Trump’s victory could wipe $36b from Australian economy

Donald Trump’s policy agenda could precipitate a global financial crisis and fuel inflation, one of the world’s leading analysts has warned, with fears Australians will suffer higher interest rates and a $36 billion hit to the domestic economy.

As the Reserve Bank conceded the incoming US president’s debt-fuelled policies would put upward pressure on global interest rates, former bank board member Warwick McKibbin likened the impact of Trump’s plans on Australia to being in the middle of a line of fireworks as they exploded on New Year’s Eve.

A KPMG analysis suggests if all Donald Trump’s policies are implemented, Australia’s economic growth would be between 0.8 and 1.5 per cent lower than under current settings.Credit: nna\NPearson

Trump’s plans also pose enormous political problems for Prime Minister Anthony Albanese and Liberal leader Peter Dutton in the lead-up to next year’s election, with analysis suggesting even winning some concessions from the Trump administration would not prevent ongoing turmoil for Australia.

Interest rates globally have climbed since Trump’s victory over US Vice President Kamala Harris, fuelled by expectations his plans for tax cuts, tariffs and the deportation of millions of undocumented workers will increase the size of American government debt.

The Committee for a Responsible Federal Budget, an independent US organisation, estimates the Trump agenda would increase debt by $US7.8 trillion ($12 trillion) by 2035, taking it to an unprecedented 143 per cent of GDP.

Following Wednesday’s election results, the Australian dollar – among many currencies – lost value against the US dollar as investors bet a further lift in American government debt would require higher interest rates.

More speculative investments such as cryptocurrencies also enjoyed a surge in support. The price of bitcoin lifted from $104,500 early on Wednesday to a record high of $116,000 in the 21 hours after Trump’s re-election became clear.

Giving evidence to a Senate hearing in Canberra, Reserve Bank assistant governor Christopher Kent said Trump’s policies such as tax cuts would probably mean higher US long-term interest rates and inflation, which would flow through to the global economy.

“Because the US is such an important source of funding, and the demand by the government for borrowing is substantial, that’ll have upward effects on global interest rates,” he said.

Kent said Trump’s protectionist tariff policies would slow growth around the world.

“We just don’t know how big and who they’ll be applied to, [but] it should push up the US dollar because US customers will be buying less goods from the rest of the world, and they’ll need less foreign exchange, but it means less demand by the US for global goods, so that’s a sort of negative for growth elsewhere,” he said.

McKibbin said Trump’s tariff plan, which includes imposts of 10 to 20 per cent on Australian goods and 60 per cent on those from China, would directly hit the local economy while undermining global trade.

But the broader elements of Trump’s agenda, especially possible interference in the setting of American interest rates, could deliver the world another financial crisis.

“It’s like standing on Sydney Harbour Bridge when they set off the fireworks – you don’t want to be on it. There are fuses everywhere and they are just going to ignite,” McKibbin said.

“China is our biggest market for energy and resources. If they don’t sell as many goods, then the demand for our energy and resources is going to fall. That’s not good for the Australian economy.”

McKibbin said the Trump plan to deport millions of undocumented workers would have a devastating impact on the American economy, likening it to the blow delivered by the COVID pandemic – only permanent.

He said US government debt was climbing by $US1 trillion every 100 days and Trump’s plans would only increase that debt. Interest repayments, already higher than defence spending, would become an even larger burden on American taxpayers and their economy.

“The problems facing America are pretty clear, but the answer is not Trump,” he said.

A KPMG analysis suggests if all Trump’s policies are implemented, Australia’s economic growth would be between 0.8 and 1.5 per cent lower than under current settings, a hit of $19 billion to $36 billion.

KPMG chief economist Brendan Rynne said if Australia avoided the full impact of Trump’s tariff plans, the economy would still lose between 0.2 and 0.3 per cent.

Not only would economic activity fall, but inflation would be pushed up by a full percentage point, delivering a huge policy headache to the government and the Reserve Bank.

“For Australia, if it turns out that the policies proposed by president-elect Trump are to be taken literally and are implemented by the Republican-aligned House of Representatives and Senate, the pathway forward for our own domestic economy, and therefore the framework for macroeconomic policy setting adopted by the RBA, has just become a lot harder,” he said.

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