I grew up in Canada, so it was a novelty to hear colleagues humming in the past week “I feel a bit nervous, I feel a bit mad,” from Skyhooks’ Living in the 70s, but the events of this year will have given many directors a similar feeling of anxiety as they survey the macro outlook. Commodity price shocks, rising interest rates and geopolitical instability are all reminiscent.
The world now looks like it may enter a period of stagflation that harks back to that decade. The World Bank, in releasing its Global Economic Prospects report last month, said the current slowdown in the global economy “could become a protracted period of feeble growth and elevated inflation”.
The Australian economy has so far remained resilient. Unemployment is at a historic low below 4 per cent and growth in the year through March came in at 3.3 per cent, surpassing the consensus expectation of 2.9 per cent. Yet for many people and many businesses, experiencing the pinch of increasing costs, rising interest rates and skill shortages, resilience may be a stretch. As economist Steven Hamilton has noted, this is an economy operating at its limits.
We know we are not insulated from the forces impacting the world economy. Secretary of the Treasury Steven Kennedy has noted that the international environment is the most complex in 70 years. In our immediate region, growth in China is slowing from various policy measures. While these measures can be reversed, a slowdown in our largest trading partner is of great concern. Dominating the headlines at time of writing was the collapse in US stock prices after the most recent inflation figures and the prospect of more aggressive rate hikes. And Europe will be challenged in the coming year by conflict and economic shocks. This represents more than 50 per cent of the global economy in turmoil.
As well as global uncertainty, AICD members in the latest Director Sentiment Index, released in April, cited labour shortages as the top economic challenge for their organisations. Companies are facing supply chain and labour disruptions, and the tightest labour market in memory due to the unique economic circumstances of the past two years. Overseas migration in 2020–21 saw a net outflow of 88,000, the first loss since 1946, the job vacancy rate at 2.8 per cent is the highest on record, and emergency economic policy settings have driven unemployment to the current lows. While the official data has not so far registered a general lift in wages, the Australian Bureau of Statistics has noted spikes in specialist professions and the Reserve Bank, through feedback in its liaison program, is expecting a pick-up in wages.
The new government must face into these economic challenges. A focus solely on demand-side measures to ease cost-of-living pressure will add fuel to the inflation fire. They must be complemented by long-term supplyside measures. A skills shortage across the economy is an immediate constraint that must be addressed, but the task of the government is to craft migration and education programs that match the needs of a globally-competitive Australian economy in the long-term. They must also take on the long-overdue task of revitalising Australia’s performance on innovation and technology adoption.
Amidst global uncertainty boards must “hope for the best and prepare for the worst” as BHP chair Ken McKenzie noted at this year’s Australian Governance Summit. Given the environment, the range of scenarios should be wider than before and old assumptions should be retested. The benefits of bringing diverse thinking into the board, and a willingness to challenge consensus, are even more evident during times of turmoil. Ending the stagflation of the 1970s required new thinking in economics, business and politics. Economies that embraced reform and globalisation, including Australia, ushered in a new wave of growth. Organisations that looked through the turmoil at long-term trends and opportunities set themselves up for decades. At the same time as prices for most goods were skyrocketing, the cost of microprocessors was plummeting. Two companies saw the opportunity and took advantage — Microsoft (founded 1975) and Apple Computers (1976). The application of technology continues to be Australia’s Achilles heel.
We remain the “lucky country”. Disruption in global commodity markets boosts our resource sector, food shortages globally — from wheat to baby formula — drive demand for our agribusiness sector, and a volatile global environment rewards safe havens and prudent economic management. We will make our own luck with appropriate investment, which has understandably been weak during the pandemic. The global war for talent should boost demand to educate that talent in Australian schools and universities if we invest in future-proof curriculum.
Technology is challenging the conventional economics of location, as the Atlassian career page highlights: “Welcome Tesla friends, we’re Atlassian and we work from anywhere”. The temptation in a risk-off world will be to continue to hold back on investment. But without a tailwind of global demand, productivity-enhancing investment will be even more important in sustaining growth.
As the Canadian rock band Bachman-Turner Overdrive sang in the ’70s, it’s Takin’ Care of Business.
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