This year’s top 10 stories included a peek into AustralianSuper’s international equities build out in London, AMP’s move to slash employee benefits, and plenty of hard-hitting analysis of the issues that matter in institutional investment. But the real story is how readers helped shape all of that coverage.
Orbis’ Stuart Place is riding from Melbourne to the Moon and Back to fund a treatment for the “monster of a disease” that his youngest son was born with. The investment industry is rallying behind him.
Immigration the key to quicker economic recovery
Australia, for once, is one of the top countries in its budgetary response to the current crisis, at more than 10 per cent of GDP in federal government-promised spending. The Australian States and Territories have added to this amount. It’s probably around 15-16 per cent in total. How do we recover that money when the battle is over? The only way is through increased immigration.
Here’s a lesson in economics 101, plus some expert commentary from actual experts. The only two ways to increase GDP growth to above long-term averages are through increased productivity and through population growth.
The only two ways to increase productivity are through technological development, such as the internet in the late 1990s, or through reduced wages. The Government can’t control either. It can spend money sponsoring tech research, which invariably ends up with not much return, and/or it can screw down on wages, which may cost the government ministers their jobs. With population growth, you have an increase in the birth rate and/or immigration. The government of the day has little chance of increasing the birth rate. Even a “baby bonus” doesn’t work.
So, this thesis, put bluntly, is: the only way the Australian Government, in rare agreement with all of the States, can rapidly rebuild the country’s GDP is through increasing immigration!
Here are the opinions of investment and economics experts. Forget the politicians, let’s continue to trust in the markets. Global equities firm Martin Currie, which has an extra expertise in emerging markets where this all started, has an interesting take on how we are going to get out of the mess.
Kim Catechis, the Edinburgh-based head of emerging markets for Martin Currie, and a frequent visitor to Australia, says: “Speaking from Europe where most countries are nearly as old as Italy (average age 46, versus Germany’s 47, the UK’s 41 and Australia’s 37.5), the idea that citizens will vote in a pro-immigration party seems unlikely. I think when this is over, we are in a fearful and defensive world. Salvini in Italy [Matteo Salvini, former deputy prime minister and populist senator], and Farage in the UK [Nigel Farage, another populist who was a leader of the Brexit movement], they’re not going away,” Catechis says.
Reece Birtles, Martin Currie’s Melbourne-based Australian equities head, says: “Australia’s birth rate and immigration have really helped keep the economy growing over time, the work force young and skilled and helped productivity. I would expect this to continue rather than accelerate.
“Productivity usually rises coming out of recession due to necessity to improve profits and balance sheets (and productivity slows late in economic cycle). We may achieve remarkable productivity gains coming out of this crisis due to even something like working remotely. No more loss of eight hours to go to Sydney for a one-day business trip. Just do V.C. [virtual communication] for one hour – 90 per cent productivity improvement! (You can do virtual beers with your clients as well.)
“I totally agree with the estimated 16 per cent increase in debt/GDP is a destruction of wealth. Luckily, the Australian Government debt started at 28 per cent of GDP and we have population growth to grow into that debt load on the other side versus a huge issue for those countries with more than 100 per cent debt/GDP, and an ageing workforce and no population growth.”
Stephen Miller, investment advisor at multi-affiliate manager GSFM, says: “The Australian economy was languishing prior to the onset of Covid-19. In some measure this reflected a proclivity on the part of governments to eschew the pursuit of productivity enhancing measures and embrace greater regulation of the economy, particularly in the wake of the GFC. To its proponents that regulation was the implementation of necessary “protections” for the “vulnerable”. To others it was futile red tape.
“At the risk of over-simplification, it is no accident that the best-performing developed economy in the wake of the GFC was the US, where the burden of regulatory, productivity diminishing measures is low. It is also no accident that among the worst-performing were European economies where the regulatory burden is high and skilled labour-force growth is low. But that paradigm may be shifting…
“For firms this will mean a reconsideration of things like just-in-time inventory management (along with building greater certainty into the supply chain). For government it could include the buttressing in the provision of public health safety nets, the maintenance of strategic reserves of essential items (medicines, food etc.), sensible mitigation of climate change and/or natural disasters, data protection measures and curbing monopolistic abuses.
“Some of these might be productivity diminishing in the short-term but productivity-enhancing over the longer term. In terms of getting back the “lost” growth attributable to Covid-19, a continuum of outcomes is possible. It can be relatively benign. In other words, learning the appropriate lessons from the pandemic to prepare for future crises of a “public” nature, at the same time as withdrawing from areas of the economy no longer in need of support as the case for draconian lockdown measures recede and the world returns to “business as usual”. “In this circumstance, fiscal and monetary support are withdrawn judiciously, measures to inject flexibility in product and labour markets are instituted (including skilled-migration programs), all of which contribute to enhanced productivity. In this environment bond yields stay low and equities bounce back, either sharply if countries are successful in navigating the worse of the pandemic by say end-Q3 this year, or more haphazardly if we are not.
“It can be malign. In this circumstance, controls over prices and wages persist, temporary emergency government spending is not withdrawn and /or becomes mostly ‘money financed’ (i.e. MMT), governments retreat to autarkic protectionist policies and industries are nationalised in the interests of supporting ‘national champions’. In other words, the world retreats to the dreary, cumbersome, rigid ‘mixed’ economy capitalism that characterised the stag-flationary 1970s.
“This time around, however, it is potentially with even more unsavoury societal dimensions that include intrusive surveillance, lack of protections around data privacy and increasing restrictions on movement of people. In this scenario, the inflation genie gets out of the bottle, while economic growth languishes and conventional financial assets (both bonds and equities) do poorly.”
David Bassanese, the chief economist at BetaShares, Australia’s largest provider of services to ETFs, says: “The significant level of stimulus in response to the coronavirus is necessary to assist the eventual recovery once the coronavirus has passed (and may even prove to be inflationary).
“Global monetary and fiscal stimulus won’t help to get consumers spending while they are in lockdown. But it will help the global economy from falling into a depression. It will also help share market returns that have fallen significantly since their peaks in January (22 per cent in US from peak to current levels and 26 per cent in Australia). However, more signs of progress in controlling the spread of coronavirus infections is necessary for share markets to recover.”
Of course, a fund manager which specialise in technology, which we need coming out the other side like never before, puts its cards on the table for some new-tech development which will give our total GDP a possible kick-along.
One of these is Alister Coleman, managing partner of Tempus Partners. He says: “Setting aside population growth, technological innovation has the potential to add at least $315 billion to the Australian economy in the decade to 2028. As a country we were already on a journey, of transitioning beyond coal and commodities to a nation built on sophisticated services and products, especially in the area of technology: cutting-edge software, leading scientific research and healthcare innovation, exported renewable energy, and the agricultural sophistication to feed billions. The knock-on of technological investment – which is partly within Government control, and in the control of the major institutional investors – and advancement to jobs, productivity, and further innovation will be a core determinant of our future prosperity.”
According to a short paper by the Lowy Institute, a think tank: “If we want to continue to benefit from China’s ascendance, Australia needs to look beyond “selling stuff” to China to the next phase in our relationship, where we encourage our technology companies and research institutions to collaborate more closely with their counterparts in China. We will also need to entice Chinese investment into our tech companies – rather than just mining and agriculture.
“That will require Canberra to rethink our foreign investment rules as they apply to mainland China. The question is whether it can look rationally at the new opportunities that could emerge from our largest trading partner - or will it continue to view China through the current geopolitical prism defined by Washington?”
Anthony Doyle, an economist and cross-asset investment specialist at Fidelity International in Australia, says: “Expansionary monetary policy will boost the economy and ï¬nally move it back to the potential growth path. This will stabilise output fluctuations and mitigate business cycle impacts. If the economy is above its potential and is overheated, let’s say real GDP grows by 4 per cent, there are inflationary pressures. In this case the central bank would carry out contractionary monetary policy and try to lower the rate of inflation to one per cent, in order to hit 5 per cent target of nominal GDP growth.
“All in all, during expansions the central bank carries out contractionary monetary policy and during recessions (or lower growth) the central bank conducts expansionary policy. This should stabilise output fluctuations and make business cycle impacts less severe. This is the main advantage of NGDPT – by its mechanism it automatically leads to stabilisation of the economy.
“In the long term, the advantage of a regime that targets nominal GDP is that it is more robust with respect to shocks than the competitors (gold standard, money target, exchange rate target, or CPI target). Nominal GDP targeting might also have another advantage in the current unfortunate economic situation that afflicts much of the world: Its proponents see it as a way of achieving a monetary expansion that is much needed at the current juncture. Monetary easing in advanced economies has not been strong enough to bring unemployment down rapidly nor to restore output to potential. It is hard to get the real interest rate down when the nominal interest rate is already close to zero.
“I think one thing is clear – central banks, including the RBA, are no longer pure inflation-targeting central banks. Labour market outcomes are as – if not more – important to central banks now. I think that the RBA will be willing to run the economy hot and see inflation rise above its target if it meant that the unemployment rate was falling.”
Diana Mousina, senior economist at AMP Capital, puts it all into a global perspective. She says in a note to clients: “The significant level of stimulus in response to the coronavirus is necessary to assist the eventual recovery once the coronavirus has passed (and may even prove to be inflationary). Global monetary and fiscal stimulus won’t help to get consumers spending while they are in lockdown. But it will help the global economy from falling into a depression. It will also help share market returns that have fallen significantly since their peaks in January (22 per cent in the US from peak to current levels and 26 per cent in Australia).
“However, more signs of progress in controlling the spread of coronavirus infections is necessary for share markets to recover. There has been some good news recently with the daily change in infections easing in Europe (especially in Italy) over recent days. However, US infections are still rising at a fast pace and need to be watched.”
– G.B.
