The second half of the 2010s brought a sharp rise in economic uncertainty and an accompanying drag on economic growth, peaking in mid-2019 with the intensification of the US-China trade and technology wars. The optimistic early case for the 2020s was that with the negotiation of a ceasefire between Washington and Beijing, and Brexit apparently resolved, a decline in uncertainty would boost sentiment and activity as the world economy entered a new decade.
It wasn’t to be. The first two months of 2020 saw the outbreak of COVID-19 virus in China, a clash between the US and Iran in the Persian Gulf, and further devastating bushfires and floods in Australia. As COVID-19 has spread, business disruption and financial market dislocation have followed contagion, prompting a rash of economic forecast downgrades.
At time of writing, there had been more than 126,000 confirmed cases of COVID-19 and more than 4600 deaths, and analysts were struggling to gauge the likely economic fallout. Early data showed dramatic falls in manufacturing and service activity in China and across the world economy in February, while global stock markets have tumbled on virus-related fears, despite proactive central bank action including the first emergency Fed rate cut since the global financial crisis (GFC). In March, the OECD estimated that under its baseline scenario, the impact of the virus would be to lower China’s GDP growth by about 0.8 percentage points and world growth by about half a percentage point this year. It also warned that global growth could be halved under more severe scenarios.
In Australia, Treasury expects the virus to subtract at least a half of a percentage point from growth in the March quarter while the RBA has brought the cash rate down to within 25bp of its effective lower bound.
At the same time, old uncertainties haven’t been so much banished, as postponed. The future trajectory of bilateral relations between Washington and Beijing, even after the signing of the “phase one” agreement, remains fraught, and the UK is now embarked on difficult trade negotiations with its former partners in the EU.
As directors come to grips with what feels like a tidal wave of event risk, six themes will shape international and national economic environments: the global growth slowdown; a technology puzzle; the uncertain fate of globalisation; a fragmenting geopolitical system; an increasingly anthropogenically challenged natural environment; and a restructuring of the political landscape.
At the time of writing, there had been more than 126,000 confirmed cases of COVID-19 and analysts were struggling to gauge the likely economic fallout.
It starts with growth
Since the GFC, the world economy has shown signs of losing its mojo. Pre-crisis, a combination of decent growth at the “frontier” of developed economies, plus rapid catch-up growth in key emerging markets, delivered an annual average pace of global growth of more than four per cent between 2000 and 2008. However, for the past five years, average growth rates have been almost a percentage point lower, despite faster-growing emerging economies now accounting for a larger share of world output. Last year’s growth rate dipped to sub-three per cent for the first time since the GFC, pulled back by weakness in trade, industrial production and investment spending and weighed down by high levels of global debt and a diminished pace of economic convergence.
Although Australia’s own growth slowdown has occurred later than that of many of our peers, we haven’t been immune. For the first three quarters of last year, annual real GDP growth was less than two per cent. With population growth at around 1.5 per cent, that puts per capita growth at a crawl. Globally and in Australia, lacklustre productivity is central to disappointing growth, with Australian labour productivity contracting through 2018–19 and continuing a run of weak productivity outcomes since 2012–13 that echoes the decline in the pace of advanced economy productivity growth that began around 2005.
The tech puzzle
That sluggish productivity performance points to a second key theme: the puzzle that — to rework economist Robert Solow’s famous 1987 observation — we can see dramatic technological innovation everywhere except in the growth and productivity statistics.
Cloud computing, AI, machine learning, digitisation and all the other elements of the Fourth Industrial Revolution (4IR) are reshaping business models, labour market performance, investment decisions, market structures and forms of competition in fundamental ways. Yet to date, there has been no correspondingly large payoff in terms of enhanced economic growth. Potential explanations for this paradox include measurement shortcomings, the offsetting effects of growth headwinds elsewhere in the economy, and the relative significance of current innovations compared to those of the past. The most optimistic take is that there is some chance the lagged impact of innovation will finally deliver the much-anticipated productivity spurt during the new decade.
The challenges posed by slow growth and the uncertain impact of technology have been exacerbated by the backdrop of an international economic order in transition to a less open, and consequently less growth-friendly, configuration. Until the GFC, the dominant economic narrative was the apparently unstoppable march of a globalisation, which seemed constantly poised to accelerate into hyperglobalisation. Instead, extremely sluggish or falling cross-border trade and capital flows, compounded by trade wars and increased protectionism, the UK exit from the EU, and the World Trade Organization’s steady slide into disrepair, have prompted a range of sombre new descriptors for the prevailing economic environment, including “slowbalisation”, “deglobalisation” and “decoupling”. The adverse consequences of COVID-19 for global supply chains and the cross-border movement of people now threaten a further retreat from the dream of a borderless world.
The adverse consequences of COVID-19 for global supply chains and the cross-border movement of people now threaten a further retreat from the dream of a borderless world.
This shift in the nature of the global geo-economic framework is also partially driven by a simultaneous fragmentation in the geopolitical order. The unipolar moment that left the US in a dominant position from the collapse of the former Soviet Union to the onset of the GFC has long disappeared into the rear-view mirror. Instead, the likely successor to US hegemony appears to be an uncomfortable mix of intensifying Sino-US strategic competition alongside a broader shift to a more multipolar world. One result is that ostensibly commercial choices over trading partners, technology standards and foreign investment strategies are at heightened risk of becoming more entangled in national foreign and defence polices.
For Australia, this raises the by-now familiar, but still critical, test of successfully managing competing economic and security interests.
Humans vs environment
Further adding to the complex topography of this macro landscape are the consequences of an increasingly anthropogenically challenged natural environment. The combined impact of population growth, urbanisation, industrialisation, globalisation and climate change is now visible in the rising frequency of and growing losses from natural disasters such as the bushfires that marked Australia’s summer.
Similarly, rising population density, changing land use, and greater international travel are all contributing to the threat and impact of global pandemics such as COVID-19.
There has also been a jump in the relative importance placed on climate and environmental issues by business, finance and regulators, alongside a large shift in public attitudes, all of which is set to further influence the operating environment for business. Each year, the World Economic Forum Global Risks Report asks leaders to rank the most probable and consequential risks to the global outlook. This year, climate-related risks took out the five top spots in the probability rankings, the first time a single issue has done so in the survey’s 14-year history. The AICD’s Director Sentiment Index has captured a parallel rise in the importance placed on climate change by Australian directors.
That steady democratic retreat has been matched by an incoming populist wave that has produced a radical shift in... potential government policy choices.
New political landscape
Finally, the ability of national policymakers to respond to these five intersecting trends has been complicated by a sixth — a rise in domestic political instability and unrest alongside declining trust in government and a loss of faith in democracy. Political sociologist Larry Diamond has described these circumstances as producing a “democratic recession”, whereby for the 13 years since 2006, more countries have moved away from democracy than towards it. That democratic retreat has been matched by an incoming populist wave that has produced a radical shift in the probability distribution around potential government policy choices.
For example, at the start of the current century, populists were represented in just seven European governments and, on average, captured only eight per cent of the overall vote. By the end of 2018, that presence had grown to 15 governments and 26 per cent of the vote.
Australia is in relatively good shape, but like the rest of the Anglosphere, we still have cause for concern. In ANU’s 1996 Australian Election Study, the share of Australians reporting dissatisfaction with democracy was 22 per cent. By last year it had risen to 41 per cent. That swing is much smaller than the 34 per cent rise in dissatisfaction recorded in the US since the mid-1990s. But it is broadly in line with an 18 per cent point rise in the UK and a fair bit larger than a 10-percentage point increase in Canada. With reported trust in government declining in the same period, the risk is that this trend compromises the ability of national policies to respond effectively to the trials ahead.