How these economists see geopolitical tensions affecting the markets
There is no doubt that geopolitical events have an effect - even if temporary - on financial markets. 2024 will be a banner year for geopolitics in that there are two ongoing hot wars, a slew of elections, and several chilly tit-for-tat conflicts just in this region alone. But how will all this affect what is already a very fragile macro environment?
Several leading economists recently presented at the Australian Business Economists' annual forecasting conference. They discussed the impact that geopolitics is having on the global economy and what it means for Australian investors. This wire is an edited summary of what was discussed.
The economists appearing on the panel were:
- Su-Lin Ong, managing director and head of economics & fixed income strategy for Australia/NZ at RBC Capital Markets (served as panel moderator)
- Paul Bloxham, chief economist for Australia, New Zealand and global commodities at HSBC
- Amber Rabinov, head of macro research and strategy, AustralianSuper
The Impact of the US Election
Unless something miraculous happens between now and November, the 2024 election will be essentially a repeat of the 2020 election in that the same two men will be fighting for the top job.
"I know there are lots of elections that are important on the sidelines but there's one that really, really matters and that's the one in November," Rabinov said.
The list of unresolved questions over a second Trump term is already long:
- If another huge tax cut were to be delivered, the already-burgeoning US fiscal deficit would get even larger.
- Trade wars were a big feature of the last Trump presidency. Will there be more escalation and rising protectionism, and what effect does that have on global trade and supply chains?
- Who will be the next Federal Reserve chairman? Trump has already said he would not reappoint Jerome Powell if re-elected.
- Geopolitical tensions: What happens to the funding of NATO and Taiwan?
So how does an economist approach this laundry list?
"One of the things that the team is talking about is the idea that, on balance, it makes us think that a strong US dollar story is the right story. Add to that, the US exceptionalism we're seeing right now, with inflation coming down and the economy continuing to hold up," Bloxham said.
Geopolitics could be the difference between "higher for longer" and "back to zero"
The outbreak of more conflict in the Middle East (and specifically, Houthi strikes against cargo ships in the Red Sea) has seen a big impact on freight prices. And while a temporary fix such as sailing around South Africa is an option for some firms, the medium-term outlook is more challenging if the strikes continue.
"At the moment, [it's] quite containable. I don't think the medium term is as sanguine as what we've seen in terms of the more rapid-than-expected easing of leisure impressions, particularly over that back end of 2023," Rabinov said.
"It's all costly. We think that it's going to feed into a more inflationary environment and higher inflationary environment. I wouldn't say high, but certainly higher than the period that we experienced in the time leading up to COVID," Rabinov added.
Bloxham sympathised with Rabinov's view:
China still holds many of the cards in this game
According to its own official statistics, China grew by 5.2% in fiscal 2023. But the much bigger story around China's economic slump is not just what it means for its manufacturing economy but also for the huge role it has in the energy transition.
China is the world's largest producer of solar panels, and wind farm inputs, and is the world's largest exporter of electric vehicles. While the excess supply is good for China's economy in that it helps it export deflation, it may also cause some geopolitical snags.
"The thing that worries me a little bit in the medium term is when we overlay the geopolitics and the trade tensions that come about with the idea that China might be seeking to try and grow its way out by exporting more, we hit some tensions," Bloxham said.
Finally, he noted that metals prices on Chinese exchanges continue to remain relatively resilient, which he suggests may be down to how the country is choosing to handle its recovery.
"It is surprising how well metals prices have held up in the face of what's been going on. And that does reflect that the property sector's weak, but that they're also building a whole lot of stuff that tends to be quite metals intensive," he said.
And that's good news for Australia.
What it means for markets
On the global interest rate picture, Bloxham referenced what he thinks will be a new era of higher term premia for bonds and later rate cuts from central banks.
"We haven't got the Fed cutting until June. We haven't got the ECB cutting until June. When they do, we've got them cutting by 75 basis points this year in the second half, and the market's somewhere around 125 basis points, starting from April. We've got less factored into our view. They can't go quite as soon and they can't go quite as hard," he said.
Ong offered this view:
And finally...
For a little bit of fun, the panel was asked for their year-end RBA rate call. HSBC plumped for 4.35% (no cuts), RBC staked their claim on 3.85% (two rate cuts), while AustralianSuper chose not to answer. And given how difficult it has been to forecast interest rates and inflation over the past three years, perhaps the last answer might be the most prudent.