Global Uncertainty

I have a lot of respect of our economic commentators across the range of newspapers I read on a daily basis. However, like all economists we tend to see things differently, and this can result in conflicting messages. Understanding “why” the reason is I studied economics late in my working life because in the late 1080’s and early 1990’s, we were in the wool industry in a big way when there were serious discussions regarding the wool floor price scheme. I went back to study was because during to the wool floor price discussion about the abolition of the program, I listened to two well qualified economists argue diametrically opposed arguments on keeping or abolishing the floor price. I needed to know why, using the same information each economist came to a completely different conclusion, again “WHY”.

So, what will be the future for our economy? Well, as business owners we need to take responsibility for our business by being informed and absorb as much information that covers both the positive and negative outcomes of a potential future result.  Get as many varied responses as we can and make informed decisions based on their response and our own experience. If possible, research why each economic commentary is coming to different conclusions (this can be as simple as who is paying the bills), get opposed reasoning, and try to obtain an unbiased opinion (this is some of the reasoning behind why I look to economic commentators employed by newspapers, as the in most cases they do not have an axe to grind, or if they do, it is well documented).

From our businesses’ perspective, we need to have a better understanding of what the future holds, and I have noted a range of comments on the future economic uncertainty, with some having a more favourable short to mid-range economic forecast, and others are less optimistic.

Regardless of what industry we are in, be it in energy, manufacturing, retail, hospitality, construction, etc, economic uncertainty impacts on our long-term financial viability.

We also need to ensure that we understand the link between the economic drivers in all of our industry sectors and how they interact. We need to take particular attention to how inflation and interest rates impact on us individually and across your supply chain. This is particularly important, as global economic conditions influence our export markets such as commodities. We need to consider how the demand of these commodities that are used to supply finished product into the US and EU markets will influence the demand for these Australian raw materials (consider the impact the GFC had upon the supply of coal and steel into China and the resulting downturn in our mining industries around 2013-14).

However, uncertainty still prevails around a range of global economic drivers. A number of commentators talk about the reduced cost of gas and the corresponding reduction in power prices in the northern hemisphere. However, power prices in the UK are still very high, even with the reduced cost of gas, equating to about $5,300 Aus per household. This will still have a significant impact on household expenditure, with the possibility that it will push the UK into a depressed economic environment as consumer spare cash dries up.

While the feedback from other EU countries is also positive, the same economic driver in the UK will also prevail with similar results to their economies. As we still have not seen what for gas supply interruption, the war in Ukraine and the impact of continued drive to penetration the energy market with non-baseload renewable energy sources will impact the longer-term economic outlook.

Another economic driver we need to be aware of is the drive to use batteries to manage the matching between energy supply and demand and the level of mineral resources to achieve this.  At the moment there appears to be a serious mismatch between demand for raw materials and the ability of the mining sector to supply. This will mean that gas will be significant contributor to energy supply into the near future disrupting prices. While Europe has a very mild winter to date, the US did not, and we operate in a global economy where capital moves freely, speeding up the impact on regional economies, even if they are not directly impacted.

So back to my comment about economic commentators and why there is a varied response to the current economic conditions. As economists, we see things differently and weigh the variables according to our experience and/or knowledge. This is why we end up coming to different conclusions regarding economic outcomes for the future. For example, one of the commentators, (an article by Ticky Fullerton Australian Business Review 18 Jan 2023 “Global economic fears are melting”) suggests that there are some positive signs in a reduction in energy prices in the future, and this will assist in reducing the impact on most of our energy reliant sectors but take the time to review other commentators.

In summary, there are positive signed, but we need to continue to be wary of future economic shocks, especially in the near future.

Good luck