There was a bit of chest-beating in the Trump administration on Friday when the latest US growth figures came out, with commerce secretary Wilbur Ross boldly declaring that “our entire economy will continue to come roaring back”.
At face value he may be right, with US annualised growth now clocked at over 3 per cent for two consecutive quarters, and big jumps recorded in consumer spending and business investment.
That’s all good news, but viewed from Australia’s side of the Pacific, the question is will it last? And will we share in this faster-than-expected return to growth?
Well, there are no guarantees, but the good US figures come against a backdrop of stronger growth in the European Union, which in itself helps to allay fears of an economic meltdown in China.
As for whether Australians will share in the good news, it depends a lot on which Australians you’re talking about.
Indebted householders could pay
Younger Australians who have leveraged up into the property boom are likely to get a tough lesson in market swings if the current US trajectory continues.
That’s because if US growth stays strong, the US Federal Reserve will take the opportunity to move official interest rates back towards ‘normal’ levels – somewhere they have not been for a decade.
Market watchers are expecting three, or even four, 25 basis-point rate rises next year, and each would flow through to wholesale money markets.
That’s bad news for heavily indebted households, because around a third of Australia’s stock of mortgage debt is funded via those markets.
Economist Stephen Koukoulas, managing director of consultancy Market Economics, says that could mean mortgage rates continuing to be ratcheted up in Australia, despite our own Reserve Bank being unlikely to raise rates itself until perhaps 2019.
Older and richer
On the flip-side are older, asset-rich Australians who have been enjoying property and share-price rises over recent months.
Global investors have been buying into those kinds of ‘risk assets’ partly because bond rates have been so low since the global financial crisis.
However, last week investors saw bond yields pass a key milestone – 2.4 per cent for 10-year US Treasury bonds – that is likely to start siphoning money away from those assets. Again, this is more of a ‘back to normal’ move rather than a crash.
Superannuation funds and other institutional investors are pretty adept at shifting their portfolios to take account of these kinds of seachanges, but mum-and-dad retail investors could be caught napping – when you’ve been making hay for a long time, it’s easy to be caught off guard.
The outlook for wage earners
Of course many Australians are neither heavily in debt, nor asset rich. So what happens to the everyday wage earner if the US growth continues?
Here is probably the best news of all. If the US Federal Reserve raises rates several times, but the RBA does not, the Australian dollar will continue to fall against the US dollar.
A lower Aussie dollar, depending on how Asian currencies move, makes our exports more competitive.
Mr Koukoulas sees that as almost inevitable, and expects it to boost investment and job creation in export sectors – especially tourism which, as reported recently, has huge growth potential.
With downward pressure on the dollar, Australia’s recently strong jobs growth may start to produce some wage inflation – or as it’s more commonly known, a pay rise.
Make no mistake – all of these trends could sour very quickly if the European Central Bank fluffs the end of its quantitative easing program, or if China’s huge share-price fall of the past week spreads further, or if the Trump administration falls further into disfunction.
But in the absence of those ‘ifs’, Mr Koukoulas says the US economy ‘roaring’ back to life is unequivocally good news for Australia.
It was always going to take a bit of luck on the global stage for Australia to transition from the mining-investment boom-and-bust to a more stable economic footing.
The US growth numbers, for most Australians, will add to that good luck story.