Soft landings, sticky inflation, the dash to decarbonise and great power rivalry including the emergence of India are among subjects exercising Paul Gruenwald, S&P Global’s chief economist.
New York-based Gruenwald, whose career includes stints at the International Monetary Fund and ANZ, was speaking ahead of an economists’ briefing in Sydney on Tuesday.
Are soft economic landings likely in Australia and elsewhere?
A “good surprise” has been the economic resilience of Australia, the US and elsewhere despite 400-500 basis points of interest rates hikes. For Australia, a drift in the jobless rate up from 3.7% in July to 4.5% would qualify as a soft landing, Gruenwald said.
“So as long as job creation is strong and wage growth is strong,” he said, central banks should be able to sap excessive heat from the economy and avoid growth “undershooting”.
The most recent successful US soft landing was in 1994-95, while Australia has – Covid aside – done a better job of keeping growth going.
Gruenwald said employers were keen to retain staff: “It’s costly to let people go. It’s costly to find workers. And it’s costly if you’re not running at the level of capacity that you want.”
ANZ is among banks predicting Australia’s jobless rate to tick lower, to 3.6%, when August data is released by the Australian Bureau of Statistics on Thursday.
How sticky could inflation get?
Central banks were “a bit too sanguine about inflation”, given the scale of the Covid-related fiscal stimuli. The spike in energy prices after Russia’s invasion of Ukraine added to the inflationary cocktail.
While the pace of headline inflation has eased in many economies, the rate of underlying – or core inflation – hasn’t slowed as fast.
Monetary authorities, including Australia’s Reserve Bank, were likely to keep interest rates elevated for some time, squeezing “air out of the balloon”, Gruenwald said.
Only once central banks were confident inflation was “well and truly under control” would they start cutting rates. For the US, that might not be until late 2024, he said. (Interest rate futures put the RBA’s first cut as about a two-thirds chance by then.)
Authorities should retain their targets to deliver “low and stable prices”, even if issues such as climate change or geopolitical tensions between the US and China disrupting free trade made those goals harder to achieve, he said; otherwise people would assume shifts in the goalposts at each crisis.
Can a dash to decarbonise work?
Gruenwald said two global energy transitions were under way: decarbonising the fossil fuel industry and ramping up renewables.
The “dirty secret” was the tailwinds from the US’s mammoth Inflation Reduction Act (more accurately the “Energy Transitions Turbocharging Act”) would mostly benefit Republican-voting states – despite that party’s Congress members opposing it.
“Houston is going be to energy transition what San Francisco and Silicon Valley are to tech,” Gruenwald said.
The US has “stolen a march on the Europeans” with a carrot approach of subsidies for battery storage, green hydrogen, electric vehicles and so on. The EU, by contrast, has been more prescriptive on what they would permit.
Australia, with its abundance of both renewable energy and the critical minerals to power decarbonisation, has few international peers.
How bad is China’s stumble and can India take up the slack?
Australia’s relative dependence on the Chinese economy, though, left it more vulnerable than the US to changes there. “If China catches a cold, the US growth needle doesn’t probably move that much,” Gruenwald said.
China’s problem was too much investment and household wealth were tied up in real estate. Local governments, in turn, were overly dependent on land sales for revenue.
China’s private consumption has been stuck at about a 40% share of GDP for decades, compared with 70% in the US and slightly lower in Australia. To western economists that mix seemed unorthodox since “we think of investment as the volatile part of GDP” while consumer durables such as food and clothing were the stable part, Gruenwald said.
China’s state banks were offering debt relief to construction firms by lowering borrowing rates and extending loan maturities. A “big question” was whether the various moves would restore enough confidence so people resumed buying preconstruction housing.
Still, China’s communist rulers have a social contract “to make everybody rich and prosperous” and a “number one objective” to maintain stability. Expect more efforts to bolster sentiment if that was needed.
With China’s annual GDP expansion expected to slow to somewhere between 3% and 5% over time, the growth baton has been passed to India, where growth of 7% is possible.
India, though, faces its own headwinds. It is not in a regional block like the US, Europe or even China.
India was also moving from an agriculture-based economy to one dominated by services.
“We don’t have an example, to my knowledge, of a country that’s become rich and prosperous and successful through that route,” Gruenwald said, but “that doesn’t mean it can’t be done”.
