'Buckle up': Australia's largest bank warns global economic order is unravelling
Australia's run of interest rate cuts risks coming to a screeching halt as the global economy enters unchartered waters, the country's largest bank warns.
The Commonwealth Bank of Australia (CBA) believes a new economic era is unfolding, with a breakdown in trust among key countries at its heart.
In an investor update yesterday, the bank's chief economist, Luke Yeaman wrote the conventions around global finance were rapidly changing, putting economic security ahead of efficiency.
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Superpower rivalry between China and the US is turning the world economic order on its head, the CBA is warning. (AP Photo/Ng Han Guan) AP
"Overall, these changes are a net negative for global growth and productivity, reversing some of the gains we saw during the era of globalisation.
"They will also put upward pressure on neutral interest rates."
Yeaman thinks dominant factors in geopolitics and the world economy are working against a lower cash rate.
"This new era will see sustained higher levels of economic and market volatility, greater domestic investment, add structural pressure to government budgets, and drive more government intervention in the economy, creating bifurcated markets," he wrote.
The major factor driving all this is geopolitics, with conflict, sanctions, industry policy, tariffs and restrictions on investment and exports unsettling the conventional order of co-operation and global capital.
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Decades of economic co-operation are long gone as economic security shapes world financieal markets.(AP Photo/Richard Drew) AP
Yeaman notes the disruptive trade policies of US President Donald Trump are partly to blame, but there is far more at play.
"This is a deep structural change, not a temporary Trump phenomenon — as some would like to think."
"Investors shouldn't lose sight of the fact that there is a far bigger game at play here that goes well beyond a standard trade negotiation.
"This is a long fight for strategic power; it is not primarily about short-term economics."
Amid the stark outlook, the CBA update has a couple of bright spots: the potential for the expansion of AI and renewable energy to restore balance.
In contrast to many forecasts, Yeaman thinks rapidly evolving technology will lift productivity in the global economy.
"Job displacement is harder to measure, and estimates vary wildly. Most job classes will be affected in some way by AI, but suggestions of mass unemployment appear alarmist."
The drive for cleaner energy will deliver huge investments in the long term, but also possibly higher prices. Dean Purcell/New Zealand Herald via AP
The huge investment in clean energy should spark new tech innovations and deliver more diverse low‑cost energy, despite the views of Trump.
But Yeaman writes reaching that point is likely to be a rocky ride.
"Most notably, energy security and reliability will be sorely tested, bringing with it the risk of higher power prices for consumers and industry.
"This will make it harder to maintain community support for the tough steps needed to drive the transformation at scale."
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