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‘They don’t hurt that much’: Trade war unlikely wipe to growth

Trade war and boxing gloves

In good news for investors in international shares, one of the nation’s top economic forecasters believes the US versus China trade war’s implications for global growth have been overblown.

The latest Business Outlook from Deloitte Access Economics partner and economist Chris Richardson notes that despite worsening trade wars, global growth remains strong.

Mr Richardson said that although tariffs do hurt growth, “they don’t hurt it by all that much”. However, the forecaster believes US President Donald Trump’s assertion that “trade wars are good” is doubtful.

“The Donald says ‘trade wars are good, and easy to win’. We doubt that, though the impact of a trade war is likely to be far more muted than much media reporting would suggest,” Mr Richardson said.

“Setting aside all the noise, the backdrop for Australia’s balance of payments isn’t that bad. There will be some pressure on the current account deficit in the next few years as commodity prices soften and interest rates lift here and around the world, but the impact isn’t expected to be all that dramatic.”

The Deloitte Access Economic report noted that the geographic base of growth continues to narrow, growing more dependent on the US. Mr Richardson believes that this poses two problems.

“First, synchronised strength tends to be more durable, so the fading synchronicity of the moment is – by definition – riskier than had growth been more widespread. The base is narrowing because Europe and Japan have lost some momentum in their growth,” he said. “And while China’s growth remains magnificent, it too is slowing.”

The second problem is that the spurt in US growth is mostly due to the juice coming from the large business and personal tax cuts enacted in late 2017, Mr Richardson said.

“Those cuts are mostly a one-off prop to growth. The upshot is that, while global growth is excellent now and should remain above trend in 2019, it looks like heading back down the slippery slope come 2020,” he said.

Commenting on the domestic market, the economist noted that despite the house price fall we “had to have”, Australia’s growth has continued to accelerate, and ongoing strength is forecast to be good enough – at a “smidge” above trend both this year and next – to keep job gains solid and unemployment edging down.

“And, with inflation gradually on the rise, that mix should see the recovery in wages continue, albeit at snail’s pace. But that will be a Faustian bargain. Alongside a lift in wage growth there’ll be a matching lift in interest rates, with the latter acting as an anchor on consumer spending – and hence on the wider economy – in the next couple of years,” he said.

Mr Richardson is forecasting that although Australian economic growth will be solid, it won’t be quite as good as global growth, with the current drought adding to the short-term headwinds in play.

‘They don’t hurt that much’: Trade war unlikely wipe to growth
Trade war and boxing gloves
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