What Should I be spending my time worrying about?

Have you noticed that we as human beings, when faced with a very large problem, tend to focus on the details? Have you for instance observed, when you are involved in a group problem solving activity, where the conversation normally goes? Down a rabbit hole – if the session is not being carefully managed – debating some peripheral issue vaguely related to the problem at hand.

There’s lots to worry about in the wider world at the moment….

In this case however, I’m going to recommend you consider the details.

There’s lots of opinion flying around about what Trump may or may not do. It’s fair to assume though that most anything he does, particularly in the space of raising tariffs, will be inflationary for the USA. And the reality is that what happens in the USA affects the rest of the world. So, it’s reasonable that with Trumps involvement the risk of the world experiencing an inflationary period is increased.

(Although you may keep in the back of your mind the recent comments of Reserve Bank Governor Michelle Bullock, as reported in the Financial Review on November 29th, whereby Australia could be a beneficiary of Donald Trump’s tariffs on Mexico, Canada and China, if affected firms divert their products to Australia and cause prices to fall).

What would an increase in inflation mean for engineering and construction?

The reported evidence suggests that industry insolvencies have normalised at relatively high pre-Covid levels after a period during Covid when insolvencies dropped to almost zero (recall in 2020 when the Government sent money to businesses and the Australian tax office stopped chasing up their debtors?).

As we’re all aware, construction businesses typically operate on a small margin relative to turnover, which gets squeezed when costs escalate rapidly. Businesses that secure their work via tenders find themselves evaluating cost risk on a regular basis.

And when accepting cost risk, the lever to manage on the job is site productivity. The evidence is that there is lots of opportunity here, with construction productivity continuing to lag the rest of the economy, with the gap between construction and selected industries having risen over 30% and is now 39% as being tracked and reported by Oxford Economics Australia and the ABS.

So, if you’re looking for something useful to spend your time worrying about, I’d propose your exposure to cost inflation risk, closely followed by the efficiency (read productivity) of your business.

Trump’s tariffs could cause deflation: Bullock

Michael Read – Economics correspondent

Nov 29, 2024 – 2.11am

Reserve Bank governor Michele Bullock says Australia could be a beneficiary of Donald Trump’s tariffs on Mexico, Canada and China, if affected firms divert their products to Australia and cause prices to fall.

The president-elect fired the first salvo in his trade war this week, vowing to impose big tariffs on America’s three largest trading partners, a move that roiled global currency and bond and equity markets.

Earlier this month, RBA governor Michele Bullock said it was too early to judge the potential implications of Trump’s win on the Australian economy. Alex Ellinghausen, AP

Trump, who takes office on January 20, said late on Monday that he would impose a 25 per cent tariff on imports from Canada and Mexico until they clamped down on drugs, particularly fentanyl, and migrants crossing the border.

China’s state media warned the tariffs could be mutually destructive after Trump announced an extra 10 per cent levy on Chinese goods.

Ms Bullock has repeatedly stressed this month that it was too early to judge the potential implications on the Australian economy from the US election since it was unclear how China would respond to any rise in tariffs.

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Asked on Thursday evening about the new tariffs against China, Canada and Mexico, Ms Bullock said trade tended to shift when levies were imposed.

“What often happens with trade is that trade moves,” she told an event in Sydney hosted by the think tank CEDA.

“So, if there are large tariffs … on China, Chinese trade will probably try to find other ways to find an outlet.

“Australia might even be a beneficiary of that. So, we might, in fact, find some deflationary impacts for Australia if it rolls out that way.”

Ms Bullock said it was difficult to say what the effect of the Trump administration would be on Australia. She said there was a difference between what the administration said it would do, and what it would actually do.

“There is a lot of discussion about tariffs, and in particular, the most recent salvos in terms of Mexico and Canada. I think that does remain to be seen whether or not that’s some sort of reality, or it’s a negotiating tactic.”

Australian National University economist Warwick McKibbin estimated that extra tariffs on Mexico, Canada and China would actually provide a modest boost to the Australian economy, since Australian exports would become relatively cheaper, and therefore more attractive.

If Mexico, Canada and China did not retaliate against the US, GDP would be 0.1 per cent higher in 2026 as US firms imported more Australian products. Were the trio to retaliate against the US with their own tariffs, GDP would be 0.2 per cent higher as firms in all affected countries imported more tariff-free Australian products.

The US is running a $14.75 billion goods and services trade surplus against Australia in the year to date, according to data from the US Census Bureau and the US Bureau of Economic Analysis released this month.

Economists agree that a wider trade war would be bad for Australia if it led to a sharp reduction in Chinese economic growth.

The Reserve Bank of Australia’s internal scenario planning warned an “extreme” trade war between the US and China would drive down the local sharemarket, push the dollar lower and potentially force the central bank to cut interest rates to prop up the economy.

Peter Wilkinson – Director, Sam Wilko Advisory

Author of “The Steel Ceiling: Achieving Sustainable Growth in Engineering and Construction” Wiley, 2023