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How Trump could boost global growth

AAP logoAAP 10/11/2016 Prashant Mehra

A Donald Trump presidency is likely to lift global economic growth and will likely result in improved commodities prices that will benefit Australia, according to economists at Commonwealth Bank.

The new administration's policies are also likely to boost equity markets, led by Wall Street, but could put an end to the era of low interest rates in major economies worldwide.

"This will be stimulatory for the US economy as personal and corporate taxes are cut. It will be expansionary for the US budget as spending goes up," Commonwealth Bank chief economist Michael Blythe said in a conference call.

Donald Trump, the Republican Party candidate was on Wednesday elected as the next US President in a stunning upset over market favourite Hillary Clinton.

While financial markets initially tumbled over the shock news, they made a remarkable turnaround later in the session.

Mr Trump has promised generous tax cuts, and more infrastructure and defence spending.

His economic policies, particularly relating to tax cuts, are likely drive capital inflows into the US economy, in turn pushing the US dollar higher, the CBA economists said.

"Capital inflows to the US will increase under a Trump administration because the cut in the company tax rate will bolster the US equity market, attracting foreign inflows, and also generate a repatriation of US profits back into the US economy," CBA's chief currency strategist Richard Grace said.

This, in turn, will force the Federal Reserve to raise the funds rate at a faster pace than otherwise, he added.

While this will put pressure on commodity-sensitive currencies like the Australian dollar and the New Zealand dollar, CBA now expects a lower downside for the local currency.

"We now expect AUD to fall by roughly 5 per cent because it is likely to receive support from higher commodity prices, an improvement in Australia's terms of trade and a narrower current account deficit," Mr Grace said.

CBA economists had previously flagged a 10 per cent fall in the Aussie dollar against the greenback, over the next 12 months.

The decline in the Australian dollar will also reduce the chances of additional rate cuts by the Reserve Bank, the economists say.

In fact, the Trump administration policies could also result in the end of the easing cycle in a lot of countries.

However, the greatest potential damage to the global economy could come from Donald Trump's trade policy.

Mr Trump has threatened to label China as a currency manipulator and pledged to slap 45 percent tariffs on imported Chinese goods.

If there are restrictions placed on Chinese goods, there could be retaliatory measures and China could look to redirect exports that are currently sent to the US, which could have a negative impact on global trade, Mr Blythe said.

China's economy is expected to decelerate to an annual pace of 5.5 per cent from 6.5 per cent, according to the CBA economists.

"Australia is far more exposed to a slowdown in the Chinese economy than it is to a pick up in the US. So certainly we are looking at that part of the scenario," Mr Blythe said.

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