CommBank Chief Economist Luke Yeaman says that economic shocks are becoming more frequent, although Australian households seem to be adapting.
Uncertainty & volatility are the new normal.
Yeaman shared that he has strongly argued that Australia is now in a fundamentally new and different economic era. This new economic era is characterized by increased danger and complexity.
I’d argue that there are not merely 1 but 4 major structural forces underway. These are reshaping the political and business landscape besides the consumer landscape.
Shifting geopolitics and the return of strategic competition are significant factors. This competition is most notably between the U.S. and China. It has undermined the rules-based order. Also, it has increased the risk of major supply chain disruptions. Additionally, it has caused globalization to shift into reverse.
The rise of AI and robotics is another significant factor. It impacts those that are likely to exceed those of the dot-com era. The immediate effects are being felt in share markets & through the AI capex boom. However, the biggest effects may come over time. This transition is when businesses as well as consumers reimagine existing ways of doing things.
The Net Zero transition is already having a big impact on energy besides gas markets. Furthermore, on household consumption patterns. This includes growing EV & battery uptake. Energy grids may remain volatile & under pressure during coming years. Increasingly, other sectors such as aviation, shipping, road transport, agriculture, and land use besides construction may be needed to adapt on a faster & larger scale.
Finally, demographics are continuing to shift rapidly. Across advanced Western countries, as in Australia, the population profile’s getting older. Birth rates are declining sharply. In some countries, including China, one can witness shrinking populations.
Importantly, it’s the cumulative effect of these rapid & massive changes that matters.
The result of this rapid change is more uncertainty & shocks. Australians shouldn’t expect major economic shocks once a decade, although more likely, once every 1-2 years.
With more investment in AI, renewables, defense & sovereign manufacturing, competition for capital is increasing. It drives up long-term neutral interest rates.
With economic security increasingly prioritized over economic efficiency, Australia is witnessing more regulation and more trade barriers. They add cost to the system.
Consumers are feeling this pressure. When one looks at surveys of consumer sentiment & broader measures, it’s clear that consumer are feeling uneasy amongst all this change. Unfortunately, these are deep structural drivers. They aren’t a temporary cycle.
Supply chains spotlighted
Yeaman added that the 2nd point he wanted to emphasise is that supply chains may be a key battleground in this new economic era. The Strait of Hormuz provides a clear example of how trade chokepoints as well as critical supply chains are being weaponized in this new era.
Recent events have displayed how easily, besides cheaply, critical chokepoints may be shut off. This situation also leads to major impacts on global supply chains.
Such a situation matters much to a country like Australia. It relies on global shipping lanes for many of its crucial inputs. Even as a major food producer, when the Strait closed, it quickly became evident that Australian agriculture required imported fertiliser besides fuel.
Australia’s central case is that Australia may see a diplomatic resolution that reopens the Strait to traffic during the next 4-6 weeks. This may avoid critical shortfalls across oil besides other key markets. However, this cannot be taken for granted. If the Strait remains closed for another 8 to 10 weeks, Australia may start to hit critical thresholds that may witness oil prices hit USD 150 a barrel. It may drive higher prices & potential shortages of other key commodities.
This remains the single largest near-term risk to the Australian economy.
The present focus is on the Middle East. Recent analysis by CommBank’s teams reflects that many of the most vulnerable global maritime chokepoints are in the Australian region.
