World economy holds breath on eve of Trump inauguration

Mr Trump's threat to impose tariffs of 10-20 per cent across the board and 60 per cent on China has raised concerns it could reheat global inflation and slow the economy of Australia's largest trading partner, with flow-on effects domestically.

Donald Trump's threat to impose tariffs has raised concerns it could reheat global inflation. (AP PHOTO)

But whether he actually follows through with his economic policies on his first day of office, as promised, is yet to be seen.

"Trump's return means increased economic, trade and geopolitical uncertainty given the more extreme nature of many of his policies and his own erratic approach to policy making often characterised by grand statements on social media that may or may not go anywhere," AMP chief economist Shane Oliver said.

"This is likely to contribute to a volatile ride for investors. 

"Trump's policy agenda is somewhat schizophrenic for investment markets in that it includes some very pro-market aspects – with tax cuts and deregulation – but some negative aspects – notably around tariffs and immigration - and the market impact will ultimately depend on what dominates."

Scott Bessent, Donald Trump's choice as Treasury Secretary, reassured markets in a speech. (AP PHOTO)

In his confirmation hearing, Mr Trump's treasury secretary pick Scott Bessent reassured markets with a speech that promised to bring inflation down and respect the Federal Reserve's independence.

"Bessent said all the right things, emphasising the importance of addressing the budget deficit and adjusting domestic discretionary spending, but without social security and Medicare cuts," said NAB senior FX strategist Rodrigo Catril.

The World Bank on Thursday warned already sluggish global economic growth of 2.7 per cent in 2025 would be reduced a further 0.3 percentage points if Mr Trump enacts 10 per cent across-the-board tariffs and other countries retaliate with trade restrictions of their own.

But ANZ head of G3 Economics Brian Martin said it was not clear to him that Mr Trump's policies would undermine the US economy's strong progress.

"It is important to keep an open mind about the outlook for the economy, inflation, the labour market and Fed funds rate as 2025 unfolds," he said.

"We expect that greater clarity will emerge soon after the inauguration, particularly with respect to tariffs and immigration."

Locally, there's little in the way of data to whet the appetite of Australian economists ahead of the Australia Day long weekend.

Dwelling commencements for the September quarter will be on show, with hopes Australia can begin to make progress with supply in 2025 and begin to turn the corner on housing affordability.

"Economists will scour the building activity report from the Australian Bureau of Statistics on Wednesday," said CommSec chief economist Ryan Felsman. 

"Previous data revealed that 2023/24 was the worst financial year for Aussie home building in more than a decade, dropping 8.8 per cent to 158,690 new starts."

US stocks rallied on Friday to close out a strong week on optimism over the health of the economy and path of interest rates as investors braced for a slew of policy changes under the incoming Trump administration.

The Dow Jones Industrial Average rose 334.70 points, or 0.78 per cent, to 43,487.83, the S&P 500 gained 59.32 points, or 1.00 per cent, to 5,996.66 and the Nasdaq Composite gained 291.91 points, or 1.51 per cent, to 19,630.20.

For the week, the Dow rose 3.69 per cent, the S&P gained 2.92 per cent and the Nasdaq climbed 2.43 per cent.

Australian futures rose 28 points , or 0.33 per cent, to 8317.0.

The local share market slipped slightly but still managed to eke out a small gain for the week.

The benchmark S&P/ASX200 index on Friday finished 16.6 points lower at 8,310.4, while the broader All Ordinaries dropped 11.7 points, or 0.14 per cent, to 8,557.4.

The ASX200 index rose 0.2 per cent for the week - its second week of gains.