The AFR is a card-carrying idiot:
…with hikes now effectively off the table, and the next move in rates likely to be down, perhaps it’s worth thinking about the next question investors should be asking themselves when it comes to the RBA.
How will the economy adjust to a prolonged period of relatively higher rates?
If we zoom out and look at where rates might head over the next two years, most economists predict a series of cuts – probably five or six – that take the cash rate down to about 3.1 per cent by the end of 2025.
Clearly, that will be sweet relief for big parts of the economy. But it’s also worth noting that even a 3 per cent interest rate would be much higher than Australia has known in the past decade. The cash rate fell below 3 per cent in May 2013, and stayed below 3 per cent until December 2022.
Yes, interest rates will fall. But we are not going back to the days of very low interest rates that became the rule, not the exception, for households and businesses over the decade.
How the economy fares under those conditions is a fascinating question to consider. It looms a small example of what BlackRock’s chief strategist Wei Li calls the new regime: higher inflation, higher rates, more volatility and more prospect of central banks struggling to tweak the dials between fighting inflation and bolstering growth.
The AFR has been hawkish throughout. Nobody in the paper forecast the RBA pivot from hikes. They were busy cheerleading hawks with no idea.
Now, the paper is adding folly to stupidity. Wei Li is wrong, and Viktor Shvets is right:
Macquarie’s strategy guru, Viktor Shvets, argues that the higher-cost world that BlackRock sees – rising labour costs as the population ages, rising input costs from reconfigured supply chains, rising energy costs from the low-carbon transition – will be totally blown away by AI, which will unleash a wave of deflation.
“AI, as a general purpose technology, is now rapidly approaching the escape velocity, penetrating almost all industries, from robotics and automation to biotech, and from 3D printing to quantum computing,” Shvets says.
“We believe that in both the short and long-term, the information age will continue lowering marginal costs (and eventually average costs) of almost everything towards zero.”
The deflation created by AI, Shvets says, “will mostly come in the form of lower demand for labour, with companies using AI to squeeze efficiencies and reduce costs, rather than augmenting labour, as some technology cheerleaders have been suggesting.”
A big chunk of white-collar jobs could be gone in as little as five years, he argues, and factories will start disappearing as the combination of AI and robotics rips through manufacturing and distribution.
This challenge will be tough enough for investment-led developed markets.
But for Australia, the world’s only developed market in which growth is led by labour market expansion via mass immigration, this is catastrophic.
Moreover, Peak Human is converging with Peak China and Peak Fat to rip away income and add still more labour.
Given Canberra shows no sign of backing away from the labour market expansion-led growth model, the major adjustment in the years ahead will transpire via a relentless climb in unemployment.
This will be matched by an equally relentless fall in interest rates to much lower levels than in other developed markets with more sensible growth models.
Unless or until immigration is savagely cut, Aussie interest rates are headed back to zero.
