Trump’s election to the presidency was quickly met by strong expectations of a new era of growth for the US economy.
With the world also desperately seeking momentum, it is not surprising that this US-centric optimism quickly transferred elsewhere. Seemingly, the US economy was thought to be the much-awaited catalyst for stronger global growth.
Now over two months later as President Trump’s first 100 days in office gets underway, financial markets have shown some signs of becoming a little circumspect over the future.
This is not because the newly inaugurated President has stepped back from his promise to spur domestic activity. Indeed, evident in the administration’s plans is a promise to “create 25 million new American jobs in the next decade and (a) return to 4 per cent annual economic growth” – almost double the average pace achieved over the past five years.
Specific detail on how these goals will be achieved is still forthcoming (and we might add highly dependent on the desires of Congress), but Trump’s administration remains firmly in favour of lower taxation and regulation; a (very necessary) renewal of key infrastructure – albeit one dependent on private-sector funding; and a greater share of global production taking place within the US.
It is this last point which is beginning to raise concerns amongst market participants (just as it did before the election). This is because the President is not seeking to win investment and activity through improved US productivity and competitiveness. Rather he is focused on the implementation of protectionist policies to remove other nation’s advantage in pursuit of “fair trade”.
A very clear belief that globalization and the off-shoring of jobs had benefitted other economies at the expense of the US was on display in the President’s inauguration speech. “We’ve made other countries rich while the wealth, strength, and confidence of our country has disappeared over the horizon.”
His intended response, a hard line on trade, was also apparent: “We must protect our borders from the ravages of other countries making our products, stealing our companies, and destroying our jobs. Protection will lead to great prosperity and strength.”
Albeit a long way short of implementing active protectionist policies, withdrawing the US from the Trans-Pacific Partnership (a broad 12 nation trade agreement, including Australia and New Zealand) on his first day in office was confirmation of his intent. Since then, Trump has also noted a desire to renegotiate the North American Free Trade Agreement (NAFTA) and to impose a “substantial border tax” on US firms who move some or all of their production offshore. While not directly related to trade, signing executive orders in favour of a wall between the US and Mexico, and against immigration to the US from a number of nations adds further weight to his protectionist stance.
Going down the protectionist path will, at the very least, severely limit the dividend on offer to the rest of the world from stronger US growth. But, more likely than not, it will also have an outright negative impact on US economic activity, by limiting US firms’ export opportunities. Expanding export capacity requires confidence in the terms that these firms will be able to trade on, but this is not available. Furthermore, aside from the uncertainty created by the US’s own policies, there is also always the potential for other countries to retaliate.
For Australia, President Trump’s policies have a number of implications broadly centred on trade, the Australian dollar and confidence.
The immediate consequence of President Trump’s withdrawal from the TPP is that it takes away the anticipated improved access for Australian firms to the US economy. While the US’s withdrawal isn’t a major surprise politically – as both Trump and Clinton had voiced objections to the deal ahead of the election – it will likely come as a shock to those firms who had planned to take advantage of these new opportunities.
More broadly though, the end of the US’s involvement in TPP and President Trump’s hard line on trade means Australia’s focus must shift to Asia. An alternative trade deal to the TPP, the Regional Comprehensive Economic Partnership, seeks to bring together south east Asian nations and their key trade partners, including Australia and New Zealand as well as China and India. While still a long way from being completed, this trade pact could offer considerable long-term opportunities to Australia across resources, agriculture and services in a region that leads the world in growth and is likely to continue doing so for many years to come.
Turning to the Australian dollar and our competitiveness, stronger US growth and rising interest rates should see the Australian dollar depreciate against the US dollar, from US76c currently to around US66c by the end of 2018. This will aid Australian exporters’ competitiveness versus those in the US. However, it must be said that we are unlikely to receive a material competitiveness windfall on a trade-weighted basis, with the Euro; Yen; Renminbi and Pound also depreciating against the US dollar.
Finally, while trade relations and the currency determine the opportunities open to Australian firms, confidence inevitably dictates whether these opportunities are taken up. While financial markets currently remain confident in President Trump’s ability to stoke US growth, in the long-term it will be the impact of confidence on the real economy that will dictate growth and lasting wealth. Evidence for or against President Trump on this front will only come in time.
By Peter King
Acting Chief Executive Officer, Westpac