Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 333

Uncharted waters, 2020 and beyond

We live in tumultuous times. Economic dominance has moved from West to East, with the West in some ways still recovering from the GFC over a decade ago. We’re experiencing record low interest rates, rising world and national debt levels, trade wars, digital disruption, stagnation in wages and household incomes in developed economies, political populism overwhelming rationality and, for some major nations, the return of 1930s-style dictators.

The Ruthven Institute has looked at 10 main issues that are making headlines to find answers to their significance and impact. These are:

  • The changing world order
  • Debt, deficits, quantitative easing (QE) and living-beyond-our-means
  • Record low interest rates, and fiscal vs monetary policy
  • Overvalued share markets
  • Populist politics and dictators
  • Trade wars
  • Digital disruption
  • Enough future jobs or enough future workers
  • Australia’s economy: structure and externalities
  • Climate change

This article discusses the first three issues, and the full report can be obtained at the address at the end of the article.

A changing world order

For over a century, spanning six or seven generations, the United States was the largest economy worldwide. China had previously held the position for millennia, but as a closed kingdom, few knew it was the largest. In 2016, and much to the West’s discomfort, China regained economic dominance.

The British Empire was regarded as the world leader into the 20th Century, and indeed it was if we factor in the GDP of Commonwealth countries such as India (long in the top four largest economies for centuries), Australia and others. With that hegemony came currency dominance, language dominance and a measure of stability.

But empires come and go, be they Roman, Ottoman, British or American-cum-the Western bloc. Their economies all slow due to their wealth, high standards of living, complacency and excessive regulation.

The re-emergence of China, and indeed the East at large, is pointing to a very different world order for the rest of this century and the next.

Eastern economies, especially China and India, have embraced the Industrial Age (with the advantage of advanced equipment and cheaper labour) but have equally embraced the West’s Infotronics Age of services and information and communications technology (ICT).

Australia, being a geographic, economic and social (via immigration and tourism) part of the Asian megaregion, has everything to gain from the East’s economic dominance. However, diplomacy must be carefully crafted and maintained as we morph into a larger, wealthier Eurasian society and economy. Is it possible to support both the fading West and the dominant East? We have to try.

The two charts below provide perspective on current world populations and economies, as we enter the 2020s.

Tectonic changes of power are always unsettling, especially if accompanied by sabre-rattling, chest thumping and hegemony from both the old and new dominant powers – as we see happening today with territory creep in the South Seas and the world’s once-largest economy waging a trade war.

The transfer of power to China and the East at large is being expedited by slow economic growth in the West, as shown below.

Ironically, this polarisation seems not to be having an adverse effect on world growth so far. However, already the GDP (in ppp terms) of the East has overtaken that of the West in 2017, with the East growing at 5% pa compared with less than 2% for the Western nations.

Debt and deficit spending

Debt levels can be worrying, as it is never wise to live beyond one’s means. The following two charts outline total debt levels and government budget balances among the world’s major economies.

More than a handful of nations have excessive debt or deficit spending risks. Interestingly, China and India are in this cohort, but Western economies are predominantly at risk. Australia is only at risk with its household debt component, but so far this has been manageable via record low interest rates … which brings us to our next topic.

Record low interest rates

Using 10-year bond rates as the guide, the picture of interest rates is mixed across the world’s 21 largest economies, as we see below. While the average of 3% is low by historical standards, six nations are at or well above the historical average of around 5% to 6%.

The United States and 14 others are well below both the historical and current average. Turkey, Russia and Brazil have ailing economies, leading to high bond rates. However, nations with bond rates below 1% – including Australia, whose growth has dropped to half its long-term average in 2019 – are hardly vibrant, or even well, by contrast.

Continuing to lower or maintain near-zero interest rates and resorting to quantitative easing (sort of pump-priming) is, ultimately, defeatist. It frees up capital for the private sector, which may or may not invest it in growth, and increases the national debt, rather than allowing nation-building projects to proceed with government deficit spending. But again, debt servicing is easy with low interest rates, so there is no Sword of Damocles hanging over heavily indebted nations in the near future.

Australia faces this question and others as we enter the 2020s, having had no wake-up call in the form of a recession for almost three decades. Meanwhile, there have been no meaningful reforms to taxation, the labour market, energy, communications, and other aspects of the nation’s affairs since the Hawke-Keating and Howard-Costello governments ended in 2007. Monetary policy is being asked to do all the work when fiscal policy and reforms should be taking the wheel, so to speak.

We must also ask: Do we really have record low interest rates in Australia? When we examine real interest rates after deducting inflation, we see that we do not.

It is interesting to note, over the past century and a half, the events that have triggered plunges in real interest rates. The five main periods have been:

  • World War I
  • The 1930s recovery from the Depression
  • World War II and the subsequent years of recovery
  • The Oil Crisis (and resultant inflation), and
  • Now, in the years leading into the 2020s.

So, yes, low and low real interest rates are sometimes a harbinger of potentially serious problems, but they are not associated with depressions (only recovery from depressions). They seem to be more related to global traumas, such as world wars and world crises. All of which is unsettling, to say the least.

No 2020 vision to certainty

As we approach the 2020s, we are indeed sailing into uncertain waters at best, if not uncharted ones. However, we are fortunate that these times also have some historical precedents.

Australia is not over-exposed to external dangers in the years immediately ahead of us. That is not to suggest that downturns, or even a recession, are not going to happen – they could. While we certainly remain a ‘lucky’ country at large, we must not rely too heavily on our relatively good fortune to date in an increasingly volatile world. Rather, we have a serious and pressing need to tackle our internal issues, including the political hot potatoes of productivity and overdue reforms. Otherwise, the luck runs out.

 

Phil Ruthven is Founder of the Ruthven Institute, Founder of IBISWorld and widely-recognised as Australia’s leading futurist.

The full 30-page report, Uncharted Waters: 2020 and Beyond, is available by emailing info@ruthven.institute or see www.ruthven.institute.

 

 


 

Leave a Comment:

     

RELATED ARTICLES

Pandemics in perspective

Internet of things and the power of 5G technology

Is Australia in trouble?

banner

Most viewed in recent weeks

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Welcome to Firstlinks Edition 433 with weekend update

There’s this story about a group of US Air Force generals in World War II who try to figure out ways to protect fighter bombers (and their crew) by examining the location of bullet holes on returning planes. Mapping the location of these holes, the generals quickly come to the conclusion that the areas with the most holes should be prioritised for additional armour.

  • 11 November 2021

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.

Welcome to Firstlinks Edition 431 with weekend update

House prices have risen at the fastest pace for 33 years, but what actually happened in 1988, and why is 2021 different? Here's a clue: the stockmarket crashed 50% between September and November 1987. Looking ahead, where did house prices head in the following years, 1989 to 1991?

  • 28 October 2021

Why has Australia slipped down the global super ranks?

Australia appears to be slipping from the pantheon of global superstar pension systems, with a recent report placing us sixth. A review of an earlier report, which had Australia in bronze position, points to some reasons why, and what might need to happen to regain our former glory.

Latest Updates

Investment strategies

Are these the four most-costly words in investing?

A surprisingly high percentage of respondents believe 'This Time is Different'. They may be in for a tough time if history repeats as we have seen plenty of asset bubbles before. Do we have new rules for investing?

Investment strategies

100 tips from our readers for new investors

From the hundreds of survey responses, here is a selection of 100 tips, with others to come next week. There are consistent and new themes based on decades of experience making mistakes and enjoying successes.

Strategy

What should the next generation's Australia look like?

An unwanted fiscal drain will fall on generations of Australians who have seen their incomes and wealth stagnate, having missed the property boom and entered the workforce during a period of flatlining real wages.

Shares

Bank results scorecard and the gold star awards

The forecasts were wrong. In COVID, banks were expected to face falling house prices, high unemployment and a lending downturn. In the recovery, which banks are awarded gold stars based on the better performance?

Exchange traded products

In the beginning, there were LICs. Where are they now?

While the competing structure, ETFs, has increased in size far quicker in recent years, LICs remain an important part of the listed trust sector. There are differences between Traditional and Trading LICs.

Shares

Should you bank on the Westpac buy-back?

Westpac has sent out details of its buy-back and readers have asked for an explanation. It is not beneficial for all investors and whether this one works for some depends on where the bank sets the final price.

Investment strategies

Understanding the benefits of rebalancing

Whether they know it or not, most investors use of version of a Strategic Asset Allocation (SAA) to create an efficient portfolio mix of different asset classes, but the benefits of rebalancing are often overlooked.

Shares

Six stocks positioned well for a solid but volatile recovery

The rotation to economic recovery favouring value stocks continues but risks loom on the horizon. What lessons can be drawn from reporting season and what are the trends as inflation appears in parts of business?

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.