Why Australia’s well placed to weather Trump’s economic self-harm

Luci Ellis is Westpac’s chief economist. I spoke to her first at midnight on Tuesday, Australian time, while she was on a train in Europe, and then on Thursday after Donald Trump’s latest move.

Fitz: Ms Ellis, thank you for your time. What I seek, please, is some crash-course tuition in this week’s economic news whereby you assume zero knowledge on my part (you won’t be too far wrong) and don’t use any big words like “marmalade jam” or “corrugated iron”. Can we start with a little about your background?

Luci Ellis: “We expect interest rates to further decline, with at least another three rate cuts of 0.25 per cent.”Credit: Janie Barrett

LE: I’ve been the chief economist at Westpac for 18 months now. Prior to that, I was at the Reserve Bank of Australia for over 30 years, including being chief economist there for nearly seven years and head of financial stability for eight years. So I had a ringside seat to the global financial crisis and to COVID, among other things.

Fitz: Again, you’re hired. Let’s start with tariffs and Trump. After all the chaos, Australia still faces its 10 per cent tariff, which means, I think, that if I am selling “FitzSimons’ Widgets” to the US for $100 a widget, from now on, Trump has said $10 will be added to the cost of each one that goes into the US?

LE: Yes. So the wholesaler in America who is importing them will have to pay the government an extra $10 for every one of your widgets.

Fitz: And to recoup that $10, the American consumer of my widgets will have to cough up another $10, and the Trump idea of making my widgets more expensive is that it means that somebody in America – say, Yon Yonson of Wisconsin – can now suddenly be competitive in the widget market, producing his own, employing Americans and using American resources to make the widgets, yes? That’s the idea?

LE: Yes. Certainly, Trump’s intention is that by making other countries’ exports into the US more expensive, it will stimulate more US production, and therefore, either American widgets will take over, or people like you will have to start producing your widgets in the US, using US labour. So that’s the idea behind the tariffs.

Fitz: But you say, to use the technical expression, the whole tariffs scheme is not only antediluvian economic policy but … batshit crazy?

LE: I say I have sworn off swearing for the last three months, so I don’t say that. I say it is an act of economic self-harm that will hurt America much more than it will hurt other countries. Just about every economist would agree that it is fundamentally counterproductive, but you don’t need to ask an economist. You can just look at the history of Australia. We, too, used to hide behind a tariff wall, and yes, we had many manufacturing firms in Australia that were therefore protected, but they never became truly competitive, so they were never able to really export. So, international experience has proved that while you can try to hide behind a tariff wall to compete with imports, what you can’t do is then become competitive enough to compete back out in a global market.

Fitz: That much seems obvious right now by the savage reaction against Trump’s tariffs around the world and in America, where global sharemarkets have all bled white since Trump’s plans were announced – having lost nearly 20 per cent in the US alone, from its February height, before bouncing back on Trump’s backflip in the pike position and massive belly flop. Everything out of the US right now is chaos, and the net result is a retraction of the global economy.

Luci Ellis: The Europeans are “looking at the behaviour of the Trump administration and finding it very unpredictable”.Credit: Natalie Boog

LE: I’m currently in Europe, and we’ve been speaking with customers over here, including investors and asset managers in London and the rest of Europe, and everybody is quite uncertain. They’re looking at the behaviour of the Trump administration and finding it very unpredictable. But in the end, the one thing I think the Trump administration does believe in is tariffs. And despite this being, I repeat, an act of economic self-harm for the United States, they seem to be fairly accepting of the market sell-off – they see it as a remaking of the trading system. This is reflected in the fall-out in Australia, with our own sharemarket falling, while our dollar value also goes down against the American dollar.

Fitz: Which is something else I really don’t get. They’re committing an act of economic self-harm, so why does our dollar go down against theirs?

LE: It is counterintuitive. Even though the US is where the trouble is happening, when bad things are happening in the global economy, financial market investors go to what they perceive as being safe and liquid, and that’s US Treasury bonds and, thus, US dollars.

Fitz: Trump’s latest contribution to chaos theory is to put all the tariffs on pause for three months, bar China, which he wants to hammer more than ever. How is Australia positioned in a China/US trade war?

LE: At Westpac Economics, we are working on the assumption that the Chinese government can provide enough support to its own economy to stop growth there slowing by much. That means Australia will be relatively insulated, too, because China is our biggest trading partner by far. The decline in the Australian dollar also helps us by making our exports more competitive in other markets.

Fitz: The Herald’s Peter Hartcher wrote a piece last month, the theme of which was that even with tariffs and crashing sharemarkets, the situation in this country “should be generally manageable with the same policy tools that Australia has used to weather a string of global recessions.” Do you agree?

LE: I do agree. One of the main reasons I agree is actually because the exchange rate adjusts. So we’ve seen the Aussie dollar sell-off relative to the US dollar in recent days, including going down three cents in one day. So even though the price of your widgets in America has gone up, and you’ll sell less, the return in Australian dollars will be more – and that absorbs a lot of the shock.

Fitz: Good news!

LE: Also, bear in mind that the US is actually not a very big destination for the things that we export, with the exception of frozen beef. And while they produce beef there themselves, it’s all grain-fed and fatty, whereas Australian and New Zealand beef is grass-fed, and so it’s leaner, and it makes better hamburger patties, right? And so McDonald’s is going to keep buying it. So, really, it’s not panic stations in Australia, as we’re relatively insulated from it – but the Reserve Bank will also move here to protect the Australian economy.

Luci Ellis: “It’s not panic stations in Australia.”Credit: Janie Barrett

Fitz: The Reserve Bank, of course, being the central bank of the bankers, the body that sets the rates at which money is available. Can you tell me its role in regulating the economy?

LE: Their role is to try and keep a stable, growing economy without huge peaks and devastating troughs. The best economies are those that steadily grow without regularly crashing and losing jobs. So, by putting interest rates up, they can slow the economy down, and by putting them down, they change people’s incentives to spend and speed the economy up. In that process, the RBA is always aiming to get inflation back to 2.5 per cent because low, stable inflation – without causing too much unemployment – is the hallmark of a well-functioning economy, and if you can get that, it avoids a lot of trouble that you get with either deflation or very high or variable inflation.

Fitz: So Treasurer Jim Chalmers has done a good job bringing back inflation from 6 per cent to the desired 2-3 per cent range?

LE: Well, a lot of the decline in inflation was going to happen anyway because the initial surge in inflation was the result of the COVID shock – which affected supply chains and boosted prices for a while through demand exceeding supply – and stimulus money being poured in, and interest rates being very low to stimulate the economy. When COVID faded and the stimulus money stopped, it was important to ensure that inflation didn’t remain built in, so that’s why central banks around the world raised interest rates to help get things back to normal. And yes, in Australia, the measures taken have helped bring it down to an acceptable level.

Fitz: Which brings me to my two key questions. Chalmers, the other day, was predicting four interest rate cuts in Australia for this year. Might that be just election talk – “vote for us, and you’ll save on your home loans” – or do you agree? Is the upside of Trump’s tariffs that it will bring the rates further down?

LE: Even without what Trump has done, we already expected a total of four cuts this year, including the one we had in February. That means three more interest rate cuts this year, and yes, the Trump hit on global growth does make that even more likely. At Westpac, we will be publishing new forecasts on Monday, but for now, it is obvious that with all that is happening, that while the RBA is certainly not comfortable about cutting rates at the moment – or haven’t been – they are very likely to be soon. So yes, we expect interest rates to further decline, with at least another three rate cuts of 0.25 per cent.

Fitz: So, before Chrissie, a total of a 0.75 per cent cut is likely?

LE: Yes, and if I’m wrong, it’s a more than 0.75 per cent cut.

Fitz: And you don’t think, despite sharemarkets around the world shedding value, we in Australia are not facing some kind of financial Armageddon, which is the fear a lot of people have?

LE: I do not. We are a resilient economy and have the means to get through this without too much damage.

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