Australia and the United States share close military and economic ties, and the US-Australia Free Trade Agreement sees the two countries trade goods and services worth US$64 billion per year.
The US is Australia’s third-largest goods trading partner after China and Japan.
As well as direct trade with the US, many Australian business owners watch US politics and its economic landscape closely because of its outsized effect on the rest of the world, including key Australian trading partners.
Current difficulties in the US economy aren’t necessarily likely to affect Australian exporters.
For example, well-publicised retail bankruptcies will create a challenge for exporters of retail goods. However, with most Australian exports focusing on foods, feeds, beverages, industrial supplies and materials, and business and travel services to the US, this retail slump is unlikely to be of major consequence.
However, it is important to keep a close eye on insolvencies in general, as they can point to worsening economic conditions across the board. And, it’s essential to consider the underlying cause of retail bankruptcies to avoid making the same mistakes in other industries.
Early warning sign
Changing shopping patterns in the US led to fewer customers visiting bricks-and-mortar stores and shopping malls. A similar change in demand in other sectors could be an early warning sign that business models need to adapt quickly.
Last year, corporate insolvencies decreased by four per cent but, this year, US business insolvencies are forecast to decrease only two percent or may even level off. Robust economic growth, tax reforms, and buoyant business confidence underpinned last year’s strong performance; this year, risks for the corporate sector are increasing. Regardless, insolvency rates are still only about half of what they were in 2012, so the US economic landscape is far from bleak.
Wages are rising due to low unemployment, which has decreased to less than four per cent. More employed people have more money to spend, and private consumption is driving US economic growth.
However, low unemployment puts pressure on wages, which could lead to inflation, which is expected to remain around two per cent in 2019. However, since wages are rising, this is not likely to stymie consumer spending power.
Strong household and business confidence
With such high employment, business investment grew steadily despite trade policy uncertainty. This was further bolstered by tax cuts, deregulation, and higher government spending, which contributed to a GDP growth rate of 2.9 per cent in 2018.
This overarchingly positive situation is reflected in persistently strong household and business confidence. With consumption set to grow by more than 2.5 per cent, the US market is attractive for Australian exporters.
Despite this positivity, there is a risk that a downturn will come sooner than expected. When it does, it’s likely that the US government won’t have sufficient levers to address it.
How trade credit insurance can protect cash flow
The fiscal deficit is expected to remain at around six per cent in 2019, limiting the government’s policy options and potentially leading to a deeper downturn if a recession does occur soon.
Any downturn in the US economy is bad news for Australian exporters looking to find a market for their goods. This could be tempered by uncertainty with key trade partners China, Mexico, and Canada, which could present an opportunity for Australian exporters.
Australian exporters can pursue these potential opportunities with more confidence if they have trade credit insurance to protect their cash flow.
The risk of doing business with unknown customers is that they won’t pay. Trade credit insurance mitigates that risk, letting exporters expand into new markets more safely.
Mark Hoppe is managing director, Oceania, Atradius, a global leader in risk management and trade credit insurance services
To learn more visit: www.atradius.com.au