The potential re-election of Donald Trump as U.S. President could introduce significant changes to the global economy, with various potential impacts on Australia. The possible effects of Trump’s policies, including trade tariffs, fiscal policies, and regulatory changes, may resonate globally, including in Australia’s economic landscape.
Australia’s initial market reactions
Following the speculation of Trump’s possible victory, Australian markets responded with notable shifts. On Wednesday, Australian shares saw a 0.8% rise, while the Australian dollar depreciated by approximately 1.5% against the U.S. dollar. However, upon confirmation of Trump’s victory, European markets retreated due to concerns that his administration might impose tariffs of 10% or more on imports, with potentially substantial levies on Chinese goods. In contrast, U.S. stocks rallied, with the Dow Jones index surging 3.4%, marking one of the largest post-election rallies. Investors seemed optimistic about Trump’s pro-business stance, expecting increased corporate profitability.
Yet, there were contradictory signals in the U.S. debt markets, with yields rising due to anticipated fiscal policies. Trump’s tax cut proposals and existing deficit-increasing policies may necessitate more debt issuance, prompting higher yields to attract buyers. Consequently, increased borrowing costs could have a dampening effect on corporate gains, making the U.S. market’s positive response potentially short-lived.
Implications for the Australian Economy
According to Australia’s Reserve Bank Governor Michele Bullock, it remains premature to assess the exact impact of Trump’s re-election on Australia’s economy, given his tendency to enact policies that deviate from his statements. However, Assistant Governor Christopher Kent suggested that Trump’s proposed tariffs, particularly on China, could negatively affect Australia. As a primary exporter to China, Australia may face adverse economic impacts if demand for its exports diminishes due to these tariffs.
Moreover, rising U.S. debt could lead to higher global interest rates due to increased inflation and borrowing costs in the U.S. Australian investors have already adjusted their expectations, predicting that the Reserve Bank of Australia (RBA) may delay interest rate cuts. Current projections place a 25-basis-point reduction in interest rates at an 80% likelihood by May and nearly certainty by July, reflecting the expected pressure on global borrowing costs due to the Trump administration’s policies.
The Australian Dollar’s Prospects
The Australian dollar initially depreciated against the US dollar, though it remained stable relative to other trade-weighted currencies. Non-U.S. markets like China and Japan, whose currencies have similarly weakened against the U.S. dollar, receive many Australian exports. However, if Trump implements tariffs against China, Australia’s currency may experience further downward pressure, reflecting a potential decline in Chinese demand for Australian exports. This depreciation could result in costlier imports and elevated inflation within Australia, which would be challenging for both the RBA and Australian consumers.
Uncertainties and future risks
One of the greatest uncertainties lies in whether Trump will execute his promises—such as tariffs on China or changes to trade agreements—and the potential timing of these actions. Reserve Bank Governor Bullock highlighted that the RBA’s inflation outlook remains unchanged, but she refrained from predicting the long-term effects of a Trump administration on Australian interest rates.
Additionally, Kent acknowledged that China is unlikely to remain passive in response to U.S. tariffs, potentially introducing its own fiscal stimulus to support growth amid a trade dispute. Such measures, while supportive of China’s domestic economy, could have mixed effects on Australian exports. Global supply chains could face inflationary pressures due to the prospect of U.S. trade disruptions and Trump’s intention to deport millions of undocumented workers.
Trump’s stance on environmental policy may also have far-reaching consequences. His withdrawal from the Paris Climate Agreement could prompt other nations, including Australia, to reevaluate their own emissions targets and climate policies, potentially affecting Australian industries and international trade agreements.
Australian Market Responses
In Australia, stocks have shown mixed reactions to Trump’s electoral success. While U.S. equities surged, bond prices declined as investors anticipated inflationary effects from Trump’s proposed tariffs and fiscal measures. With the U.S. dollar strengthening, Australian commodity prices may face downward pressure, potentially influencing the Australian stock market, particularly resource-dependent shares.
Certain Australian companies, like BlueScope Steel, have benefitted from the prospect of U.S. tariffs on foreign steel, yet Australia’s iron ore market remains more sensitive to Chinese economic decisions than to the U.S. election outcomes. Should China respond to U.S. tariffs with increased domestic stimulus, Australian exports may experience support despite the global economic uncertainties posed by Trump’s policies.
As the global economy braces for the potential policy shifts under Trump’s leadership, Australia faces a season of heightened market volatility and uncertainty. The extent of these impacts will largely depend on the actions of both the U.S. administration and other major economies in response.
