Welcome to Strategic Alternatives the RBC Capital Markets Podcast. I'm Rod Ireland, Head of Global Markets for APAC. Today, I'm joined by our macro specialist Rob Thompson, Macro Rates Strategist Australia, and Abbas Keshvani, Asia Macro Strategist, to take a forward look at the economic landscape for 2026 across the Asia Pacific region. Welcome to both of you.
Rob Thompson
Thanks Rod.
Abbas Keshvani
Thanks, Rod. It's great to be here.
Rod Ireland
So, it's been a complex year, shaped by shifting U.S. tariff policy, questions around China's fiscal capacity, ongoing FX pressures, and an Australian economy that has remained resilient, even as inflation has proven sticky. Against that backdrop, we'll be focusing on the themes we think that will matter most next year. So let's start with a lens on trade and tariffs. First question to you, Abbas, we're seeing the new US tariff regime creating meaningful shifts across the region. Where do you see the pressure points emerging?
Abbas Keshvani
You know, all things considered, most of Asia looks like it will be able to weather the impact of the new tariff regime fairly well. Most of the region have incurred tariff rate of 15 to 20% and because the rates are so similar across the region, the tariffs should not lead to a transfer of U.S. market share between countries. That's to say, tariffs don't necessarily make Taiwanese exports that much more expensive than Korean exports, but if the tariffs trickle into higher consumer prices in the U.S., they might dampen overall American appetite for foreign goods. That does not appear to be happening too much so far, so many of Asia's export economies, could come out of this unharmed. China is a notable exception, though, because they have incurred a 47% tariff, which is higher than most of their peers. Exports in 2026 will probably no longer contribute as much to Chinese growth as they have until now, and slower Chinese growth will likely radiate out into the region via reduced demand for Asian goods, in general, from Indonesian coal to Korean electronics. So, on their own, tariffs on China have the ability to impact growth across the region next year. How China reacts to the higher tariffs will determine the impact on their own growth, but also growth across the region,
Rod Ireland
And staying with growth across the region. I want to throw a question to you now, Rob, when you look at Australia, how do these same tariff pressures and the changes we're seeing in China's export cycle translate into the Australian outlook, whether that's commodities, supply chains or general business sentiment.
Rob Thompson
So, it's worth addressing first, the relatively small direct effect of US tariffs on Australia. We only run a small deficit with them, except for some chunky occasional gold flows, and hence we've only been tagged with the baseline 10% tariff unlike much of Asia. As a market, it's only the fifth largest trading partner for merchandise, goods. For us, our exports, 23.8 billion went over to the states in 2024 which is only around 5% of the total. This 10% tariff, it affects a few industries more than others, so some meat, gold and medicines exporters. But in a macro sense, it's quite far down the list of our worries. But turning back to China's recalibration, at the margin, given you do see some redirection of Chinese imports to other markets, as we know, there's actually a little bit of imported deflation coming through to Australia, we can already see electric car imports are one channel, but not enough to structurally change what is overall, quite a worrying inflationary picture in Australia, but we'll get to more on that later. For many other countries that tick up in manufactured goods exports, like cars at lower prices, might be a real pain point for businesses, but we don't have a domestic car manufacturing industry anymore, and we're not really a large manufacturing base competing with China and all that many other markets, either. So, local business confidence is reasonably okay through this channel of macro worries. The pain points for Australia in China's general reconfigurations are elsewhere, but we'll get to that a bit later on this podcast, I believe.
Rod Ireland
Thanks, Rob, and staying with the China theme for a moment, let's spend some time focusing on China's growth path and fiscal levers available. And Abbas, I'm going to throw this question to you to start with, what's your base case for China's 2026 growth mix, and where do you see fiscal policy making the biggest difference?
Abbas Keshvani
Well, we are projecting a growth rate in China of 4.5% next year. That is a notable miss from their 5% growth target. Now, the PBOC have already cut interest rates by a fair bit over the years. So the onus is increasingly on fiscal to lift growth. This fiscal stimulus is likely to contain some measures to boost consumption. This is what the market is most likely to focus on in any announced package, as it would have the greatest impact on immediate growth. For example, the government managed to lift growth by around 0.2 percentage points this year by subsidizing consumers upgrading their old cars and appliances. Investment projects, on the other hand, will probably receive a smaller share of the fiscal given the government's anti-involution campaign against surplus capacity, but we're still likely to see some spending in strategic sectors like semiconductors and aerospace tech. And finally, we are also likely to see more fiscal space allocated to addressing structural issues like the local government indebtedness and ex inventory in the property market. But like I said earlier, the market will inevitably zoom in on measures like consumption support, since those have the greatest ability to goose growth in the near term.
Rod Ireland
And to you, Rob, how does that slower but more targeted China outlook spill into Australia?
Rob Thompson
Well, we’ve got Australian growth around two and a half percent next year, and while we have factored in some Chinese weakness already, a further one percentage point undershoot, for instance, in Chinese growth from that four and a half would probably mean about another quarter point drag on our growth next year. So, there's a fairly chunky degree of potential pass through. The risk is there. The main channels this can spill over to us are, of course, through our exports. So, I mean, China takes about a third of our merchandise exports, plus a raft of services via international students, tourism and elsewhere, plus some smaller bits and pieces of other commodities and exports. The main one we always look to, of course, is iron ore, on the flip side, we would note that if authorities turn back to infrastructure as a stimulus measure, which I get we're not talking about right now, then it can actually give Australian income boost through increased exports. But no, the main story here is that we are quite heavily exposed to a downturn in China through a number of channels here, both through our high commodities exports and through services.
Rod Ireland
Let's change direction slightly and talk about FX pressures in the market. Regional currencies remain under pressure, even with the recent rally in Chinese equities. With fed cuts expected and greater U.S. scrutiny of FX practices, how are you thinking about CNY direction into 2026? And then secondly, does this environment change how Asian exporters approach conversion decisions?
Abbas Keshvani
So, one of the more bullish developments in recent months is that we've been seeing the PBOC guiding the yuan stronger. The currency is still very weak, especially against others like the euro, despite China's notable trade surplus with Europe. China has to be careful here, because the U.S.-China truce is being reevaluated in 11 months, and across the pond, the EU are being more vocal about CNY weakness. So the likelihood for 2026 is that the PBOC will continue to guide CNY stronger. And speaking of that tremendous trade surplus of China's, when exporters have confidence that the currency is appreciating, they are more inclined to sell their dollars while they can still get a good rate. So in this way, strength begets more strength feeding into an appreciation loop. Finally, if, more likely when, China announces a fiscal stimulus – that will boost stocks and encourage foreigners to pile into Chinese equities, which remain relatively cheap – that would result in the next round of CNY appreciation.
Rod Ireland
And Rob how do these global FX dynamics, a potentially softer U.S. dollar and a more volatile CNY influence the Aussie dollar performance, yield curves or hedging behavior for Australia?
Rob Thompson
Well, softer USD should be pretty unambiguously helpful for strengthening the Aussie dollar and a stronger CNY should be the same. We typically trade with a heavy proxy element to China, given our already discussed very high export exposure there. So that reflects a perfectly normal repricing of our nominal, effective Australian exchange rate. But look, I mean, the stronger Aussie dollar would be deflationary. Our imports would cost less, and our exports also earn less. So imported goods would become cheaper and exports would have less income to add to domestic demand, so that, in turn, would mean some downward pressure on interest rates in Australia. For hedging behavior, the obvious segment to point to is superannuation funds here as a good example of where this might matter. So they hold over 50% of their over 4 trillion in assets offshore. If they sense that Aussie appreciation is around the corner, they're likely to up their hedge ratios, which, of course, has impacts on both FX forwards and spot markets, and might add some further upward momentum to the Aussie dollar. But returning to the question, if we see volatility in CNY as opposed to strength, that could be a less positive story for the Aussie dollar in a spot sense.
Rod Ireland
Okay, so let's now discuss domestic growth, labor markets and inflation constraints and staying with you, Rob, private sector activity is accelerating in Australia, with the recent national account showing both consumers and business lifting their spending. The labor market softening a little bit, but remains very resilient, and inflation is proving sticky at a level too high for the RBA to be comfortable. What will this mean for the RBA through 2026 do you think?
Rob Thompson
The story’s really turned from 2024 when we saw a fair bit of weakness through the consumer and broader private sector. We've come through with a decent recovery, and especially the last couple of quarters of national accounts seen a pickup in demand across the private sector, adding to what has been, I should mention, pretty strong spending from the public sector throughout. So, for the RBA, it's starting to lead to a situation where supply and demand are not in perfect balance, but it's the demand side beginning to pick up above what the supply side is capable of achieving. So, in other words, a positive output gap seems to be emerging, and the Reserve Bank is starting to really focus on this from an inflationary standpoint. We expect the Reserve Bank to keep rates on hold through 2026 but given this inflationary backdrop, the risk of a fresh hiking cycle is climbing fast. The last few rounds of inflation, labor market and national accounts, as I mentioned, have really brought the possibility of rate hikes firmly into the frame. A modestly more restrictive stance might well be prudent and appropriate over the year ahead. And in fact, we'd say that the onus is now on the data in the first half of next year to prevent hikes, given we've got core inflation likely to be running well in excess of 3% for the majority of next year, and we'll get the next couple of inflation prints in January. That's when markets most keenly focused and trying to work out where the RBA is going to go next. This is what really matters over the next couple of months. And again, if we sort of put things in order of what the market is focusing on, between inflation, labor market, national accounts, it's inflation that has really jumped the top of the queue of focus for us now. The labor market, meanwhile, really does seem to be holding up okay. And that's always been the X Factor, which could bring cuts back into the equation. But we and markets have really set that to one side right now it's holding it much better than we would have expected. And hence, the focus has been more on strengthening demand and strengthening inflation.
Rod Ireland
And what about you, Abbass, are you seeing similar constraints across Asia, or does the region's inflation structure give central banks a little bit more flexibility as we head into 2026?
Abbas Keshvani
Central banks in Asia have a little more leeway than the RBA. For most countries in Asia, inflation is tracking around or below the official target. India is a good example where inflation has cooled to less than 1% year on year. That's a far cry from the 10% inflation the country saw a little more than a decade ago. But I digress. The point is that inflation across Asia is running relatively cool, and because of that, a lot of central banks probably have another one to two cuts left in them. But what's holding them back is financial stability, including defending the currency and some macro prudential considerations like soaring property prices.
Rod Ireland
So now let's spend a few moments on housing, migration, and structural pressures. Rob housing and migration remain major forces in Australia's economic backdrop. Prices and investor credit are rising again and supply is still tight. How are these pressures shaping your outlook for 2026?
Rob Thompson
Well, I've discussed the RBA already and their worries about inflation, the migration housing picture just adds to that list of worries for them. So, through the population channel, and we're seeing long-term population growth, looks like it's averaging around one and a half 2%, after a bit of fluctuation through the covid period and adjustments post, that's well above most other countries, and at the margin this is adding to demand for your general goods and services in the country. On the housing side, things remain very, very tight. So again, migration coming through. We are simply not building enough houses. Rents look like they're picking up again. If we look at the last monthly on a three month, three month basis, rental prices actually seem to be headed back towards around 5% annualized growth. Now they had me coming off after hitting 7% through 22/23, had been a good news story, but seeing this come back into, into frame, these pressures through the housing side. On the construction side, the cost of new homes is also once again lifting, which is a real concern. And then in terms of our favorite metric for Australia, house prices, the outlook remains that there's going to be more appreciation next year. We're talking mid-single digits, maybe a bit higher. The situation there, supply/demand factors, even with the possibility of interest rate hikes, it's very hard to see a situation where the housing market doesn't continue to appreciate in price terms as well. This has also brought the regulators back into the fold in terms of trying to address what is a pretty big political concern as well, the younger generations feeling locked out of the markets.
Rod Ireland
And staying with that same theme, Abbas, how does that compare with the property dynamics you're seeing in China, especially given how this affects the growth outlook there?
Abbas Keshvani
Well, China's property market is proving to be a real drag on growth. New home prices there are down 7% over the last few years, 18% if you look at the resale market. Compare that with a 20% gain in US home prices over the same period. The softness in China home prices leads to a negative wealth effect, where people who have seen their net worth decrease feel less inclined to spend. It also leads to less property construction and investment, which has historically speaking been a central driver of economic growth. Finally, it has even percolated into fiscal spending since local governments have been collecting less land tax revenue. The market is currently trapped in a vicious cycle with sliding prices discouraging buyers, which causes more softer prices. And all of this is spilling out into growth. Even if buyers return to the market, it will be some time before property investment recovers. Excess inventory is equivalent to almost a year's worth of sales. The point is, property is likely to remain a drag on China growth for some time. So, it's all the more important that fiscal step up and pick up the slack.
Rod Ireland
So, let's finish today's podcast with the external drivers, and staying with you for a moment, Abbas, when you look at China's trajectory and at the wider global drivers, what are the one or two external variables you think could most shift Asia's growth outlook in 2026?
Abbas Keshvani
Tariffs are a big one, unfortunately. The U.S. China deal is up for renewal in November 2026 or thereabouts. So the second half of the year, we'll probably see concerns about protectionism come to the fore. A notable risk is if countries, other than the U.S., start taking on a more protectionist tone. The EU sounds increasingly protectionist lately. So there's a risk that China in 2026 deals with another trade war European edition. Other than that, there is, of course, the fed. U.S. financial conditions affect everything from us, demand for goods, the direction and magnitude of FDI and portfolio flows, and they set the tone for local central banks. So, the composition of the FOMC next year is going to be an important factor for us in Asia.
Rod Ireland
And same question for Australia. Rob, what external drivers have most potential to meaningfully change Australia's economic trajectory next year?
Rob Thompson
It’s going to sound like there's a bit of an echo here, unfortunately. So first up, I will choose China via second order tariff impact. So as discussed earlier, the trajectory of Australian growth remains deeply impacted by what happens to the China story for our income, our broader growth prospects heading into the new year. And then the second piece, I guess, for markets, again, on this echo theme, it is the Fed for us as well. The channels are slightly different, but all the same things of us already mentioned, board composition. The fact is that Australian interest rates are so heavily influenced by Fed policy we cannot escape the vortex that is the Treasury market and the U.S. dollar. And much we have had quite a big independent set of movements in our rates recently, into next year, we think that we will be very much guided by where the Fed takes policy rates and what the implications from that will be if, for instance, they cut too hard and see inflation return and has to see a move in the other direction. We will be very much a follower of the broader direction of especially the longer-term interest rates being set by the U.S.
Rod Ireland
I think that's a great point to end on. Rob and Abbas, thank you for the insights and for taking us through such a broad set of dynamics from your regions.
[OUTRO]
Rod Ireland
Thank you for listening to Strategic Alternatives, an RBC Capital Markets podcast. This episode was recorded on the 10th of December 2025. You can listen and subscribe on Apple, Spotify, or wherever you get your podcasts. If you like to learn more or continue the conversation, please visit RBCCM.com/strategicalternatives or contact your RBC representative.
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