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The upcoming US presidential election on Nov. 5 is expected to have significant implications for Australia, particularly if Donald Trump maintains a lead. As an open economy heavily reliant on trade with China, Australia is vulnerable to the potential fallout from intensified global trade wars.
AMP chief economist Shane Oliver said that a Trump victory might escalate protectionist policies and reverse free trade initiatives, leading to a rapid increase in tariffs and a move away from globalization. This could directly impact countries like Australia.
The Organization for Economic Co-operation and Development (OECD) has indicated that Australia could face a 1.2% reduction in GDP from a 10% decrease in global trade between major countries. This would be the second-largest impact among OECD nations, underscoring Australia's high exposure to China. Resource sectors would be most at risk—and the Australian dollar would likely decline.
Oliver pointed out that the economic implications of a Trump win are multifaceted. Trump's tax cuts and deregulation policies could boost the US economy's productivity, benefiting from the rapid adoption of artificial intelligence. However, these gains may be offset by higher tariffs, reduced labour force growth, and potential threats to the Federal Reserve's independence, likely leading to increased inflation.
Additionally, the US budget deficit at 6.3% of GDP could worsen under Trump's tax policies, potentially leading to higher bond yields. The sequencing of Trump's policy implementations will be crucial. Oliver said that initial focus on tax cuts could stimulate the economy, while early moves towards tariff hikes and immigration cuts might have a negative impact.
Historically, US shares have shown average returns of 12% in presidential election years. However, heightened policy uncertainty could lead to increased market volatility, particularly if Trump leads in the polls. After Trump's 2016 victory, US shares initially surged but faced declines in 2018 due to trade war concerns. The market's reaction to a potential 2024 Trump win will depend on the timing and nature of his policy decisions.
US shares have performed best under Democratic presidents, averaging returns of 14.4% per annum since 1927, compared to 10% under Republican presidents. The most favourable outcomes have occurred with a Democrat president and Republican control of the House or Senate, while the worst have been seen with a Republican president and a Republican-controlled Congress.
