The rise of Australian exceptionalism

Will Australia benefit from Trump's tariff turmoil?

Last week’s Brief (Trump enters middle game) was the last of our trilogy of articles looking at the global fallout of Liberation Day. This week, we turn our attention to the implications for the Australian economy and financial markets.

Currently, there is a consensus forming that, even though Australian economic growth may slow, it is likely to outperform most of its developed economy peers. This view is based on five key assumptions.

First,

Australia’s trade exposure to the US is low with our share of exports going to the US around just 5% of total exports. While steel, aluminium and beef exports are under pressure, there can be some redirection of trade in these categories to domestic consumers and (particularly in the case of beef) to other foreign consumers.

Second,

imports of manufactured goods that are attracting high tariffs in the US will be redirected to other trade partners including Australia. Australia sources around 60% of its goods imports from China and other East Asian countries.

Unlike, for example, the euro area, Australia does not have significant import-competing industries in these product categories. Hence, we can support an increase in supply of these goods at lower prices without damaging domestic production.

In fact, the lower prices of many of these goods, such as motor vehicles and trucks, will lower capital expenditure costs of businesses and incentivise an increase in private sector investment expenditure. This will reinforce the benefit of lower consumer price growth arising from a drop in imported consumer goods such as clothing and footwear.

Third,

the increased demand for Australian resource exports arising from China fiscal and monetary stimulus. To offset the hit that tariffs will bring to their economy, Chinese authorities will be rolling out fiscal and monetary stimulus.

During Covid, the IMF has estimated that Chinese authorities rolled out fiscal stimulus of around 5% of China’s GDP, lifting iron ore prices by 50% compared to pre-Covid levels throughout the period from mid-2021 to 2024. Consequently, Australia’s terms-of-trade has averaged around 17% higher in the 5 years since Covid, compared to its pre-Covid level. 

The boost to Australia’s terms of trade and the expansion of the mining sector exports supported government tax revenues and allowed for our own fiscal stimulus without completely destroying our public finances. To date, Chinese authorities have remained silent around their stimulus intentions.

We expect a more modest stimulus package than that unleashed during Covid. Nonetheless, our assumption of stimulus close to 1½% of GDP would still deliver a boost to Australia’s terms of trade and the Australian economy.

Fourth,

cheaper imports and a terms-of-trade driven recovery in the AUD should release pressure on domestic inflation and allow the RBA to continue with its easing cycle. Currently, the market is pricing 125 basis points (bps) of rate cuts between now and May 2026.

Our view is that the market is overstating the extent of RBA rate cuts. However, three additional 25bp rate cuts are likely, more than our expectation from earlier this year of just one more rate cut.

Fifth,

with a more buoyant economy, lower inflation and a more stable currency than many of its peers, Australia’s attractiveness as an investment destination is enhanced over this period of uncertainty. This should result in capital inflows to Australia, lowering the cost of capital to Australian businesses and Federal and State governments.

If we combine the likely outperformance of the Australian economy through the tariff turmoil with its traditional strong points of sound economic growth fundamentals due to high population growth, relatively robust public finances, high credit risk ratings for both government and our banking sector and sound governance of monetary policy, Australian exceptionalism is on the rise just as US exceptionalism begins to fade.