The latest research conducted by the Reserve Bank of Australia (RBA) shows that when an all-out global trade war fully escalates, Australia’s real exchange rate could soar while the Gross Domestic Product (GDP) could take a nose dive.
“When we allow the exchange rate to respond to the imposition of tariffs in the third scenario, it suggests that the real exchange rate would appreciate by 6 percent,” according to an analysis dated March 21. “GDP would then fall by an additional 2.5 percent. A lower cash rate could largely offset these effects in the long run.”
The RBA stated that while a negative shock to Chinese exports would have a great impact on commodity demand, “any compensating domestic stimulus — akin to the response to the global financial crisis export shock — could provide an offset, albeit at the cost of exacerbating longer-term structural problems and contributing to financial risk.”
China is the largest trading partner of Australia. Now that the US-China trade war intensified with Trump imposing a new round of tariffs on $200 billion worth of Chinese imports and Beijing’s retaliation on its way, Australia’s economy would be one of the casualties of trade war.
According to Sally Auld, JPMorgan Chase & Co.’s head of fixed-income and currency strategy for Australia, “We’re No. 1 on the list of collateral damage in who really has a lot to lose if the China story goes south. We’re a small, open economy that’s highly leveraged to trade and to China so anything that creates difficulty with global trade is bad for us by definition. It’s pretty fundamental to our economic well-being.”
Auld added, “It’s hard to argue that we’re in the direct firing line if you look at what the U.S. is proposing or has put tariffs on. We’re just being caught up in the dollar strength at the moment. There’s no reason why we should get pounded just because the Turkish lira is belted.”