Global uncertainty to weigh on Aussie business investment: RBA
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The news: Reserve Bank assistant governor Sarah Hunter is warning that global uncertainty as a result of US President Donald Trump's new tariff regime will likely result in lower business investment, with knock-on effects for the Australian economy.
After a volatile few months in the markets, Hunter, in a speech at the Economic Society of Australia's Queensland branch lunch, also warned that there remain further risks that changes to tariffs, other policy settings or economic outcomes could "prompt financial markets to downgrade the outlook, which leads risky asset prices to fall sharply".
She said this would lead to a more sustained tightening in financial conditions, making it "more expensive" particularly for businesses to borrow or raise funds for investment.
Hunter said higher global uncertainty has a "large negative effect on Australian business investment", but the impact on consumption from households is more modest.
"Though the magnitude of these effects is itself very uncertain, this does suggest that global uncertainty may weigh substantially on domestic activity if uncertainty remains elevated," she said.
The context: The RBA has been paying close attention to developments in the global trading environment as part of its forecasts for the domestic economy. Its recent statement of monetary policy outlined several different scenarios for what could happen next, including a ramp up in tensions and a "trade peace" scenario.
One of the major areas of focus is what occurs in China, Australia's major trading partner, and the impacts on crucial commodity prices that in part underpin the local economy. As Hunter said in her speech, so far there has not been a sharp correction in these prices due to the "relatively positive" outlook for China.
Beijing is expected to keep supporting the Chinese economy via fiscal stimulus and at the moment this is a critical assumption in the RBA's outlook. If there was a downside trade war situation, Hunter warned income from commodity exports would decline "significantly".
The RBA is continuing to monitor the situation.
What they said: "Typically, higher uncertainty leads firms to delay decisions that are costly to reverse, like investment and hiring. This makes sense intuitively, because there is value in waiting to see how things are playing out before making a decision that is (at least partially) non-reversable — something often referred to as ‘real options’ value. These ideas are borne out in the historical data," Hunter said.
"Research suggests that the negative impacts of higher policy uncertainty — including trade policy — are largest for businesses, as they typically pull back on investment. Some studies find higher uncertainty also has a measurable impact on household consumption, but this is typically more modest.
"If we see businesses and households respond as they have in the past, then the current level of uncertainty will weigh materially on global activity. But the unpredictability and unprecedented nature of the current situation makes it hard to be precise on the size of the impact."
The source: Reserve Bank speech
