Transcript

Stan Grant

00:12

Now to our next discussion, which is about management during a time of crisis. Again, very, very timely. The OECD just this week is now cutting 0.5 of a percent of global growth forecast. It's now saying that global growth will dip below 2.5%. When you get below 2.5% then you are heading into potentially a global recession. After three decades of economic growth in Australia, the R word is being spoken about back here again as well, and this is part of the impact of coronavirus.

 

Stan Grant

00:49

That really sets up our next conversation. Andrew Charlton will be joining us. He has senior experience in business, government, and international forums. He commenced his career at the Boston Consulting Group working with clients across the Asia Pacific region. He later served as senior economic advisor to the prime minister of Australia, and Australia's senior government official to the G20 Economic Summit. He's the author of two books, Ozonomics in 2007 and Fair Trade For All in 2005, co-written with Nobel Laureate, Joseph Stiglitz.

 

Stan Grant

01:20

Mark Thirlwell, of course you met yesterday. He joined the Australian Institute of Company Directors as chief economist in February 2019. They're here to discuss governing during a time of crisis.

 

Mark Thirlwell

01:37

Thanks Stan. Stan mentioned already that overnight we got the new OECD forecast out. They've trimmed 0.8 percentage points from Chinese growth, half a percentage point of world growth. Australian growth has also been trimmed by half a percentage point. They're thinking I think 1.8% this year now. The other big thing that happened overnight is that we saw markets start to price in the possibility of fairly radical central bank action, particularly for example, rate cuts from the U.S. Fed. In the case of our own RBA and of course you'll find out at 2:30, so I'm not sure I should make any forecast on it… can be so quickly proved wrong, but if you think back to last Friday, market pricing was suggesting the chances of an RBA rate cut today were less than 20 percent when I looked late yesterday, the odds were over 100 percent in other words, absolute certainty that we get one cut and a pretty good chance, not a pretty good, but a modest chance that we are even might get more than 25 we might get 50 and the pricing said by July complete certainty.

 

Mark Thirlwell

02:44

In fact, that we would get two 25 basis point cuts. In other words, we'd be at 0.25, which if you remember last year, the RBA said a cash rate of 0.25, that's the point at which we stop cutting rates because it doesn't do any more good and we start to think about all those weird and wonderful things like quantitative easing. The other thing that started to go on. I'm starting to get these deja vu back to 2008 to 2009 where people started talking about alphabet shapes of recoveries and if you remember, it's kind of really depressing in a way. But we have Vs, Us, Ls, Ws, I think at one point we even had an inverse J in terms of recovery outlook.

 

Mark Thirlwell

03:21

Given that as I say, that slightly disturbing sense of deja vu Andrew I thought it would be useful to start off, you were front and centre during the government's response to the 2009 global financial crisis. When you were advising the prime minister, what was sort of some of the key lessons that you've learned through that experience? What happened then? What are the kind of responses did we see and you know, to what extent can we take the lessons that you learned then and apply them to current circumstances?

 

Andrew Charlton

03:50

Yeah. Well as the economic fallout of the coronavirus has intensified just over the last week, I do have a bit of a sinking feeling in my stomach. Something of a sense of deja vu. We called that moment, after Lehman brothers fell in 2008 the top of the roller coaster moment where things had been going well and then suddenly you look down and see the possibility of a significant dislocation. I think there's a chance we're at another top of the roller coaster moment, although I think there are some similarities and some differences from that time. I mean the main similarity is the scope of the potential impact. Just like in 2008, 2009 the coronavirus has the potential to simultaneously affect global markets with very wide sweeping effects. Secondly, it has the potential to affect financial markets and the real economy and have a very broad impact across a lot of sectors.

 

Andrew Charlton

04:56

We're already saying a range of dislocations in global supply chains and some significant falls on stock markets around the world, but there are some differences too, and it's very important to keep those differences in mind. One of the differences unfortunately, is a difference in the firepower that governments around the world have to respond. You know in 2008 after Lehman brothers fell, we, the prime minister immediately flew to New York. We had briefings with senior US officials on the scope of the crisis and the key message was to put down a battle plan for how we would act. If I look back at the elements of that battle plan, big fiscal stimulus, big monetary stimulus, coordinated action on trade and international institutions, how many of those things are available or effective now and the answer is not very many. Yeah, there are, there are two types of shock that can hit the global economy.

 

Andrew Charlton

06:05

One is called a demand shock. When consumers get frightened. They get nervous and they stop going to the shops, they stop spending and that causes the economy to fall. The other one is a supply shock where producers, those who produce goods and services have some disruption or dislocation. That means they can't supply goods and services into the economy and the economy falls. Now, the 2008 crisis was for the most part, a pretty classic demand shock and so the government can do something about that. You can put money into the hands of people, you can cut interest rates, coax people back into the market. A supply shock is very different. You can’t stimulate for a supply shock. We might get an interest rate cut today, but if the goods can't be produced because people are staying at home because of a virus, because global value chains have been disrupted and key parts in the manufacturing sector are unavailable, then the value of pumping money into the economy is much lower.

 

Andrew Charlton

07:13

So, we have less fire power from a fiscal and monetary perspective and it's much less clear that will be effective. I think the third difference that it's worth thinking about here is we don't really have a map for this crisis, and you know, touch wood, it doesn't play out as badly as the 2008 financial crisis, but at least in 2008 and nine we had a sense of what that type of shock does to the economy and how to cope with it. This shock, which is simultaneously, well actually not simultaneously, first and foremost a public health crisis. Plus, a consequential economic shock is very different just from the perspective of what we know, our historic experience in dealing with this kind of shock.

 

Andrew Charlton

08:01

 

So for that reason I think it's more likely that governments are going to be slower to really get their grips around the economic consequences and the economic solutions, just for that lack of experience and we don't know how we'll interact with other underlying issues that have already been bubbling along in the economy. Low growth, very high debt levels in many parts of the world, some underlying weaknesses in China's economy. So, for those reasons I do have that top of the roller coaster feeling.

 

Andrew Charlton

08:32

Hopefully the drop isn't as deep, but I worry that there are some differences that could make it challenging to deal with.

AGS 2020

Mark Thirlwell

08:39

One of the things you mentioned there is that very different set of starting conditions. I was looking back at the numbers. So, in 2009 the height of the global financial crisis, Australia grew at 1.9 percent which at the time we thought was a terrible growth outcome and we won't know last year's full year growth results till tomorrow. But if you look at the first three quarters of last year, we did 1.7, 1.6, 1.7 population growth over the same periods running at about one and a half. So, in other words, per capita growth, we're doing 0.1 0.2 so we're going into the crisis already with very weak growth. Of course, the other big difference is in 2008 financial crisis, China slowed a lot, but it was still a global growth locomotive. This time it's right at the epicentre of what's going on. So, the starting conditions, this is not just the nature of the crisis looked very different. The starting conditions look much more challenging, I guess. And that gives you a new set of governance, governance challenges too.

 

Andrew Charlton

09:34

Definitely. You know, you think back to the conditions we went into that 2008 crisis with. We had one of the largest big budget surpluses we've had in two decades, $30 billion of budget surplus fiscal firepower ready to go. Interest rates were at seven and a quarter percent, which was painful at the time for anyone, anyone who was, who had borrowed money. But it meant that we could very rapidly cut interest rates. Interest rates were cut by 400 basis points, which was a huge stimulus into the Australian economy, which helped put the economy back on its feet.

 

Andrew Charlton

10:12

We also had the Australian currency was very high and we had a big drop in the currency, which massively boosted our exporters. Let's just preview each of those things right now. We don't have a budget surplus despite the earlier announcement, last May, interest rates are already very low so there isn't as much scope to drop them and our currency yesterday hit an 11-year low. So just in terms of the amount of gas in the tank for each of those three major levers, Australia would go into this crisis, if it emerges, in a much weaker position.

 

Mark Thirlwell

10:48

With that really sombre backdrop, we're not doing a really great job of reassuring you here, apologies. But when you're thinking about it from a board perspective in terms of risk management and risk planning, we've heard a lot about what you think about that already. But in terms of thinking about the kind of economic scenarios that would play out from here, what kind of things do you think should be front of mind? What are the base case style scenarios? What are the things that boards should be thinking of?

 

Mark Thirlwell

11:17

The OECD for example, the numbers I was quoting beginning, that's the OECS base case. Then it has this so-called domino scenario where instead of world growth at 2.4 you get world growth at one and a half percent. It's still much better than the GFC, which is minus 0.1 but near as damn at a global recession. What kind of scenarios or frameworks you think boards should be having in their mind when they look out at this scenario that this kind of world that we're talking about and these very challenging starting conditions?

 

Andrew Charlton

11:43

Yeah, I mean if I think back to the Australian companies that managed the last crisis well and those that really struggled through that crisis or in fact succumbed to it. I think the way that those companies prepared for the crisis and the way that they scenario plan through it made a big difference. I think from the perspective of boards, step number one is clearly just to try and understand all those range of potential consequences that means thinking through potential impacts on your suppliers, potential impacts on customers and how they might respond, competitive dynamics and other dislocations in the market.

 

Andrew Charlton

12:32

What are all the potential impacts that could, that could come at your organisation from different angles. Step two is then to ask the executive team to prepare a plan for the different scenarios around each of those groups. I think in 2008/2009 some Australian companies were quite well prepared. They very quickly put in place plans to deal with worst case scenarios, medium case scenarios without throwing their hands in the air and they performed generally better.

 

Andrew Charlton

13:16

I think step three is really shoring up the financial implications those scenarios. The Australian companies that did well through the last crisis took early decisions to stabilise their balance sheets. You saw companies early on make in some cases some tough decisions around capital raising and debt reduction. Some companies took a very bitter pill early on in the crisis in order to do that, but that ultimately I think put them in a good stead, not just through the crisis but also to be in a good position coming out of the crisis to be able to capitalise on the U or hopefully V-shaped recovery.

 

Andrew Charlton

14:06

Fourth, I think the, the fourth key lesson for companies is to keep that eye on the long-term. Make sure that the actions that you take, position yourselves well for a recovery, for long-term growth and for future changes in the market. Rather than cutting back, even though it might be tempting to cut back on those things which are more long-term and less immediate. Those are the things which are actually going to enable some companies to really profit out of this crisis. If it emerges and touchwood that it doesn't.

 

Mark Thirlwell

14:41

That's really interesting. Linking it into long-term, because obviously when you've got this kind of dramatic challenge, it's all about risk management. Focus on end because the short-term horizon is so unpredictable. Inevitably we're spending a lot of time thinking how do you manage the next week, the next month? But if the parallel is right, and you don't know, but if the parallel is right that this is kind of a similar magnitude shock to the global economies, the GFC, one of the things we know about that is not only did it have this big short-term dislocation effect, but it really changed the contours of how the world economy looked. I mean it changed. Ultimately it changed the way that politics has worked. It changed the way that businesses thought about risk profiles. It changed investment returns. It changed the nexus, if you like, of global asset prices and interest rates in some of those things may be predated it, but it certainly was a trigger for some of those big changes.

 

Mark Thirlwell

15:30

It's really early, I know, to sort of speculate about what the world might look like as a result of this, but if you are sort of just between us and we won't hold you to the forecast, but if you kind of do some wild predictions about what might a post-COVID-19 world look like and how might it look different to the pre-COVED-19 world in ways that when you're doing that strategic planning exercise, preparing for the longer term, other things that come to mind or is it just too early to tell?

 

Andrew Charlton

15:57

Well, I'll tell you one danger that does come to mind. The spirit of the international response to the 2008/2009 crisis was one of global cooperation. Countries came together they made significant joint agreements around stimulus, around avoiding, trade protectionism, around jointly supporting the international institutions and enhancing the role of those international institutions. That was then, and this is now. At that time, the president of the United States was Barack Obama. Now the president of the United States is Donald Trump.

 

Andrew Charlton

16:40

At that time the global mood was supportive of globalisation. Now there is a significant trend towards nationalism and I worry that these crises could play into that geopolitical dynamic and the consequences of that dynamic might mean that it takes away some of the tools that the international community, some of those collaborative tools at the international community used to fight the last crisis. But secondly that it plays into the tendencies that are already in the atmosphere right now. Trade protection, closing of national borders, distrust of international institutions. And I think if we get this sense of like global fear, global pandemic, that could energise those tendencies and lead us into an acceleration of those geopolitical trends. And I'm not sure that's a good thing for the world.

 

Mark Thirlwell

17:53

Okay. So it can act as an accelerant for some of those risk trends that are already present and I guess, which we should already be baking into our strategic planning, this idea about maybe that's a de-globalising error, maybe it's a fragmenting geopolitical area, but we focus those things in. Well, I'm aware unfortunately of the time, this has been a really quick discussion. I hope you find it valuable. Personally, was great to have the insights. It's obviously a rapidly changing situation. But thanks Andrew, so much for coming and sharing your thoughts on the environment with us. Thank you very much. Thanks a lot.

 

Angus Armour

18:29

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