Provision Newsletter

We asked our readers for their top tips to keep the kids entertained during the school holidays without blowing the budget

Art and craft, board games and movies at home all proved popular, as did visits to the park, playground, picnics, riding bikes and camping.

And perennial favourites such as taking advantage of museums and galleries with free entry, and visits to the local library, also rated a mention.

Most creative low-cost school holiday activities

If you’re looking for some fresh school holiday inspiration, some of the most creative ideas included:

• Looking through photo albums together and creating a family slideshow.

• Putting on a concert or play for friends, getting the kids to create the show, make costumes and props, and make tickets and food for the guests.

• Getting the kids to write books and turning them into movies.

• Going on a park crawl, by setting a timer and after an hour at a park, moving onto another one.

• Using old bottles and jars to create terrariums using succulents and plants from the garden.

• Getting together with a group of friends and each taking all the kids for a day, so you only have one day to plan and pay for, and some child-free days during the holidays.

• Making a list of things for the kids to spot then heading out in the car and playing car bingo.

• Cutting out pictures from old magazines and cards and creating new homemade cards for upcoming birthdays and events.

• Scouring the internet in the lead up to the holidays for free and cheap activities to create a lucky dip jar to draw from when boredom sets in.

• Instead of just playing board games, making one, including planning the theme, rules, making the board, cards and questions, then playing it.

 Source : AMP 3 July 2018 

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One uncertainty regarding the global outlook stems from the direction of international trade policy in the United States. There have also been strains in a few emerging market economies, largely for country-specific reasons.

Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar. In Australia, short-term wholesale interest rates have increased over recent months. This is partly due to developments in the United States, but there are other factors at work as well. It remains to be seen the extent to which these factors persist.

The recent data on the Australian economy continue to be consistent with the Bank’s central forecast for GDP growth to average a bit above 3 per cent in 2018 and 2019. GDP grew strongly in the March quarter, with the economy expanding by 3.1 per cent over the year. Business conditions are positive and non-mining business investment is continuing to increase. Higher levels of public infrastructure investment are also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

Higher commodity prices have provided a boost to national income recently. Australia’s terms of trade are, however, expected to decline over the next few years, but remain at a relatively high level. The Australian dollar has depreciated a little, but remains within the range that it has been in over the past two years.

The outlook for the labour market remains positive. Strong growth in employment has been accompanied by a significant rise in labour force participation. The vacancy rate is high and other forward-looking indicators continue to point to solid growth in employment. A gradual decline in the unemployment rate is expected, after being steady at around 5½ per cent for much of the past year. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are increasing reports of skills shortages in some areas.

Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

Nationwide measures of housing prices are little changed over the past six months. Conditions in the Sydney and Melbourne housing markets have eased, with prices declining in both markets. Housing credit growth has declined, with investor demand having slowed noticeably. Lending standards are tighter than they were a few years ago, with APRA’s supervisory measures helping to contain the build-up of risk in household balance sheets. Some further tightening of lending standards by banks is possible, although the average mortgage interest rate on outstanding loans has been declining for some time.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, July 3rd, 2018

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Depending on whether your finances are straightforward or more complex, you may choose to do your tax return yourself or engage a professional.

If you have multiple sources of income, various investments, possibly your own business or have lots of deductible work-related expenses, using an accountant (who’ll need to be a registered tax agent¹) to prepare and lodge your tax return may be useful.

However, if the only income you earn is from your employer and you don’t have many deductions to claim, or investments you’re making money on, you might choose to lodge your tax return online yourself via myTax, which is accessible through the Australian Government’s myGov website.

If you’re not sure which way to go, here are a few pointers that might help you with your decision.

Lodging your tax return yourself

If your finances are relatively simple, you might consider lodging your own tax return (which you’ll need to do by 31 October, for the previous financial year), while saving money on what a registered tax agent might charge you.

According to the Australian Taxation Office (ATO), the benefits of lodging your tax return online via the myTax system is it’s safe, secure and most of the information from your employer, bank and government agencies will be pre-filled for you by around late August².

Meanwhile, even if your situation is a little more complex, you can still use myTax if you have investments, rental properties, capital gains or are a sole trader³.

On top of that, the service is available all day, every day so you can lodge your return at anytime and you’ll generally get your refund within two weeks, which may be faster than doing it another way⁴.

Engaging a registered tax agent

If you do want to use a registered tax agent to prepare and lodge your tax return, it’s important to note you will pay a fee for their service, but it’ll typically be deductible in next financial year.

Note, tax agents must be registered with the Tax Practitioners Board (TPB) and you can find a registered tax agent or check whether a person is registered by visiting the TPB website⁵.

If your finances are more complex, going down this path may provide you with peace of mind, as it could save you time, highlight deductible work-related expenses you didn’t know about, while ensuring all your claims are legitimate.

On top of that, most registered tax agents have a special lodgement program, which means they can usually lodge returns for their clients after the usual 31 October deadline, but you’ll need to contact them beforehand to ensure that’s something you can take advantage of it you want to.

Other things to note

Whether you plan to lodge your tax return yourself, or use a professional, you can use the myDeductions tool in the ATO app to save a record of your deductions throughout the financial year, which you can upload at lodgement time.

To ensure you’ve got all the relevant information you need ahead of filing your tax return, check out the ATO’s tax time checklist .

If you seek futher assistance please contact us on |PHONE|  .

1, 5 ATO – Lodge with a registered tax agent paragraph 1
2, 4 ATO – Lodge online (Benefits of lodging with myTax)
3 ATO MyTax replaces e-tax paragraph 2

Source : AMP 28 June 2018  

It’s nearly two years since the Reserve Bank of Australia last changed interest rates – when it cut rates to a record low of 1.5% in August 2016. That’s a record period of inaction – or boredom for those who like to see action on rates whether it’s up or down. Of course, there are lots of views out that the RBA should be doing this or that – often held and expressed extremely – and so it’s natural that such views occasionally get an airing. This is particularly so when the RBA itself is not doing anything on the rate front.

And so it’s been this week with a former RBA Board member arguing that the RBA should raise rates by 0.25% to prepare households for higher global interest rates and that the RBA should consider ditching its inflation target in favour of targeting nominal growth.

Our view – rates on hold at least out to 2020

Our view for some time is that the RBA won’t raise interest rates until 2020 at the earliest. In terms of growth, a brightening outlook for mining investment, strengthening non-mining investment, booming infrastructure spending and strong growth in export volumes are all positive but are likely to be offset by topping dwelling investment and constrained consumer spending. As a result, growth is likely to average around 2.5-3% which is below RBA expectations for growth to move up to 3.25%. This in turn means that spare capacity in the economy will remain high – notably unemployment and underemployment at 13.9% – which will keep wages growth low and inflation down. On top of this house prices likely have more downside in Sydney and Melbourne over the next two years, banks are tightening lending standards which is resulting in a defacto monetary tightening and the risks of a US-driven trade war are posing downside risks to the global growth outlook. As such we remain of the view that a rate hike is unlikely before 2020 at the earliest and can’t rule out the next move being a cut.

Raising rates to prepare for higher rates makes no sense…

Against this backdrop, raising rates just to prepare households for higher global rates would be a major policy mistake:

• It would be like shooting yourself in the foot so you can practice going to hospital. Some might argue that given high household debt you might miss the foot and hit something more serious – but I wouldn’t go that far!

• What’s more it’s not entirely certain that outside the US higher global rates are on the way any time soon – particularly given the risks around a global trade war, the European Central Bank looks unlikely to be raising rates until 2020 and with Japanese inflation falling again a Bank of Japan rate hike looks years away.  

• The RBA needs to set Australian interest rates for Australian conditions not on the basis of other global economies that are in different stages in the cycle – notably the US which has unemployment and underemployment of just 7.6% in contrast to Australia where it’s 13.9%.

  
  Source: Bloomberg, AMP Capital

• Raising rates when there is still high levels of labour market underutilisation, wages growth is weak and inflation is at the low end of the inflation target would just reinforce low inflation expectations – causing businesses and households to question whether the RBA really wants to get inflation and wage growth back up to be more consistent with the inflation target and run the risk of a slide into deflation next time there is an economic slowdown.

• The RBA has already provided numerous warnings that sooner or later rates will go up, effectively helping to prepare households that such a move may come and in recent times banks have raised some mortgage rates, albeit only slightly. Last year’s bank rate rises were in response to regulatory pressure and recently they have been in response to higher short-term money market funding costs as the gap between bank bill rates and the expected RBA cash rate has blown out by around 0.35% relative to normal levels. This has further reminded households of the risk of higher interest rates.

…nor does changing the inflation target

Suggestions to change the inflation target or move to some other target for the RBA get wheeled out every time we run above or below the target for a while but its served Australia well. When it’s above for a while like prior to the Global Financial Crisis some wanted to raise it, when it’s below for a while some want to cut it. And there are regular calls to move to something else like nominal growth targeting. But the case to change the target is poor:

• The 2-3% inflation target interpreted as to be achieved over time has served Australia well. It’s low enough to mean low inflation, it’s high enough to allow for the tendency of the measured inflation rate to exceed actual inflation (because the statistician tends to understate quality improvement) and to provide a bit of a buffer before hitting deflation. And the achievement of it over time means the RBA does not have to make knee-jerk moves in response to under or overshoots because it can take time to get back to target.

• Shifting to a nominal GDP or national income growth target would be very hard for Australia for the simple reason that nominal growth in the economy moves all over the place given swings in the terms of trade which the RBA has no control off. It would have meant much tighter monetary policy into 2011 than was the case and even easier monetary policy a few years ago when the terms of trade fell. In short it would mean extreme volatility in RBA interest rates.

• And in any case, nominal GDP or income growth is made up of two different things – inflation and real growth – so targeting just the aggregate could lead to crazy results for example if the target is 4.5% the RBA could get 4.5% inflation and say it hit its target! Which would be nuts.

• Finally, while low rates risk inflating asset price bubbles it’s worth noting that apart from Sydney and Melbourne home prices, the period of low rates has not really led to a generalised asset price bubble problem in Australia. And in any case as we have seen recently in relation to Sydney and Melbourne property prices – which are now falling (despite still ultra-low interest rates!) – the asset price problem where it does arise can be dealt with via macro prudential controls on lenders. Arguably, if we had moved faster on the macro prudential front around 2014-2016 then the east coast housing markets would have been brought under control earlier and rates could have come down faster in Australia and we could now be in a tightening cycle…but that’s all academic!

Bottom line

The bottom line is that the RBA should stick to its inflation target and ignore those arguing for a premature rate hike. Our assessment is that this is just what it will do and that rates will be on hold for a long while yet. In the meantime, the debate about rates will no doubt rage on.

Continuing low interest rates in Australia will mean term deposit rates will stay low, search for yield activity will still help yield-sensitive unlisted investments like commercial property and infrastructure (albeit it’s waning) and an on-hold RBA with a tightening Fed is likely to mean ongoing downward pressure on the Australian dollar as the interest rate differential goes further into negative territory.

Source: Bloomberg, AMP Capital

While a crash in the $A may concern the RBA, we saw in both 2001 when it fell to $US0.48 and 2008 when it fell from $US0.98 to $US0.60 in just a few months that the inflationary consequences of a lower $A are not what they used to be and in any case the RBA would likely welcome a fall to around $US0.65-0.70.

Source: AMP Capital 28 June 2018

Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist, AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

You might have a friend who wouldn’t be caught dead in the same outfit twice. But what’s the real cost of fast fashion –  the buy it, wear it once, throw it away culture of cheap clothing that has hit the mainstream?

What is fast fashion?

Not dissimilar to the fast-food movement, fast fashion is about getting the latest trends from the catwalks to the stores in the shortest time possible and at the lowest price.

Pioneered by retailers such as Zara, H&M, Uniqlo, Gap, Forever 21 and Topshop, fast fashion is challenging the standard fashion industry cycle of introducing new clothes on a seasonal basis¹.

The emergence of fast fashion has also been fueled by the rise of social media influencers, leading young women, in particular, to adopt a new way of consuming clothes – 25% of 14-to-17 year olds and 13% of 18-to-24 year olds say they’re buying more clothing than they were a year ago².

What’s the problem with fast fashion?

The appeal is that the products are cheap, trendy and often, limited in number. But the financial downside is that to stay on trend, you need to buy more items more often.  One survey found that 21% of respondents estimate that they own over 100 items of clothing (excluding underwear or accessories)³.

Millennials (16-34 year olds) have the highest proportion of new clothing; 38% of millennials say they have purchased at least half of the clothes that they own in the past year, while just 9% of baby boomers (over 55s) have done the same⁴.

And fast fashion also has other costs. Workers’ rights, including fair pay and safe working conditions, are often sacrificed in order to provide clothes at the possible lowest price⁵.

But while the human rights challenges facing the garment production industry are relatively well known, what you mightn’t have considered is the environmental impact of fast fashion. In terms of the environment, the problem is two-fold:

• Firstly, there are the immediate environmental impacts. Clothing fibres, such as non-organic cotton, require large amounts of water, plus pesticides and fertilisers, to grow⁶. And, further along the production line, huge amounts of water are used to dye clothes, with the water – polluted with bleaches, acids, dyes and inks – contaminating local waterways in developing countries, where the majority of clothes are produced⁷. 

• And secondly, the disposable nature of fast-fashion means that more and more clothes are being thrown into landfill. Amazingly almost a quarter of Australians admit they’ve thrown away an item of clothing after wearing it just once, while 41% say they’re thrown unwanted clothes straight in the bin⁸.

What can I do?

If you’re concerned about the impacts of fast fashion both from a budget and environmental point of view, why not be part of the solution, not the problem? Below are a few things you can do to help.

Shopping checklist:

We’ve provided a checklist to use the next time you’re thinking about shopping for a fresh new look.

• Do I need to buy new?

Consider secondhand stores or websites when shopping. Aside from snagging pre-loved bargains, some retailers even donate their slightly damaged goods (think missing buttons or make up stains) to these stores so you can actually find brand new clothes. And if you want to stand out from the crowd with a look that’s unique, where better than secondhand to find a fabulous one-off piece or rock a vintage look.

• Think about fabrics.

Polyester, nylon and other plastic-based synthetics take a long time to break down in landfill while cotton farming is very water and pesticide intensive. Organic cotton, tencel, hemp, bamboo, linen, silk and wool are better choices⁹.

• Buy quality, not quantity.

If you’re used to buying four or five new items at an average of $50 per item every month, instead consider pooling that cash and spending $200-$250 on one quality item that you can wear season after season.

• Support sustainable labels.

You can do this via online ethical marketplaces such as Well Made Clothes or Sustainable Fashion, while most major retailers also list their approach to ethics and sustainability on their websites. It may take a little more legwork, but your conscience will thank you.

Clean-out checklist:

You can also help by thinking carefully about when and how you dispose of clothes and avoiding landfill where possible. Here’s another checklist to consider when you’re doing a wardrobe clean out.

• Can it be fixed?

Instead of simply throwing away damaged clothing consider whether you can mend it, or if you’re not handy, have it fixed. If it can’t be returned to its original condition, perhaps you can embrace the visible mending approach and create an item that is totally unique by adding your own spin on it when repairing.

• Would someone else love it?

Perhaps your trash could be someone else’s treasure, so consider whether the item could be passed on to younger siblings or family friends, sold secondhand via websites such as eBay or Gumtree, or traded at a clothes swap event.

• Can it be donated to charity?

While in theory, donating to secondhand stores (especially those that support charities) is a great idea, with 82% of Australians donating to charity stores but only 53% buying from them, there’s an obvious mismatch in supply and demand¹⁰. Fast fashion donations have added to the problem, with charities reporting that the quality of the clothing received is often so poor it has little or no value, and then then have to pay for its disposal¹¹. So, ask yourself if the item is really in good enough condition to be re-sold before donating.

• Are there alternative recycling options?

Some large retailers are now looking to close the loop they’ve created through fast fashion. For example, H&M offers in-store recycling where used clothes (in any condition, from any brand) can be returned in exchange for a H&M discount voucher. They are then either re-sold as secondhand, made into new clothing or turned into other textile products such as cleaning cloths and fibres for insulation. Zara have introduced a similar scheme, however it’s not yet available in Australia.

Source : AMP 27 June  2018 

1 Investopedia, Fast Fashion, paragraph 1, 5.
2 War on Waste Survey, Understanding Australia’s waste attitudes and behaviours, pg. 24.
3, YouGov, Fast fashion: Three in ten Aussies have thrown away clothing after wearing it just once, 2017, paragraph 5.
4 YouGov, Fast fashion: Three in ten Aussies have thrown away clothing after wearing it just once, 2017, paragraph 6.
5 Oxfam Australia, What she makes: Power and poverty in the fashion industry, 2017, pg. 6, paragraph 7.
6 McKinsey & Company, Style that’s sustainable: A new fast-fashion formula, 2016, paragraph 7.
7 Yale School of Forestry and Environmental Studies, Can waterless dyeing processes clean up the clothing industry?2014, paragraph 1, 8.
8 YouGov, Fast fashion: Three in ten Aussies have thrown away clothing after wearing it just once, 2017, paragraph 4,9.
9 The Green Hub, Sustainable fashion – a quick guide to eco-friendly fabrics, 2017.
10, 11  War on Waste Survey, Understanding Australia’s waste attitudes and behaviours, pg. 16.

The threat of a full-blown trade war has escalated in the last few weeks with the G7 meeting ending in disarray over US tariffs on imports of steel and aluminium from its allies and more importantly President Trump threatening tariffs on (so far at least) $US450bn of imports from China, and China threatening to retaliate. Our base case remains that a negotiated solution will ultimately be reached, but the pain threshold in the US is clearly higher than initially thought and the risks have increased.

Background on trade wars and protectionism

A trade war is a situation where countries raise barriers to trade, with each motivated by a desire to “protect’’ domestic workers, and sometimes dressed up with “national security” motivations. To be a “trade war” the barriers need to be significant in terms of their size and the proportion of imports covered. The best-known global trade war was that of 1930 where average 20% tariff hikes on most US imports under Smoot-Hawley legislation led to retaliation by other countries and contributed to a collapse in world trade.

A basic concept in economics is comparative advantage: that if Country A and B are both equally good at making Product X but Country B is best at making Product Y then they will be best off if A makes X and B makes Y. Put simply free trade leads to higher living standards and lower prices, whereas restrictions on trade lead to lower living standards and higher prices. The trade war of the early 1930s is one factor that helped make The Great Depression “great”. As RBA Governor Philip Lowe has observed “Can anyone think of a country that’s made itself wealthier or more productive by building walls?”

Access for US exports to China and stronger protection of US intellectual property. His comments at the recent G7 meeting where he proposed completely free trade suggest he secretly does support free trade (although it’s a bit hard to know for sure!)

Most of these issues were covered in more detail here.

Where are we now?

Fears of a global trade war were kicked off in early March with Trump announcing a 10% tariff on aluminium imports and a 25% tariff on steel imports. US allies were initially exempted but China was not and the exemptions for Canada, Mexico and the European Union expired on June 1. But tariffs on steel and aluminium imports are minor at around 1.5% of total US imports. There is a risk of escalation though as the affected countries retaliate.

However, the main focus remains China. On March 22, in response to the Section 301 intellectual property review (alleging theft by China), Trump proposed 25% tariffs on $US50bn of US imports from China and restrictions on Chinese investment in the US. At the same time, the US lodged a case against China with the World Trade Organisation. China then announced “plans” for 25% tariffs on $US50bn of imports from the US with a focus on agricultural products. Then Trump threatened tariffs on another $US100bn of imports from China in proposed retaliation to China’s proposed retaliation to which China said it would retaliate.

These tariffs were put on hold after a May 19 agreement between the US and China under which China agreed to import more from the US, reduce tariffs and strengthen laws to protect intellectual property, with negotiations around the details to come. Trump initially cheered the outcome, but after domestic criticism did a backflip and announced that the $US50bn in imports from China to be subject to a 25% tariff would be finalised by June 15, which they were (with a July 6 start date set for $US34bn) and that investment restrictions would be finalised by June 30.

After China said that the May 19 deal was no more and that it would match US tariffs, Trump upped the $US100bn to a 10% tariff on $US200bn of imports and said that if China retaliates to that it will do another $US200bn. This brings the tariffs on US imports from China to $US450bn which covers 90% of America’s total annual imports from China. Along the way Trump has also announced consideration of automobile tariffs – with the outcome yet to be announced.

Rising risk of a full-blown trade war

Clearly the escalating tariff threats have added to the risk of a full-blown trade war between the US and China, and with an escalation possible between the US and its allies. The initial tariffs on steel and aluminium and proposed for $US50bn of imports from China amount to a still small 3% or so of US imports or just 0.5% of US GDP so only a trivial impact and hardly a trade war.

But if there are tariffs on $US450 of imports it’s about 18% of total US imports and will have a bigger impact. On this scale it’s inevitable that consumer goods will be impacted. And with China only importing $US130bn from the US annually, it’s proportional retaliation to US tariffs will have to move into other areas like tougher taxation and regulation of US companies operating in China and selling US Treasury Bonds (although this will only push the Renminbi up which will make things worse for China).

And of course, with US allies preparing retaliation against US tariffs on steel and aluminium (eg EU tariffs on US whiskey and Harley Davidsons) there is a danger that conflict escalates here too as the US counter-retaliates. And then there’s potentially auto tariffs.

There is also the danger that President Trump’s flip flops on policy (particularly after the May 19 agreement with China) and the confusion as to who is handling the US negotiations (whatever happened to Treasury Secretary Mnuchin who declared that the trade war had been put on hold?) has damaged Trump’s and US credibility.

Economic impact

The negative economic impact from a full-blown trade war would come from reduced trade and the disruption to supply chains that this would cause. This is always a bit hard to model reliably. Modelling by Citigroup of a 10% average tariff hike by the US, China and Europe showed a 2% hit to global GDP after one year, with Australia seeing a 0.5% hit to GDP reflecting its lower trade exposure compared to many other countries, particularly in Asia which will face supply chain disruption. At present we are nowhere near an average 10% tariff hike (the average proposed tariff on $450bn of Chinese imports is 12% which across all US imports is around 2%). So this would need much further escalation from here.

It might also be argued that the US is best placed to withstand a trade war because it imports more from everyone else than everyone else imports from it and the negative impact from the proposed tariffs (which is running around $60bn in tax revenue out of the economy) is swamped by the $300bn in fiscal stimulus boosting the US economy. Trump also feels empowered because there is a lot of domestic support in the US for taking a tougher stance on trade (particularly amongst Republicans) and his approval rating has risen to 45% – the highest in his Presidency.

And the current situation mainly just involves the US and China (in terms of significant tariff announcements), so arguably Chinese and US goods flowing to each other could – to the extent that there are substitutes – just be swapped for goods coming from countries not subject to tariffs, thereby reducing the impact.

Some reasons for hope

So far what we have really seen is not a trade war but a trade skirmish. The tit for tat tariffs triggered in relation to US steel and aluminium imports are trivial in size. All the other tariffs are just proposals and the additional tariffs on $US200bn of imports from China plus another $US200bn would take months to implement, much like the initial tariffs on $US50bn. Trump is clearly using his “Maximum Pressure” negotiating approach with US Trade Representative Lighthizer saying on Friday that “we hope that this leads to further negotiations”. If the US didn’t really want to negotiate, the tariffs would no longer be proposals but would have been implemented long ago. And while Trump is riding high now as he stands tough for American workers, a full-blown escalation into a real trade war with China come the November mid-term elections is not in his interest. This would mean higher prices at Walmart and hits to US agricultural and manufacturing exports both of which will hurt his base and drive a much lower US share market which he has regarded as a barometer of his success. US Congressional leaders may also threaten intervention if they feel Trump’s tariff escalation is getting out of hand. So negotiation is still the aim and China, given its May agreement, is presumably still open to negotiation. So our base case is that after a bit more grandstanding for domestic audiences, negotiations recommence by early July allowing the July 6 tariffs to be delayed as negotiations continue, which ultimately lead to a resolution before the tariffs are implemented. Share markets would rebound in response to this.

But given the escalation in tension and distrust of President Trump we would now only attach a 55% probability to this. The other two scenarios involve:

• A short-lived trade war with say the tariffs starting up on July 6 and maybe some more but with negotiations resulting in their eventual removal (30% probability). This would likely see more share market downside in the short term before an eventual rebound.

• A full-blown trade war with China with all US imports from China subject to tariffs and China responding in kind, triggering a deeper 10% decline in share markets on deeper global growth worries (15% probability).

What to watch?

Key to watch for is a return to negotiation between the US and China by the end of June. The renegotiation of NAFTA and proposed retaliation from the EU against US steel and aluminium imports are also worth watching.

Why are Australian shares so relaxed?

Despite the trade war threat Australian shares have pushed to a 10 year high over the last few days helped by a rebound in financial shares, a boost to consumer stocks from the likely passage of the Government’s tax cuts (even though these are trivial in the short term) and strong gains in defensives. Given that China takes one third of our exports the local market would be vulnerable should the trade war escalate significantly. But if our base case (or even a short-lived trade war) plays out the ASX 200 looks on track for our year-end target of 6300.

Source: AMP Capital 21 June 2018

Author: Dr Shane Oliver, Head of Investment Strategy and Chief Economist , AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.