‘New economic era’: CBA issues stark warning
CBA’s chief economist says Aussies should buckle up as the world is about to enter a concerning new economic era.
Higher interest rates, market volatility and geopolitical tensions are all on the horizon as trust breaks down between countries, according to Commonwealth Bank chief economist Luke Yeaman.
“We have entered a new economic era, one with rules that are very different to the last,” Mr Yeaman wrote in a dreary note to investors this week. His assessment of what the future held for markets, trade and the global economy was largely negative.
He maintained the world was in the grip of a “deep structural change, not a temporary Trump phenomenon - as some would like to think”.
The current frictions between the US and China were a case in point.
MORE: Top 200 Aussie suburbs for property investment
“China and the US aren’t negotiating a typical trade deal; they are flexing their economic and strategic muscle as part of a contest for long-term supremacy.”
Most investors and business leaders had “cut their teeth” in the last economic era - a period of globalisation stretching from the mid-1980s to the GFC, and characterised by stability, trust between countries, and capital flows across borders.
Now, however, “globalisation has stalled, a massive defence uplift is underway, and there is a rapid (and costly) push to rebuild sovereign manufacturing capability in advanced countries”.
Mr Yeaman described a “multipolar world order,” with the two largest countries in the world in open strategic competition.
“Assumptions that China would continue pursuing economic reform as it became more integrated into the global economy proved naive.
“Instead, China has adopted a more assertive posture - seeking to dominate strategic sectors, using economic coercion to achieve its political aims and openly fostering closer ties with Russia, Iran and North Korea (CRINK).”
That geopolitical shift would be compounded by three other factors, he warned: the race to net zero emissions, the AI boom, and declining populations.
MORE: Where the population has boomed most and why
“We expect a sustained increase in the level of economic and market volatility, especially when compared with the relative calm of the Great Moderation. Black Swan (low probability-high consequence) events are more likely now than in the past few decades,” he wrote.
“This places a premium on diversification, hedging and other forms of insurance against shocks.”
He added that globalisation was now “firmly stuck in reverse gear”.
“In this new era, we expect more trade and investment restrictions, along with more regulation.”
Mr Yeaman acknowledged that his assessment had painted a “gloomy picture”.
“It suggests this new economic era will be more dangerous, more uncertain, with lower productivity and economic growth, and higher interest rates, relative to the last few decades.
“However, there are also clear positives. The combination of AI and other new technologies, along with the move towards net zero, has the capacity to generate a major boost to global productivity.
“If this does come to fruition, it will help to offset many of the negatives outlined above.”
The quiet race China is winning
Mr Yeaman isn’t the first expert to warn of a new multipolar order.
Anne-Marie Brady, a specialist in Chinese foreign policy from the University of Canterbury, has commented on China’s strategy of locking up key resources - not just rare earths, but everything from uranium to gold.
“We are returning to an era of two worlds,” Ms Brady told news.com.au.
“Strategic technology and strategic minerals will be one of the clear divides: the likemindeds who support the rules-based multilateral order, versus the authoritarians in a China-centred order.”
Rare earths became front-and-centre of the US-China trade war earlier this month, after the Chinese government further restricted exports. Beijing controls most of the mining and processing of the metals.
In the case of uranium, the Chinese government has been busy stockpiling and building up equity in foreign mines as it forges ahead with its vast nuclear program.
It’s a decades-long strategy without the institutional constraints that democracies often struggle with. And it’s left the US playing catch-up, struggling to secure its own stable uranium supply.
More Coverage
China has used similar tactics with lithium, cobalt and nickel.
Gold, too, is being stockpiled in China at a rapid clip as the country seeks to diversify its foreign exchange reserves away from the US dollar. Officially, Beijing holds more than 2,200 tonnes of gold, but analysts believe the real figure is much higher.
The BRICS nations, which include China, Russia and India, have even discussed creating a new gold-backed currency that would compete with the dollar.
