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Stock markets falling, investors getting nervous – is the debt-fuelled finance party over? | Australian economy

Financial news has started to turn negative, both at home and abroad.

Is the debt-fuelled party that has provided solace amid the pandemic as well as jobs and rising asset prices for millions if not billions about to end?

There are certainly some near-term nasties but the larger and more serious threats are geopolitical and difficult to predict – including the next stage of the Covid pandemic – or of our own making.

Here’s a non-exhaustive list of the economic challenges we face.

Gathering storms

First up, Omicron has been around for more than a month but the more infectious Covid variant hasn’t – so far – derailed financial markets.

Sure, there’s mass absenteeism of infected or close-contacted staff, upsetting supply chains in Australia where many businesses have started to disclose fears of running out of cash. And, globally, firms are scrambling to secure inputs for everything from cars to fertilisers.

Monday’s financial media warned of brewing market turbulence, as the binary world of punters are apparently shifting from “risk on” to “risk off”.

US stocks dropped more than 5% last week, reportedly the worst return since Covid got serious in March 2020. The famously tech-heavy Nasdaq was about 14% lighter since the start of this year.

But a bigger plonk, though, is coming from the cryptic world of crypto-currency. The Washington Post over the weekend estimated digital tokens had “vaporised” $US1.4tn (almost A$2tn) in just two months as the ethereal market halved in value.

When Australia’s sharemarket opened on Monday, stocks duly dived about 1%. By close of play, though, losses were a more modest 0.5% – not a savaging by any measure.

Another tumultuous day beckons, though, with Australian stock futures projected to open lower on Tuesday after wild swings of sentiment on Wall Street. Europe’s STOXX 600 index earlier fell by 3.8% ‑ its worst day since June 2020.

Inflationary threat

Investors have reason to brace for a big week in financial markets.

The big bugbear is inflation with nations such as Britain and the US recording their fastest price spurt in decades, and the US Federal Reserve meeting for two days this week to signal if higher interest rates are coming sooner than flagged.

Those with variable-rate mortgages know having to repay more on a loan typically discourages purchases of everything else.

One’s sense of wealth, too, takes a hit if others become less willing to borrow as much for property, nixing the chances of repeating last year’s 25% run-up in average Australian “home values”, for instance.

For Australia, the next glimpse of inflationary pressures lands on Tuesday, when the ABS releases December-quarter consumer price figures.

The headline figure of 3% or so will largely be ignored, with attention focusing on the trimmed mean – a gauge that strips out the more transient spiky movements.

The expected 2.4% rate will be the highest in more than seven years, and will renew fears Australia’s Reserve Bank will move earlier than its 2023-24 projected first rise in official rates.

Westpac last week brought forward its tip for the first RBA move to this August, a shift that gained more credence after another strong job recruitment month – at least before the Omicron disruptions kicked in.

Weathering the supply storm

Analysts like Nathan Roost, a logistics expert at consultancy Ernst and Young, reckons we have about six weeks or so of supply shortages to get through.

One lesson learned, he says, is we need investment not just in highly efficient, just-in-time supply networks, but also a more resilient workforce.

Even so, “there’s this pent-up demand for lots of things, services, goods, travel” which will remain as an underlying driver of the Australian economy for the next six to nine months.

“There’s a shock clearly in the short term, but I think longer term, the economic momentum will remain somewhat positive,” Roost says.

The OECD, too, expects growth this year to be a robust 4.5%, down from 5.6% in 2021, but rosier than the 3.2% predicted for 2023 as Covid-related stimulus packages peter out.

‘Roach motel’

Other economists, though, offer a less sanguine view.

Stephen Anthony, a former Australian Treasury official, and now chief economist with consultancy Macroeconomics Advisory, argues the central banks have shed credibility and distorted economies as they have become massive investors in economies.

Major central banks have been on an asset-buying binge to support – but also distort – economies, with Australia lately joining in, economist Stephen Anthony says.

The RBA, for instance, has been buying up Australian debt, mostly federal, at the rate of $4bn a week to push down bond prices and so, lower the cost of borrowing to stoke economic activity. Debt holdings exceed $330bn, and amount to the bank “owning a third of the yield curve”, Anthony says.

In a recent paper released through the Australian National University’s Agenda journal, Anthony argued the RBA was a latecomer to so-called quantitative easing but had done much to close the gap with counterparts in the US, Japan, Europe and elsewhere.

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All that easy money has had a “pretty profound effect” in inflating house, share and other asset prices here and all around the globe, he said

“Markets are getting nervous because they know that there is a contradiction in those policies,” he says. “What happens in the next market rout if a major central bank such as the Fed has to choose between supporting financial markets and/or maintaining lower inflation?”

As the Hotel California song goes, central banks are finding “you can check in but you can never leave,” Anthony says. “And once you do, you got a roach motel. It’s something you just can’t get rid of it.”

In other words, withdrawing support would probably trigger a market selldown by investors that would bring back that same central bank binge to avoid an economic collapse.

Debt trap, geopolitics and climate

Satyajit Das, another independent economist, warns of similar excesses and the limited options for Australia’s leaders in his latest book, Fortune’s Fool, scheduled to be published by Monash University in March.

“Policymakers are skint,” Das says, adding that the trust of governments and central banks, dimmed by the global financial crisis and subsequent super-bubbles, has been further diminished in the current Covid crisis.

“If they had retooled their economies, if they’d invested massively where there’s a stream of income that’s going to amortise the debt on the other side, I’m very relaxed” about the debt build up, he says.

“You can’t get funding consumption from borrowing” as they have done for 30 years, Das says. “That’s the problem that they’ve created and now they are kind of trapped.”

Das says investors are poor at picking geopolitical issues, although he doesn’t think a Russian invasion of Ukraine is likely to be a big threat. For one, Russia’s Vladimir Putin will not be keen to disrupt China’s Winter Olympics run by his mate Xi Jinping.

Another is the Pinsk Marshes, a giant bog covering much of Ukraine’s border that has stalled other armies in the past, will soon start to thaw as spring approaches, Das says.

Other surprises though could include China clamping down on its supply chains to eliminate Covid.

Another threat is also not going away: climate change.

“The other risk … is extreme weather events,” Das says. “They have massive costs, and they have massive disruptive values, and nobody seems to even be talking about those any more.”

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