Recently, we had the pleasure of hosting Jonathan Pain, as he gave us his insights on today’s global political and economic reality. Jonathan kindly provided us with a synopsis of his presentation on what the future holds for the global economy, and how that will impact Australia.
The tectonic plates of the political and economic landscape are rupturing as the winds of change herald a new geopolitical reality of anti-establishment populism and nationalism. The cosy Post-Cold War liberal and globalist consensus has fractured and we must now brace for a period of instability as we search for a new political and economic equilibrium. The good news is that after eight long years of Alice in Wonderland monetary policy, animal spirits have emerged from hibernation and lower for longer, is no longer. The first derivative of reflation is easy: stronger growth, higher inflation and rising bond yields.
In recent months we have seen evidence that the eurozone economies have turned the corner and I see stronger economic growth ahead. This is great news as for far too long Europe has been in the doldrums. Furthermore, the emphatic victory by Emmanuel Macron in the French Presidential election removes a significant political risk premium hand brake. In addition, and most significantly, it represents a pause in the swing of the political pendulum towards populist nationalism. At 39 years of age Macron becomes the youngest French leader since Napoleon Bonaparte and his emergence from political obscurity is a political fairytale in every respect.
In America President Trump’s stimulatory fiscal agenda will serve to boost economic growth and if he can be convinced to moderate his more protectionist trade policy stance this should be good news for global economic growth.
Chinese economic growth at 6.9% is commendable if one remembers that it is now a $11 trillion economy. Statistically, and arithmetically, it is surely to be expected that growth will slow in the years ahead. In addition we should remember that corporate debt levels have reached very elevated levels and this will serve to slow growth in the years ahead. It is also evident that Chinese policy makers are increasingly concerned about excessive leverage in the economic system and are looking to slow the rate of credit growth.
Looking at the rest of Asia I remain very positive on India, Indonesia and Vietnam, as I have been for more than a decade.
It is my firm belief that the most significant and defining economic phenomenon of our lifetime is the rise of the Asian middle classes: and they will shape and define the topography of the global economic landscape for many decades to come.
In this regard Australia will continue to be a major beneficiary of the relentless rise of the world’s fastest growing and most populous nations.
Australia is likely to remain a favoured destination for investment, tourists and students from the Asian region. Similarly, Asian nations will continue to secure their resource supply lines in nations they view as stable and friendly. It is important, however, that Australia accelerates the diversification of its economy and that we are not too reliant on coal and iron ore.
In the short to medium term the Australian economy will face some headwinds as the housing sector cools, both in terms of prices and construction activity. The government’s recently announced increase in infrastructure investment is welcomed as it will spur an increase in business investment and help offset the likely weakness in housing in the years ahead.
All in all the global economic outlook has improved led, this time, by Europe; something we haven’t seen in a long time.
In conclusion, the political winds of change are blowing and populist nationalism is on the rise and this is the ‘New Political Reality’. Fortunately ‘The New Economic Reality’ is that the days of Alice in Wonderland negative government bond yields are behind us and we look forward to reflationary forces generating stronger global economic growth.