AUD/USD and NZD/USD Fundamental Daily Forecast – RBA’s Debelle: Trade War Risks “Self-fulfilling Downturn”

The prolonged trade dispute between the United States and China is causing businesses worldwide to postpone investment decisions, hampering economic activity and risking a self-fulfilling global downward spiral, a top Reserve Bank of Australia (RBA) policymaker cautioned on Thursday.

RBA Deputy Governor Guy Debelle also warned that the impasse over technology could prove to be more damaging in the long run, forcing business entities to choose between East or West rather than doing business with the global market.

“On the tariff side, the prospect of a 25 percent tariff is a first-order consideration in determining whether to invest in a new factory or new machinery and where to locate that investment,” Debelle told a conference on risk.

“Businesses are waiting to see how the uncertainty resolves rather than invest,” he added. “The longer businesses hold off, the weaker demand will be, which will further confirm the decision to wait. That runs the risk of a self-fulfilling downturn.”

Debelle also said the trade dispute is dampening the system of rules-based trade that had lasted for decades.

“We can see that manifest in the U.S.-Europe trade issues, as well as those between South Korea and Japan,” he said. “Trade is being used as the bargaining tool of choice, including for issues that don’t have much to do with trade.”

Debelle thinks the trade dispute has had a limited impact on Australia because Beijing’s economic stimulus package has helped drive up demand for Australian commodities, like its number one export, iron ore.

“But a further significant slowing in the Chinese economy and household incomes would clearly pose a risk,” said Debelle.

Domestically, Debelle said the risk to the Australian economy was a drop in household consumption, which could be impacted by the slow growth in personal income and wages.

“We do not expect much of an increase in wages growth although employment growth is expected to be reasonable,” said Debelle.