dollar to rise by 10% over a 12 to 18 month period.
Potential game changer for the world
As the world’s largest economy, faster economic growth in the US will reverberate around the world. Trump’s policies could be the circuit-breaker the world’s central banks have been looking for to end the monetary easing cycle. They should certainly favour the focus on infrastructure spending.
Not all of Trump’s trade policies may be passed but certainly some barriers will be erected. These will attract responses from the countries affected. That is potentially a negative factor for global economic growth. Some of Australia’s most important trading partners in Asia could be hardest hit as they have integrated themselves into global supply chains.
More broadly, if global trade isn’t a driver of growth, the burden falls back to domestic economies. If China is shut out of the US market, it will look for markets elsewhere. So the outcome depends on how other countries respond to Trump’s trade policies.
The impact on Australia through China and commodity prices
A significant stimulus response from China’s policy makers is likely if trade issues really began to drag. But China would be weaker than otherwise, with a flow on to commodities. Any commodity price impact would be accentuated by a stronger USD. Lower commodity prices bring some income risks back into play for Australia.
In September we had forecast a 10% drop in the AUD/USD exchange rate if Trump triumphed. We now only anticipate a 5% fall because of the large lift in the terms of trade and resulting improvement in Australia’s trade and current account deficits. We also believe that the decline in the Australian dollar will reduce the chances of additional interest rate cuts by the Reserve Bank of Australia.
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