Decelerating Economies, Accelerating Risk

Rising trade and geopolitical tensions have increased uncertainty about the future of the global economy and international cooperation more generally, taking a toll on business confidence, investment decisions and global trade. Ten years after the last recession, economic slowdown has re-emerged as the top risk facing organisations globally. The resurgence of this concern is connected to accelerated rates of change in market factors, globalisation and geopolitical uncertainty.

Headline findings from Aon’s 2019 Global Risk Management Survey (GRMS) revealed that economic slowdown and volatile market conditions have led to the lowest levels of global risk readiness in 12 years, impacting the C-suite’s ability to manage volatility and maximise performance.

Speaking at the opening session of Aon’s Insights Series Conference 2019 in Melbourne, the Dean of Melbourne Business School and a Senior Advisor to Deloitte Access Economics, Professor Ian Harper, described how these tensions are affecting the economic landscape.

As the trade war grinds on and key economic indicators begin to point towards a slowdown, governments, businesses and individuals are changing their behaviour towards a more defensive stance. The perception of risk appears at every level and charts across the board show a slip below longer-term averages.

A key impediment to global growth is the uncertainty flowing from the ongoing Sino-America trade war. World trade is not only stifled but shrinking, and the ripple effect of this is putting nations dangerously close to recession territory. As an example, Professor Harper described how the uncertain outlook is stifling Australian investment and labour market outcomes, even as the dollar continues its downward trajectory. Wages growth continues to slow as people increasingly stay in the same job seeking stability, and a “save” rather than “spend” mindset is having a significant impact of levels of investment.

Although global growth is slowing and commentary regarding Australian monetary policy and declining rates suggests a dampened market environment, Australia remains resilient as it completes its 29^th year of uninterrupted growth. Participation rates in the job market are at their highest level ever, contributions from imports and exports remain strong and Australia’s economic foundations remain sound. This assessment aligns with the local results of the GRMS, in which Australian organisations ranked economic slowdown as only the second highest risk, while ranked number one globally. Despite it being more than a quarter of a century since the last Australian recession, fears for the domestic economy, fuelled by the decline in the property market and electoral uncertainty, did push the risk of an economic slowdown up six places since the 2017 GRMS survey.

Professor Harper delved into three scenarios (not forecasts) for Australia’s economic future:

1. The first, and most unlikely of the three scenarios presented, was that a full-blown trade and technology war sparks a global recession. In this cataclysmic scenario, business investment would dry up, private consumption levels would falter, as incomes decline and unemployment rises. Professor Harper described this as far from an ideal or realistic scenario.
2. The second scenario was that secular stagnation sets in. If income and wages growth remain low, governments would look to monetary policy and tax-easing measures for further stimulus. As stagnation settles in, per capita consumption and incomes would fall. Professor Harper noted that, while this scenario is not as dangerous as the previous one, it is, unfortunately, more realistic. Only a focus on productivity growth will help boost investment and break the cycle of economic stagnation.
3. The third and more positive scenario was “migration supports growth”. Reflecting on the host city of the Aon Insights Series, Professor Harper reminded the audience that Melbourne is the fastest growing urban economy in Australia, and that it is no coincidence Melbourne is also the preferred destination of large numbers of migrants.

Migration emerges as an important driver of economic growth, affecting the size, composition and geographic location of the population and workforce.

Boosting demand, growing an active and engaged population directly grows the economy. Migrants bring with them skills, innovation and the opening of new markets. There is also strong evidence that per capita incomes rise as productivity improves with economies of agglomeration. Professor Harper said, “It’s about diversity of minds, people and scale. Our competitiveness will be based on the growth of our cities, of places. Australia’s longer-term fortunes can no longer be based on what we mine and grow.” This scenario is also the most plausible of the three presented.

Professor Harper concluded the session in Melbourne by saying that, while none of these scenarios is a forecast, they provide interesting lenses through which to view the potential impact of current trends and political discourse.

The views and opinions expressed in this blog are those of the author(s) and do not necessarily reflect that of Aon.  We make no representations (express or implied) as to accuracy, completeness, correctness or validity of any information in this blog and accept no responsibility or liability for any errors, omissions or misstatements of whatever nature and however caused.