What Trump's second term means for Australia, the US, and the global economy | talkBIG podcast | Season 3 Episode 6

Jamie O’Rourke: [Music] Ladies and gentlemen, we might get started just in the interest of time. Hello and welcome to you all joining us for this economic update. I'm Jamie O’Rourke, the Chief Executive Partner of RSM Australia, and I'm delighted to have you with us today. I would like to acknowledge the traditional custodians of the land that I'm on today, the Wurundjeri people of the Kulin Nation. I pay my respects to the elders past and present.

Ladies and gentlemen, we coin this update "Bracing for Impact" because Donald Trump has been confirmed as the next president of the United States, and there has been a Republican sweep of Congress. Global markets are already starting to react to the anticipated shifts in policy. As we close out a year of relatively strong global economic growth in Australia, new and significant variables like potential changes to trade policy, monetary direction, and fiscal priorities are now firmly in play. Closer to home, Treasurer Jim Chalmers has already cautioned that Australia won't be immune to the fallout of a possible trade war if the incoming administration moves forward with sweeping tariffs on China's imports as they have discussed.

These dynamics raise pressing questions about the trajectory of growth, market stability, and business opportunities on both sides of the Pacific. We've got two great economists from RSM to join us today. 

Outlook for the middle market: Insights from RSM’s global CEO

But before we go to Joe and Devika, who I will formally introduce, I would also like to welcome the global CEO of RSM worldwide, Mr. EJ Nedder, who is joining us today. He's in Melbourne with us. In fact, we had a national partner meeting last week in Brisbane, and EJ came out and explained a whole lot of things strategic for RSM around the world. EJ has been in his role for six months, and during that time, he has visited five different continents and met the RSM member firms around the world. EJ, if you could maybe just share a couple of insights as to what the middle market of the world is seeing through your eyes.

EJ Nedder: Thank you, Jamie, and glad to have all of you joining us here. As Jamie said, I stepped into the global CEO role in June of this year, and it's been an absolute pleasure to get to go around the world and hear about all our great member firms and the work that they're doing. Some of the perspectives I've heard are that the middle market, which is a core focus for us, and our member firms are strong and in a great position of advising and helping our clients. But we do see a lot of trade pressure and financial pressure that's continuing and we expect to accelerate to a certain extent in the upcoming year. You'll hear from Joe and Devika on those key matters. The middle market has been resilient and continues to be resilient, but they will have new challenges to deal with as we start to see trade change globally. I'm excited for this conversation and hope all of you will enjoy it. Thank you, and back to you, Jamie.

Jamie O’Rourke: Thanks, EJ. Yes, there are always challenges. The idea of today is to try and provide some insight and interpretations of what might happen so that you can use this information to better plan for the challenges that may come forward in your business. 

How will Trump’s second term impact the global economy?

We have two fantastic guests. First of all, joining us from Austin, Texas, is Joe Brusuelas. Joe, I apologize – it’s Sunday evening where you are at the moment. It's great that you could join us today. Joe is the Chief Economist of RSM in the US and is a widely respected voice on US economic policy. He has more than 20 years of experience analysing US monetary policy, labour markets and fiscal strategy. Joe is an award-winning economist and a member of the Wall Street Journal's forecasting panel. He regularly briefs members of Congress on the real-world impact of federal policies and provides invaluable guidance to executives making critical business decisions around the world.

We also have Devika Shivadekar from Australia, our own in-house economist. Devika has deep expertise in macroeconomic issues across both the public and private sectors. Devika brings a nuanced understanding of the Asia-Pacific region and is a frequent commentator in the media on Australia's position in the economic order. With a talent for distilling complex dynamics into actionable insights, Devika will help us assess how the US election could reshape the economic environment here in Australia. We've already had many questions posted, and we will get to those. If you have any questions, please put them in the Q&A chat.

Joe, if I can go to you first, please. We see everything through an Australian lens. I'd be very interested to hear how you're seeing things through the world lens given the now announced change in administration that will occur on the 20th of January 2025.

Joe Brusuelas:

Thank you, Jamie, and it's certainly good to be here. I appreciate everybody on the call. Good morning, it’s good evening where I am. Your most valuable commodity is your time, and I'm so pleased that you're going to share some time with all of us today. 

The global economy in 2025 looks to grow somewhere between three and three and a half percent. While that's not the rate that we grew accustomed to prior to the pandemic, it is an improvement and will largely be driven by the two big economies of the United States and India, not China. We'll get to China in a moment. In addition to pretty solid growth in the US, it will be probably around two and a half to three percent. In India, you're looking at the six to seven percent range. The primary driver is going to be the emerging markets, which we expect to see growth in that four to five percent range next year.

Of course, when we talk global economics, we have to talk commodities. The most important commodity out there is the price of oil. It does appear that in 2025, we're going to have a global surplus of about one million barrels a day, which will effectively put a cap on oil prices. This is good for the global economy, which is still emerging in many cases from the price shock that followed the shutdown of supply chains and the reopening of the overall international economy. My sense here is that what you’re going to see is the United States continue to drive overall economic activity due to the fact that its economy is going to grow between two and a half and three percent. It has a very low unemployment rate right now of 4.1 percent, but it's consumer-based because wage growth in the United States for the past 18 months has been advancing above inflation. This means you're going to see robust consumer spending somewhere in the range between three and four percent.

US trade policies and tariffs in 2025-26

As we turn to the policy matrix, the real challenges are going to come from the new policies that will be adopted by the Trump administration. Two big important things, and these are the things I hope you take with you. 

First, the US is likely to adopt an expansionary fiscal policy. This means you're going to see lower taxes and increased federal spending, which in turn will create increased personal disposable income across American households. They will then spend that capital by vacuuming up excess production everywhere across the world except from China. We'll get to that in a moment. This means the United States is likely to see an increase in its already large trade deficit. That's where we get into some of the challenges of the new Trump administration. You have heard that the Trump administration intends to adopt a new tariff regime, which means increased taxes on imports from around the world. Now my sense is that we have to separate out the campaign rhetoric from the grim realities of governing. What we expect to see early in 2025 is a series of tariffs put on Chinese imports, which will have an indirect effect on other Chinese trade partners in general and Australia in particular.

Okay, so what should you expect? Well, currently, US tariffs on Chinese goods sit at around 25 percent. The average is closer to 12 percent, but the really big value-added products have a fairly high tax on them. The Trump administration is expected to increase those tariffs by somewhere between a rate of an additional 20 percent and in some cases as high as 60 percent. This will roil the global economy in a number of ways, but we should expect to see that as early as January 21st in the United States. This will carry a cost. When the Trump administration put tariffs on Chinese goods in the 2018 to 2020 period, we did see an almost one-for-one depreciation in the Chinese yuan and the Chinese clearly intend to take retaliatory steps. What was a trade skirmish during the first Trump administration… we want to watch this closely to make sure it doesn’t turn into a trade war, where you get bigger currency depreciations, capital controls, and other measures that are not in anyone's interest.

Now, when we think about the global economy in 2025, I think we need to start with the role, status and value of the US dollar over the past year since late December of 2023. The US dollar has appreciated by 7.5% and you should expect that to continue because the dollar is on such a tear it’s going to cause some issues in the global economy – particularly for large emerging markets with significant dollar-denominated debt, currency pegs, and large external debt. This will entail a period of transition, because the cost of servicing that debt, maintaining those pegs, and importing oil all increase, leading to slower growth than would otherwise have been seen and a possible resumption of inflation via the energy channel. 

The inconsistency in Trump’s policies

Now at the heart of the Trump policy is an internal inconsistency. It wants lower taxes and increased government spending, but it wants to narrow the US current account surplus and US trade deficit. Something’s got to give. 

Typically what gives is you get higher interest rates in the United States, which then in turn serves to act as a magnet for global capital. Through the middle of 2024—and I really want to lay this out—the level of foreign direct investment and capital inflows in the United States was larger than the next 12 economies combined, and this trend is likely to accelerate in 2025 and 2026. So there’s going to be friction, even as the global economy accelerates and some economies are going to have a more difficult time adjusting. 

China, Trump’s tariffs and geopolitical tensions

Now you know I laid out a scenario where we’re going to see the global economy grow between 3% and 3.5%, driven by the 2.5-3% growth in the United States and 6-7% growth in India. 

China’s goal is 5% growth, but to be honest it looks like their economy is growing closer to 2-3%. Now I know since the election of Trump, attention is rightly turned to tariffs and non-tariff barriers and a disruption of global finance and global trade. For Australia, again, those impacts are likely to be indirect or second-order, at least at first. The major challenge globally, separate from the United States but more importantly for Australia, is the fact that the Chinese are caught in a debt trap. They've entered a multi-year period of debt deleveraging. Typically, when an economy enters a period of debt deleveraging, it takes about 7 to 10 years to work through. The properties are very simple: households, firms, and in some cases, state and local governments, and the national government all will enter a period of deleveraging, meaning working down that debt. That means slower growth and definitely a more difficult period of adjustment in which the Chinese are attempting to export their way out of it. They're exporting the burden of adjustment to other countries. The Chinese are essentially asking their trade partners to accept a reduced share of global manufacturing.

One of the things that is different is that right now, the United States, Europe, Japan, South Korea, and Australia are not really willing to accept the surplus production of China. This creates the condition for real frictions—trade frictions, frictions in global finance—that likely will spill over into geopolitical and other security tensions that are already there in Northeast Asia. 

When the United States recently went through its period of debt deleveraging that started in 2007 and for all intents and purposes didn't end until 2014, the Chinese, I think, are about two years into this. So at best, we've got five years; at worst, probably eight years until they're through. 

Now, when we think about the collapse in housing prices and in commercial real estate around China, we've got a situation where their state and localities have very large quantities of debt. The Chinese say that there's 14 trillion yuan of debt at the state and local level. The International Monetary Fund says that's not likely the case; it's closer to 60 trillion. So we're just going to be in a period where the global economy is going to go through an adjustment. 

The primary driver of growth, at least since the great financial crisis, has been China. That baton has now been passed to the US and India. What it means is we're going to be diversifying away from risks, whether they be firms looking to avoid increased export taxes into the United States, which means essentially forward planning in terms of your own economic activity to avoid indirect or direct taxes, and second, diversifying your supply chains to get closer to your markets. In many cases, we see firms leaving the Chinese supply chains and moving into other areas—Vietnam, Indonesia, Malaysia. They tend to be the winners in Asia. Here in the Western Hemisphere, Mexico is definitely the winner as firms relocate or think about relocating the North American free trade zone.

My sense is most of the major trading countries have gone through four years of Donald Trump. They have an idea of how things work. My advice on this is to take him literally. He believes in tariffs and he believes in them as an instrument of negotiation or leverage. My sense when it comes to the Chinese is that there's not much to negotiate. He intends to keep their electric vehicles out of the North American free trade zone. He intends to limit the import of high-value tech because the United States—and I want to be clear here, this isn't a function of Trump; this was done under the Biden administration also—intends to protect its artificial intelligence industry, its quantum computing industry, and it intends to create a hemispheric market for critical and sophisticated microchips. So in many ways, this is just a continuation of policy that's already been put in place, perhaps with a steeper set of tariffs.

 Of course, there will be a focus on transshipment because what this administration won't tolerate—and it didn't in the first administration or their first four years—is firms essentially of Chinese origin moving to different countries and then just selling through different markets to gain access into the United States. Remember, in the United States, manufacturing only accounts for 10% of its $29 trillion GDP. 90% is services. The United States is a large, globally important country. It is on 90% of the $6 trillion a day churn in global capital markets. Of the $31 trillion global bond market, the United States accounts for about $23 trillion. It literally is the benchmark for the entire global economy. So most of that economy will continue to operate as is, but on the margin, there will be frictions in trade, finance, and geopolitical security concerns because of the competition with China. 

My sense is the Trump administration will need to get legal cover from Congress to impose a 10% or 20% tariff on all imports into the United States. My sense is that that's just not going to happen in 2025. That may be in the out years, and that would have to be legally binding—an act of Congress, something that the United States hasn't done in almost 100 years.

In closing, before I turn it over to Devika, the global economy is going to grow. That growth may not be as impressive as what we observed prior to the pandemic, but it will be growth nonetheless. There will be opportunities, even as China sees its economy grind towards much slower growth. There's still going to be opportunities to be had. Oil, which was one of the primary causes of inflation in the post-pandemic era, the price for Brent crude will probably trade between $70 and $75 a barrel next year, with the likelihood of lower prices and a move into the $60s simply because there's too much oil being produced relative to demand. 

Second, my sense is many of the trade frictions can be managed, but we're all going to have to learn to operate in a different way because we've reached a point where the Chinese have decided to export the burden of their domestic political and economic adjustment onto their major trading partners, who in turn simply are not willing to accept its surplus production into their own economies at a time when populist politics around the world are focused on domestic employment and manufacturing.

 So we are entering a new era, and that post-pandemic global economy is beginning to take shape. We're going to do okay; we're all going to grow, but there are going to be some new challenges, and those challenges at times may get quite noisy. It's good that we have forums like this where we can talk to each other in open and transparent ways to find common ground again to navigate those disruptions and those frictions. Thank you for your time. I want to turn it over to my good friend Devika.

Jamie O’Rourke: 

Thanks, Joe. We will come back. Don't go anywhere. We've got questions already coming in the Q&A box, so don't go anywhere. 

Australia’s economic outlook in 2025

Devika, if we were doing this three months ago, it would be about interest rates. It wouldn't be about bracing for impact from a new Trump administration. So Joe's talked about a 7 to 10-year cycle of debt and deleveraging, and we're two years in. That's going to have a massive impact on Australia. How are you seeing the Australian economy in this new Trump administration?

Devika Shivadekar:

Thanks so much, Jamie, and thank you so much, Joe, for the insightful talk. Let me perhaps start by giving a quick overview of where we are at today, and perhaps I think I would also like to touch upon how important the United States is for Australia because its importance can't be underscored. I think those couple of numbers might just help our audience understand how much of an impact and how much we should actually brace for Trump coming into power. I'll quickly give a brief of that and then maybe touch upon some points that I feel are pertinent to Trump becoming president and how that impacts Australia.

Looking at the Australian economy, our growth has remained quite subdued. Inflation is gradually easing, but services inflation still persists due to a tight labour market. In fact, policymakers have been surprised by the resilience of the labour market conditions because they have a dual impact. Number one, it eases wage pressures when there's a larger workforce, but simultaneously, it also has the potential to drive consumption up as more individuals earn incomes. Now, the participation rate has remained high, making it easier for businesses to find labour. However, skill mismatches are a continuing challenge. We believe hiring activity is being fuelled by two factors. Number one is weak productivity that Australia has been grappling with, which has been forcing businesses to expand headcount to maintain output. On the other hand, sustained demand for labourers in the public sector area, particularly in healthcare and construction. There was also a time when education hiring did see an upswing, but financial pressures from declining international student enrolments are likely to dampen that going ahead into the next year.

On the monetary policy front, despite headline inflation breaching the RBA's 2% to 3% target, we anticipate a gradual easing cycle. Our base case projects rate cuts beginning in the first quarter of 2025, though this could be delayed to the second quarter as the RBA prioritises a sustained reduction in core inflation, which is still sitting at 3.5% outside of the RBA's desired target range of 2% to 3%.

As we are here today, I think I would like to shift the focus from when the rate cuts will start to how much they are going to be cut because I think that's a much more important conversation to be had. The timing of rate cuts is likely to be influenced by many moving parts in the domestic as well as the global economy. Any forward-looking central bank would be looking at how far to ease the interest rates to ensure the economy does not get destabilised, regardless of the moving factors, whether we are looking nationally or internationally. 

We project a terminal rate of 3.35% by the end of 2025, reflecting a modest 100 basis point reduction only. If we were to begin interest rate cuts in the first quarter of 2025, I would say one 125 basis point cut each quarter to take us down to 3.35%. If the cuts are moved back or pushed back from the first quarter, I would expect the second quarter easing to be around the 50 basis point mark, followed by 25 basis points in the third quarter and 25 basis points in the fourth quarter.

Now, why do I see a risk of the RBA delaying its cuts further? I think it would be helpful to understand that we will be heading into a federal election in May 2025, and we have a pre-budget election scheduled somewhere in March. There is a risk that there may be a fiscal boost coming in that pre-election budget, so that is what the RBA might be looking at, as well as the fact that core inflation is still trending down quite slowly.

Moving on to businesses, I think it's important to note that in Australia, insolvency numbers are climbing as banks and the ATO resume enforcement of overdue debts. This reflects a backlog of cases deferred during the pandemic when leniency measures provided some temporary relief. Many businesses that survived due to those subsidies are now succumbing to financial pressures compounded by high inflation and elevated interest rates. Retail sales per capita have also been declining as high costs and rising interest rates erode household spending.

Here I would like to draw a comparison with the United States. We all heard Joe when he said that the United States consumer is in an extremely strong position, which is not the case in Australia. This pressure on consumer demand directly impacts business revenues here, creating a cycle of financial strain that can lead to further insolvencies.

We have a broad overview of what Australia has been going through.

US-Australia relations and defence collaboration under Trump 2.0

 Now let's try and understand how important the United States is for Australia. I firmly believe that we can't underscore the USA's importance enough. That relationship is pivotal. The most important governing factor in this bilateral relationship is the Australia-United States Free Trade Agreement implemented in 2005, which has been completely transformative for Australia. Since then, bilateral trade in goods and services with the United States has more than doubled to 98.7 billion as of the end of 2023. Key Australian exports include gold, meat, and financial services, while American exports feature machinery, vehicles, and technology services. Two-way investment has also tripled, with US investments in Australia reaching $1.2 trillion and Australian investments in the US at a similar $1.21 trillion mark. In fact, US direct investment into Australia is the largest in the Indo-Pacific region. Over 10,000 Australian companies sell or operate in the United States, and Australian companies employ an estimated 180,000 people in the United States.

From a defense perspective, this is what people in Australia are most interested in knowing, which also has somewhat of a direct implication because of Trump coming into power. The AUKUS partnership highlights the strength of this alliance. Efforts are underway to enhance Australia's nuclear-powered submarine capabilities and to develop these advanced military technologies, promoting stability in the broader Indo-Pacific region. It is going to cost the Australian federal government about $368bn over the next three decades. While it is aimed at deepening this collaboration between the two nations, there is no denying the fact that it is a significant expense on the government purses.

When we discuss bilateral relationships, we cannot do justice to that discussion if we don't look at the politics of it. Trump 2.0 will likely bring bolder and more unpredictable policies. Joe touched on a lot of them quite well and quite deeply. What I believe for Australia is that the first half of 2025 is likely to be focused more on policy formulation by Trump and his cabinet, and the effects of these policies will be more apparent towards the tail end of 2025 and well into 2026. 

The question on everyone's mind is probably what if Trump slaps tariffs on Australia too? We are all aware that he's keen to slap tariffs on China, but what if he does that on Australia? There is an interesting dynamic here between Australia, the United States, and China. Australia is one of those countries where we have a trade deficit with the United States and a surplus with China, so this should somewhat reduce considerable pressure on the tariff front for us. However, the only area in that we see an increased risk is the pressure to ramp up spending in the defence space, particularly with the AUKUS partnership.

Barring the Trump factor, in the short to medium term, the strength of the US economy that Joe highlighted for us is a bigger influence for Australia. While Australia stands to benefit from the United States' strong economic performance, which is likely to bolster global commodity demand and investment flows, a robust US economy may also exert upward pressure on global interest rates, posing challenges for us here. The RBA doesn't necessarily move in lockstep with the US Federal Reserve, but it does have to move somewhat in sync, even if it is with a lag. A robust US economy means higher spending, greater demand for goods and services, and the risk that prices remain elevated. If prices were to remain elevated, it forces the US Federal Reserve's hand to reduce the pace with which it starts cutting interest rates, which means it has a ripple effect globally.

In summary, the US-Australia bilateral economic relationship is definitely a cornerstone for both nations. However, it is a bit too soon to expect any significant ramifications for Australia as of today. For us, the short-term to medium risk comes more from the strength of the US economy, but we are likely to see the effects of Trump's policies on Australia and broadly China more in the 2025-2026 time period. We have to be mindful that Australia is in a unique position given that the United States and China are both its largest bilateral trade partners. If the United States and China were to engage in a trade war, Australia would definitely be caught in the firing zone. Thank you. 

Jamie O’Rourke: Devika, you say that there's a lesser risk because the US has a surplus with us, whereas we have a surplus with China. When you say lesser risk, that means that we've got a chance at the negotiation table to justify fewer tariffs or no tariffs, hopefully. Let's hope that's correct.

US immigration policy implications

Joe, a couple of questions have come through on immigration. You didn't touch on it, but there's a lot of talk leading up to the election on one of Trump's key policies being to deport a lot of individuals back to their country of origin. You've said they want to reduce their inflows from China, they want to do more manufacturing themselves, and you've said that only 10% of their GDP comes from manufacturing. But if they move a whole bunch of people out of the US, how are they going to do this?

Joe Brusuelas:

This is what I mean when I mentioned the inconsistencies at the heart of the Trump agenda. While he wants to reinvigorate the manufacturing sector, we simply can't do that without the labour we've imported from around the world. Tighter immigration carries two problems. First, it's going to cause real issues in agriculture, manufacturing, construction, and leisure and hospitality across broad swathes of the US economy. The real issue over the medium term is if he does intend to deport millions of people, which seems practically impossible and literally won't happen next year. It's something that will take time, they'll have to get budget for, and they'll have to plan out. From my point of view, it's a 2026 and beyond issue. If they do that with the US unemployment rate sitting at around 4.1%, we just don't have enough native-born workers to meet the demand across not just the lower added value traditional economy, but especially up the value chain where we import large numbers of people with advanced degrees who work in tech, life sciences, and other fields that really propel the US economy forward. You know in five years we're likely to be short 6 million people if the administration were really to pile forward on this it would create the conditions for unemployment to decline, wages to go up, which then sets the predicate for a possible wage price spiral and much higher inflation. 

So that's that inconsistency, that tension between its goals on manufacturing and what it's told the public it's going to do on immigration just are fundamentally not consistent. So again, something's going to have to give and if that's the case, that's one of the reasons why at least since the president-elect was announced as the victor, you've seen investors bid up long-term yields from 10 years to 30 years on the US Treasury maturity spectrum. 

You know what's interesting is next year we expect the Federal Reserve to cut rates between half a percent and 1% (50 basis points and 100 basis points). The front end of the curve 2 to 5, the belly of that curve will likely see rates fall which is very good for private equity and finance and financial services and energy and tech, but that long end's likely to increase. We have a 4.5% target on the US 10-year yield at the end of 2025 with risk of a 5%. I mentioned our base case on growth which was 2.5%. The alternative to our base case (the base case was 55% probability) the alternative is a 20-30% probability whereby we see the US economy grow by over 3% and that's when we'll start talking about rates of 5 to 5.5%. So there is quite a bit of internal tensions inside the US economy that will spill over into financial markets, and again, one of these things will have to give because all of them can't happen at the same time. And that was a thank you for asking that question on immigration. It's just not pertinent to the 2025 outlook, it's really 2026 and beyond.

Jamie O’Rourke: 

Thank you Joe. 

How will China’s economic situation impact their demand for Australian mineral commodities?

We are essentially a mining country. One of the questions is what are the likely effects of the tariffs that will be placed on all countries but in particular China and then their capacity to continue to buy our iron ore. 

Devika Shivadekar:

Yeah, so I think for this Jamie, there's been a very interesting dynamic that's been going on in China which I often speak about. It is that the residential sector particularly in China has been extremely weak, and as a result of that following the pandemic we have been seeing that the demand for some core commodities from Australia, particularly things like iron ore, copper, aluminium, they've all been falling because the demand from China is so substantial in our external sector that none of our other trade partners are able to revive that amount of demand. So it has been on a seesaw. 

Now what China has done in order to support its economy, I think Joe touched upon that and I will speak a bit briefly as well, is that with the weakness in the residential construction sector it has moved to what has traditionally been its stronghold which is the manufacturing sector. Now in the manufacturing sector China has been focusing predominantly in the new energy vehicle space which primarily means what we know here as EVs. Now it was just in the recent news that Australia is being flooded by a lot of EVs and however those EVs are not being sold very fast because there are a couple of challenges when it comes to managing EV sales here. Number one is lack of proper infrastructure and people are still going in that hybrid space rather than investing completely in an EV. 

So broadly what does that mean for our mining industry in Australia’s core commodities like iron ore, copper, aluminium and lithium? Now with the residential construction sector being extremely weak we can expect iron ore demand to be somewhat weak unless it is offset extremely well by our other trading partners which doesn't look like it's happening. Our iron ore dependency is still extremely high on China. Now because that focus has shifted from iron ore to lithium now and Australia is one of the largest producers of lithium, there's a very interesting dynamic here as well. China does not import lithium directly from Australia, it invests in lithium mines in Australia then ships it off to China, uses that in the EV space and then sells those EVs back into Australia. So it doesn't do a direct trade when it comes to lithium. So I believe broadly for the commodities and in the mining industry, I would say the weakness from China is likely to persist for the next 6 months at least and if Trump's policies are to some more tariffs which might decrease the appetite for China to look outward for its resources and make it look even more inwards, I think it would have a material impact on commodity prices and as well as the Australian dollar.

How will cryptocurrency impact traditional markets? Will crypto replace the US dollar?

Jamie O’Rourke: 

Thank you Devika. Here's a question on an alternate currency Joe. What impact will crypto rise have on traditional markets and what role does crypto play in the future versus the US dollar? 

Joe Brusuelas: Okay, so crypto is a highly speculative, very risky asset. When crypto was first introduced two decades ago, it was positioned as the successor to the dollar. Okay, well that's not the case anymore because stable coins are predicated on the value of the dollar, right? It's predicated on the stability of the dollar so we see them moving in tandem. Now my sense is that crypto is going to break $100,000 dollars per unit tomorrow morning when trading opens in the United States and it will likely continue to rise for some time but I see a financial asset bubble has formed. There's no economic value or rationale for crypto, it's just simply another speculative asset. I liken it to a very risky table in the back dimly lit corner of a casino. If you want to play in the market, I think that's great but you should only do so with capital you're willing to lose. When I see global currency markets, the US dollar is 60% of all reserves. When I add in Canada, Mexico, the UK, European Union, Australia, Japan, South Korea, Europe up above 95% of all reserves, that's the dollar bloc. Crypto is not going to replace that. Crypto will be part of a global mosaic of financial assets, some more exotic than others but I don't expect it to be a major factor in the global macroeconomy or the domestic micro economies of the major trading nations.

How will US economic policy impact the Australian dollar?

Jamie O’Rourke: Thank you Joe. And Devika, what about the impact on the Australian dollar? What do you think?

 Devika Shivadekar: Yeah, thanks. I think that's another important question following if Trump's policies are inflationary and the second question I always get asked is what about the AUD. So I think let me weave that into a story and connect that with how everything moves, particularly RBA as well as the AUD as well as the trade dynamics. So I think if we are to think about these upside risks from Trump coming into power on the Australian economy, its currency and its trade, we have to understand that most of our exports go to places that don't use the dollar such as China and Japan. 

Now in recent days if you check Bloomberg, most of these currencies have tended to track below the Aussie dollar and fall even more against the US dollar in comparison to how the AUD has been faring. However, Australia's reliance on exports to China may slide if Trump's anti-China tariffs do get enforced as sharply as he's claiming he would. Now weaker demand for Australia's currency would, all things being equal, push down its value further complicating the matter as our imports would get more expensive. Now to the extent that these imports can't be substituted, inflation will be higher than otherwise forecast which means tradable inflation becomes a risk. Now what does that mean? On one side our value is getting pushed down because of our reliance on China on the trade side but on the policy front the RBA is definitely not going to be happy with the tradable inflation risk possibility so our interest rates do not come down as fast as they should. 

Now if the US Federal Reserve continues on its easing path but the Reserve Bank of Australia is not able to follow the United States, it naturally appreciates the Australian dollar. So net-net, on one side trade is going to pull the Aussie dollar down but our monetary policy is likely to keep it elevated. What that means is to some extent there's a chance that the Aussie dollar's negative and positive, the appreciation and depreciation might just get offset. 

So the outlook for the Australian dollar is broadly unchanged as of today unless trade factors as discussed and the divergence in central bank policies do not destabilise the whole structure too much. So net net I think it's safe to assume that the Aussie dollar should stay around an average of 69 cents.

Can Australia capitalise on skilled workers leaving the US?

Jamie O’Rourke: Thanks, that's good to hear. Just back with you on immigration and there's been a lot of talk about immigration quite some months ago that we need more immigration to actually grow and improve GDP. More recently it's been we need to reduce immigration for a whole bunch of reasons.

With what's happening in the US with illegal immigration and the Trump Administration saying that they would like to export that, what opportunities does that open up for Australia?

Devika Shivadekar: Yeah, so I think if it's illegal migration, Jamie, we don't want those opportunities in Australia. But I believe our over-reliance on migration stems from the pandemic when people thought the lockdowns in Australia were quite strict. People on temporary residential status moved out of Australia, which predominantly were the ones engaged in the Australian labour market. This created an acute shortage of people to fill job vacancies. We opened the borders to invite more people in to fill those gaps because the sustained pressure in the labour market was putting a lot of pressure on wages, and because wages were growing continuously at a break neck speed, we had the problem of inflation.

We opened the borders, we invited more people in, but that brough along a new problem because we moved from the problem of absolute unemployment to structural unemployment. While we were finding it hard to find people to fill those gaps, now we are finding it hard to find good enough people to fill those jobs. Many people are applying for jobs, but they're not good enough for that job vacancy, which means our productivity suffers. When our productivity suffers, I woulud like to take  you back to the first point I had raised, that businesses are being forced to hire more because productivity is low. Now because productivity is low, our hiring continues to increase despite being in a very different macroeconomic environment. The situation we are in currently does not warrant such a tight labour market. Yet we are sitting at a 4.1% unemployment mark for the last six months. 

We've added an average of about 0.3% jobs every month, and it's only in October that employment growth inched down to 0.1%, which should have happened at least a couple of months ago. Productivity is a big challenge in Australia. Initially, it started off as not having enough people; now we have too many people, but none of them are working hard enough. So we are stuck in this cycle of hiring more people but not generating output. Productivity remains low, wages are increasing, which adds to the inflation problem, as evidenced by services inflation, which still remains around 3.6 to 4% in our inflation metrics.

When it comes to immigration, I think the policies have to be a lot more forward-looking than just short-term.That is what I think impacted Australia the most – our migration policies were very short-term. We didn't have a good forward-looking migration policy, which should have been more about only allowing people with the right skill sets to enter Australia. I believe our immigration policies have now changed, and we are seeing better filtration of the people entering Australia.

Australia should begin bidding on global talent to drive our economy

Joe Brusuelas: Jamie, let me add something to that if I can. During the first Trump Administration, immigration policy tightened considerably. There was an unintended consequence in North America that the competition for skilled labour, especially technically skilled labour, ended up being favourable to our friends in Canada. Toronto became the startup capital of the world until the pandemic because educated people from all around the world suddenly said, "Maybe the United States isn't the place we want to go.”

With immigration tightening in the United States for the next four years, I think it would be wise for Australia to get in the game, to begin bidding for that global talent that might have otherwise gone to Silicon Valley or places like where I'm at today, Austin, Texas, which is one of the emerging capitals of artificial intelligence. We're likely to not see that intellectual capital migrate to the United States because of the policy changes. 

This is one of those hidden opportunities that I think is just sitting in plain sight. If you're in Melbourne, Sydney, or anywhere in Australia, you want to get in that game because that's the way you can stimulate productivity in the short term. It's a little different way of thinking, but right now there's a real premium on global talent because innovation is what's going to drive all of our economies and productivity, which is key to lifting living standards.

Jamie O’Rourke: Yeah, we definitely agree with that. We've had some of our earlier economic discussions about the importance of increasing productivity and embracing new technologies to do so. The labor shortages are critical around the world, especially skilled labor shortages. That's good advice, Joe. Thank you. 

Trump, Musk, D.O.G.E and the realities of economic populism

Joe, a couple of questions here just on federal government spending. Firstly, Mr. Trump has said that he's going to increase spending. In what areas and what about the increase in defence spending, noting the very interesting geopolitical issues going on around the globe? That's the first part of the question. The second part is the very interesting appointment of the head of government efficiency, Mr. Musk, who has said that he'll take a third out of government spending. How does all this work?

Joe Brusuelas: When I go around the world talking about the US economy, I tend to remove Trump from the equation and talk about what economic populism is. Economic populism tends to move through the fiscal channel. Populists like to cut taxes and increase spending. In Trump's case, it will likely be through the defence channel and pretty big tax cuts for some esoteric areas of the tax code that he thinks may impact positively his constituents. The US deficit is likely to rise, spending trade, excuse me, its budget deficit is likely to increase, not narrow, in the coming years. US spending on defence will increase to well over $1 trillion in the near term. 

The question is, how long can this go on? Clearly, the US annual budget deficits at 6 to 7% can't continue indefinitely. Something's going to have to give. My sense is it'll probably be a combination of spending cuts and tax increases over time, but for the next two years, don't count on it. This is important because the dollar is the reserve currency. The US has that exorbitant privilege where it can spend more than it takes in. It can literally have its cake and eat it too. Because of the trade tensions that are not exclusive to the United States and China but most major economies and China, the world is moving into trade blocs. It's why I was very careful earlier to mention the global financial situation about how major US trading partners account for 95% of all currency reserves. That's the US currency bloc, the US trade and finance bloc. Australia is a part of that. Vietnam, Indonesia, Malaysia, Singapore are all going to be forced to choose which bloc they want to be part of going forward. That's at the heart of those global tensions and the regional trade and financial tensions that will be inescapable over the next couple of years.

There's a great question in the chat about Vietnam. Vietnam has a really large and growing trade relationship with the United States. I mentioned transshipments, the idea that Chinese companies are now setting up in other places like Vietnam and attempting to export to the United States. The Trump Administration is going to be focused on that, and there's going to be some real tension on the ground in Vietnam because Vietnam is always caught between China and the other major powers, whether they be regional or global. Vietnam's going to be on the tip of everybody's tongue over the next four years.

Where does RSM get its economic information?

Jamie O’Rourke: Thanks, Joe. A general question as we are approaching the hour: where do you both get your information from in this very news-crowded space? We're all grabbing information from different places. What do you rely on? And you can't say Bloomberg because I know you both subscribe to Bloomberg Terminal. So what's a good place for information?

Joe Brusuelas: The economists at RSM are data-centric. We have data providers that we pay for, and then we focus on government statistics. When it comes to the global economy, I rely on international institutions like the Bank of International Settlements, the International Monetary Fund, and the World Bank. We're looking at the potential disruption next year of global finance due to the increase in the value of the dollar. I'm spending a lot of time inside the Bank of International Settlements looking at dollar-denominated debt and dollar credit to see if the move away from dollar-based credit over the past five years has put select emerging economies in a situation where they're not going to be harmed in the way they would have been 30 years ago. Thirty years ago, the United States Central Bank increased its policy rate by 5%, and it tipped over almost every single Asian economy. That's not going to happen this time. That's actually progress. 

But we really are data-centric at RSM, and all of our economists are committed to starting with the data, and then our analysis proceeds from there. It's not a top-down thing; it's an inside-out thing.

Devika Shivadekar: If I may add, Jamie and Joe, I think Joe put it together really well that data is what we rely on heavily when it comes to making sense of what's happening in the economy. But to a great extent, I would say, Jamie, that when I'm on the ground speaking to clients, there are often times when I'm wondering why there is a mismatch and why this data is not making sense. Speaking to clients on the ground also helps a lot. Essentially, we start with data, like Joe said. We put it all together, try to strip the noise to bring together the trend, but every time we hit a roadblock and wonder why the data is not moving as it is supposed to, we try to fill that gap with what we hear on the ground. Then we come back to our data, use those insights, and make sense of the trends. There we have our insights. 

I completely understand where the question came from. There's a lot of noise in the media, and we don't understand what to listen to. But I think it always helps to take a step back. If you want to understand what consumers are doing, think as a consumer. If you want to understand what businesses are doing, think as a business. Often, it also helps a lot to read the communication that comes out of central banks and central bank office bearers because I believe those speeches are published. That's another good place to get some insights from.

Future capital flows in the Asia-Pacific

Jamie O’Rourke: Thank you, Devika and Joe. I think we've got time for one or two more questions. I know we've just clicked over the hour, but there's still more than 500 on the call, so we might run one or two more questions.

Joe, you mentioned at the start there's going to be a big change in capital flows for the US. Which countries, and if I could ask you to maybe focus on Asia-Pacific and ASEAN, and then I'll go to Devika second. Where do you think there will be the biggest changes in the capital flows for those?

Joe Brusuelas: Well, I think that the countries or the economies that were the recipients of prodigious foreign direct investment are at risk of seeing those reverse. So you think the big three in Asia on that are the developing countries, right? Vietnam, Indonesia, Malaysia. I think that's where you'll see that the most. Obviously, China is going to be having issues, and this is not dependent upon what's going on in the US. This has to do with their own deep domestic economic and financial problems. As recently as 2014, 2015, 2016, China saw prodigious capital outflows. But make no mistake about it, with the growth in interest rate differentials between the US and its major trading partners, with those tariffs, with the fiscal expansionary policies that are going to be put in place, capital is going to flow from the south to the north, and most of it will be towards the United States. Outside of ASEAN, I think of a country like South Africa that's having some economic difficulties, that's got large external debt, large dollar-denominated debt. They're one of the countries that I'm most concerned with. They're going to be at risk going forward over the next couple of years.

Jamie O’Rourke: Thank you. Devika, your thoughts?

Devika Shivadekar: I think I echo what Joe has said. He's spot on. I have nothing to add there.

Jamie O’Rourke: Great. All right, well, that takes us past the hour. So on behalf of everybody, we had a fantastic attendance today. Joe, thank you. As I said, Sunday night, you haven't even started your week yet, so we really appreciate your input, your insights, and sharing your experiences. You're very close to, in particular, Middle Market USA and the world, so thank you very much for sharing your insights. Devika, as always, you've done a number of these now, and your views and your research are fantastic and spot on from an Australian context. So thank you very much for your commentary and for your answers to the questions, which were great. 

And thank you, ladies and gentlemen. You've been a wonderful audience, and the questions have been fantastic. We are still bracing for impact, it sounds like, for the next six or eight months. We're going to be thinking about what's happening in Australia because the Trump Administration won't be in full force till the end of calendar 2025, and in particular, it sounds like calendar 2026. So we've got some time. We need to bring those interest rates down, I think, to help us all, and in particular, our Middle Market businesses. Thank you, ladies and gentlemen. That's a wrap for today. Thank you.