It’s not just for Scott Morrison’s khaki election that Australia has an AUKUS focus – our common- or garden-variety of economic commentary remains Anglophone centric, missing the bigger picture.
Reserve Bank Governor Philip Lowe gently made that point in his Recent Economic Developments speech on Wednesday, so gently that it was generally missed.
Most commentary about the speech focused on the usual preoccupation with when interest rates would start to rise. The consensus among the banks’ economist tipsters is sooner rather than later, certainly this year.
But Dr Lowe delivered enough economist’s “on the other hand” material to make it less than a sure thing. Quite probable, but don’t rush to bet your house on it.
The commentariat is hot to trot on the commodities price shock from the war and sanctions coming on top of international inflation that was already bubbling higher.
“After many years in which concerns about high inflation were at the periphery of the radar screen, they have now moved to the centre in a number of countries,” Dr Lowe said.
“This is especially so in the United States, where the CPI increased by 7½ per cent over the year to January, which is the fastest rate in 40 years. Inflation rates in the United Kingdom, Germany, Canada and New Zealand are also at their highest in decades.”
Given our usual focus on the US and Europe, that’s been central to much local commentary.
But you know the old cliché “if America sneezes, Australia catches a cold”? It’s very last century and long overdue for retirement.
In the GFC, for example, the US caught pneumonia while the Australian economy escaped with a head cold. The two main reasons for that were our best-in-class policy response and primarily being part of Asia rather than a North Atlantic nation.
Ditto when it comes to considering what inflation is doing to the world.
Dr Lowe conceded that the North Atlantic inflation increase was rightly receiving a lot of attention – and then added an important kicker:
“It is important, though, to recognise that inflation rates in much of Asia remain low and not much different from before the pandemic. In China, CPI inflation is running at just 0.6 per cent and in Japan it is 0.5 per cent.
“Australia sits somewhere in the middle, but closer to the experience in Asia. Headline inflation here is 3½ per cent, less than half the rate in the United States. In underlying terms, inflation is running at 2.6 per cent.”
It is inflation, Jim, but not as America knows it.
Dr Lowe went on to explain to anyone who wanted to know why the RBA has more time on its side than many other central banks in considering rate increases.
The stickiness of our low wages growth is the main factor. For all that we are seeing a little pick-up in private sector wages of late, especially in those industries experiencing labour shortages, Australian wages growth is still running below the average of the past decade. Dr Lowe had a graph to prove it.
The West’s response to the madness of Tsar Putin has added another layer to inflationary pressures, potentially a commodity price shock as bad as the 1970s oil shock.
What everyone seems to miss though is that it is by no means certain the shock will be universal. Crucially for our Asian world, there’s a strong possibility China, our biggest economy, and India could end up with cheaper oil.
With Europe and the US refusing Russian oil, it should become cheaper for those still buying it. And if China ends up buying more from Russia than elsewhere, elsewhere’s oil becomes more available to the West, easing the pain of having principles.
India has nothing bad to say about Russia, its old and continuing friend. China has tut-tutted a bit but is likely to remain true to form in taking an entirely pragmatic course of non-action. Nothing could be more pragmatic than securing cheaper commodities.
Having done their best to isolate China, to push it into a closer relationship with Russia, the US and its client states can hardly be surprised if Xi Jinping makes the most of the opportunity.
And, as Alan Kohler has pointed out, it’s not just oil supplies that are affected by cutting Russia off. If China, our dominant economy, dodges most of the inflationary bullet, it will lessen the inflationary pressure on our region.
While there has been endless warmongering speculation about China perhaps making use of the Ukraine crisis as a distraction for attacking Taiwan, there are plenty of Sinophobes on both sides of American politics and useful idiots abroad who will use Ukraine as an excuse to ratchet up their attacks on China.
There’s a fair chance the American desire to retard China’s rise by any means will see calls to punish China for remaining neutral on Ukraine – calls that won’t be made about India.
Isolating Russia from the Western economy will be disruptive enough. Pushing ahead with the American desire for a bifurcated world would be utterly disastrous.
In a prescient speech to the Asia-Australia Institute in 1994, then-prime minister Paul Keating acknowledged the importance of our global ties before delivering the home truth those who hunger for Mother England and Uncle Sam prefer to shy away from.
“In a quite different way from the past – in a deeper, more urgent and intense way – Australia’s economic, strategic and political interests now coalesce in the region around us. If we do not succeed in the Asia-Pacific, we succeed nowhere,“ he said.