Trumped?
Group think continues
Not my purview, but a strong interest.
Yet somewhat relevant given that many have asked me about what a Trump White House might mean to the Australian economy and housing market.
My reply – in short - has been “Very little”.
Official interest rates are dropping across the west, except here and our sticky inflation is the fault of Labor government policies, current mindset and largesse. As a result interest rates remain artificially high.
And too high me thinks, given that what will move the cash rate down, regardless of the CPI result, is rising unemployment. Which for mine is coming in 2025.
We need to create 33,000 new jobs each month to keep unemployment steady. And whilst we have achieved that over the past 12 months – just – last month’s labour force result was surprisingly weak.
Our labour productivity is also in the toilet. The new employment regulations are draconian. AI is on the rise. Something has to give. For mine it is new jobs.
What this space.
……
And if I am feeling energetic, I might add to my Trump’s impact reply “We might see more US expats return home and some of the more liberal Yanks may look to migrate downunder. That will add more heat to the top end of the housing market”.
Apparently, Tom Hanks has been checking out our online real estate portals since early November. Ha!
But all jokes aside I think some of the commentary about Trump’s likely impact is wrong. Group think – again – is at play.
I want to cover two things this post – tariffs and commodity prices – both of which will impact Australia’s economy and in turn our housing market.
But first
Let’s resist the temptation to either demonise or lionise Trump’s policies by association with the man himself and consider them dispassionately.
Trump’s plans in the areas of energy, taxation and reform of the federal government promised the greatest economic benefits to the US.
On immigration, Trump’s focus is on stopping illegal inflows, not legal ones. Smart moving forward, less so when it comes to deportation. That is spilt milk.
In fact his economic policy philosophy is highly familiar, in many respects orthodox.
They are very Reagan-esque. Reagan’s policy strategy, which emphasised individual aspiration and supply-side growth, was successfully adopted by Hawke, Keating, Howard and Costello.
One truism is that Trump is transactional. He is mercantile. And this is the key personal trait when it comes to his comments about tariffs.
Tariffs
Trump is also a New York real estate agent. Think about that for a moment. If he wants to buy a property, his first offer will have shock value. It will be way below the asking price and on ridiculous terms. And it is from this point that the negotiations begin.
The same mindset – I believe – applies to his comments about potential tariffs on the campaign trail. Again he is all about leverage and cutting deals. A Republican White House will no doubt use tariffs to negotiate with friendly countries and lean on bad actors.
Yet he threw some big numbers out there, threatening China with an across the board 60% tariff, growling about taxing Mexican cars at up to 500% and about a flat tariff on other imports of between 10% and 20%.
Almost universally, economists – including our own RBA – say such hefty duties would lead to higher consumer prices and act as a drag on investment and economic growth.
However, few have examined the strategy behind Trump’s comments, and they can be found in a recent book by his trade adviser, Dr Peter Navarro, titled “The New Maga Deal”.
It was a hard read – so let me spare you the pain – in short there are 132 countries whose tariffs on products exported from the US are higher than the duties imposed by US.
Some of the disparities are large, cars for example where US imports are taxed at just 2.5%, whilst US car exports to the European Union attract a 10% tariff. In China the duty is 15% and in Brazil it is 35%.
If countries were to reduce their tariffs to match those of the US, it could lower the US trade deficit by as much as 10%.
This is a key point when it comes to understanding Trump’s negotiation strategy.
Should these countries refuse to reciprocate, then the US could increase its tariffs to match theirs, resulting in the same (or very similar) trade shortfall.
This could see hundreds of thousands of new manufacturing jobs being created across the US and help them boost their defence spending as well.
I reckon – and this is a punt – that many countries will capitulate and lower their US tariffs, thereby helping to reduce inflation, not increase it.
Now let’s turn to commodity prices and this is a China story.
Commodity prices
China’s economy is on the back foot.
The country is also experiencing a property crisis, which was well overdue if you ask me, after years, if not decades, of overbuilding. Whole districts are housing graveyards. Literally ghost cities.
Apparently, the whole of China’s population – some 1.4 billion of them – could fit into the country’s empty homes. Wow!
Now Australia exports a lot of coal to China and most of that is used to make steel.
So with new home sales and housing construction plummeting one would expect that China’s want for our black stuff to fall as well. And with that fall in demand, comes lower prices.
And this is where most economic commentary stops.
But last year China produced a billion tonnes of steel. This is up 50% from about a decade ago.
Ten years ago, some 45% of China’s steel was used for domestic buildings. Today is is closer 20%.
Today most of China’s steel is used to build machines and machinery. And much of this stuff is exported across the Indo-Pacific. Think India, Vietnam, The Philippines and Indonesia.
All these countries are growing at a fast clip and are expected to increase their economic grunt in the decades to come.
So China will want more coal – and our good stuff – in the future.
You also have the impact of falling US interest rates, which will see the US dollar fall and after a lag, commodity prices typically rise not fall.
End note
So maybe we should push the pause button on some of the doom and gloom.
Trump isn’t the end of the world and nor is China’s property crisis.
In fact both developments are positive for Australia.
Our focus should be on fixing things at home. We are lagging the rest of the developed world on inflation and productivity; and it is high time our policymakers rediscovered it.
Not only does it make eminent economic sense, but it is also an appealing political pitch, as Trump showed. Australia simply cannot afford the current waste in government.
Also we are going to need to create jobs for a large number of people. The last time this occurred was at the end of World War II when we had large numbers of soldiers returning to the workforce plus a heavy migration program motivated by the perceived need to increase population to be able to defend the country.
This should be our mindset again.
We used tariffs and subsidies to develop private manufacturing to absorb that labour. And like the US we face a repeat of the post-war environment, so we will also be looking for solutions.
Two easy wins is to give the recent industrial relations legislation the boot and ditto when it comes to high power costs being imposed on Australia thanks to the bad application of renewable projects.
Ordinary Australians outside the capital city elites - I believe - have similar attitudes to the US.
When given the chance they voted no in the voice referendum.
In the US they voted to change the government mindset, lower energy costs plus taxation and attract the right type of migrant. They were also down on “woke”.
Expect the same here in 2025.
Postscript
Thanks to Michael Knox - one of our best economists - for this input and advice. For more visit Morgans website.
And normal programming returns next week.