Economic Update

Economic Update

Whilst the US election outcome surprised many, markets have embraced a Trump led growth agenda, with most leading indices rallying since the election outcome. Whilst Trump policies are broadly accommodative for business and should provide economic stimulus, a number of risks remain.

 

Firstly, Trump’s protectionist trade policy may provide short term benefits for the US economy, it is largely seen as a negative, and whilst there are likely to be only minor effects in Australia’s current trade with the US, there is a China/US trade war looming which could have adverse effect on wider global trade dynamics.

 

Another issue for our domestic economy is the increasingly uncompetitive Corporate tax rate.  With our rate broadly set at 30% and many competing Western economies significantly lower and the US targeting 15% under Trump, pressure is mounting on Canberra to make a more concerted effort for tax reform.  If the US gets anywhere near 15% and we remain at or close to 30%, our ability to draw and retain capital in this country will be significantly diminished.

 

There is also a legislative or process risk with the new US parliament.  Whilst Trump has a fairly clear agenda, and appears to have Republican numbers in both the House and the Senate, there remains some risk to him garnering support across the party.  I also hold some concerns regarding the pace of change.  Trump, a self confessed outsider, may not be used to the legislative and bureaucratic processes, and his desired pace of change may not be matched by reality.

 

The final concern relates to the management or containment of inflation should the US succeed in its aim to inject growth into its economy.  Whilst inflation between 2% and 3% is regarded as a ‘Goldilocks’ setting, where wages and asset prices rise at steady pace, thus creating wealth, if inflation gets out of hand there can be severe detrimental effects not the least – Central Banks spoiling the party by setting significantly higher interest rates.

 

As usual, we’ve concentrated on the risks in the above but on balance I think the policy agenda is broadly positive and with reasonable execution should lead to the world’s largest economy returning to above average growth, which in the past has been good for most economies around the globe.  Another predictable outcome will be the A$ depreciating against the US$, which will be a positive for our economy with most business benefiting from improved trade on currency terms (not so great if you are planning an overseas trip!).

 

We expect markets will kick along well around the Christmas break on lower volumes, but with a number of Government changes around the globe and continued unprecedented Monetary policy settings to be unwound, we expect 2017 will bring about one thing we have become used to – and that’s volatility.  So take a deep breath and embrace the opportunity.