13 Sep Economic Update – September 2017
Every month Michael Pollack of Kaplan Professional interviews a key economist for their thoughts on the current economic climate. This month Tim Harcourt, host of The Airport Economist and fellow at the University of NSW Business School, tackles some pertinent issues bubbling in the Asia Pacific region and the Australian housing market. Thanks to Kaplan Professional, we bring you their monthly economic update for September.
Q: Let’s firstly take a look at the US. To what extent do you expect the isolationist policies of the trump administration to trigger an outbreak of global protectionism?
A: Well, there are certainly signs that it is. The DHL Export Barometer 2017 indicates that over a third of Australian exporters thought Trump was disrupting the trading system, and a quarter of them were concerned about withdrawal from the Trans-Pacific Partnership. So, I think there are real issues now business-wise in terms of the Trump disruption effect on trade.
Q:How do you see the brinkmanship between the US and North Korea ultimately playing out?
A: It’s very difficult with North Korea in a sense that you can normally threaten another nation with economic sanctions. North Korea is already very poor. They starve their people and spend all their money on armaments, so those normal economic incentives probably don’t work in the same way.
It’ll be a matter of how far North Korea is going to push it and the role that China plays in the sense that China is still officially an ally of North Korea, and it’s probably not in China’s best interests for North Korea to be playing up.
Q: Looking more closely at China, how problematic do you see the flow of credit to the many inefficient state-owned “zombie enterprises” being for the economy?
A: It’s been hard. Clearly, they do prop up a lot of their enterprises through the state. Recently, it’s been announced that they’re [the Chinese Government] going to write the Chinese Communist Party into the Articles of Association, even for state-owned enterprises on the New York Stock Exchange. So, clearly they’ll do whatever they can to prop up these enterprises.
The difficulty will be, not so much domestically, if it works into the international trade sphere, where we’ve basically got very large foreign investment, very large capital injections for enterprises that are basically arms of the state. That’s something to be concerned about with international investment.
Q: How do you see this playing out in the longer term?
A: Probably, it’ll have to reform from within. I can’t see them totally giving up the party links. But I think as they learn about intellectual property and international investment internationally, they’ll have to adapt those enterprises so that they work better for the Chinese economy.
Q: What is your perspective on China’s economic vision in global terms at a time when the US is turning inward?
A: Well, they’re certainly taking advantage of it. We’re used to the US playing a strong world leadership role, and perhaps a lot less erratic one than they currently play, so China will play that well.
You’ve already seen with the South China Sea and them being more aggressive in some of the global institutions. Even in terms of trade, China is probably more open now than the Trump administration. They’ll use the “One Belt, One Road” policy to basically expand so that there are stronger links to the Middle East and Europe and Central Asia. So, I think we’re going to see a very expansionist China in terms of world influence.
Q: Looking briefly at Europe, at the recent G20 summit, Angela Merkel said the region must, “take its fate into its own hands” and stop “glossing over” clear differences. How do you see this ultimately affecting European-US relations?
A: Probably the biggest trouble with Europe has been too much German influence, not too little. I think with Brexit on the cards and a more isolationist stance in Washington, it probably does mean more challenges for Europe.
More German control is probably not going to solve Europe’s problems. At the end of the day, you can’t have a German factory worker who is 77 working in the snow in Dusseldorf paying for a Greek public servant’s pension who’s 51 in the sun in Athens. Ultimately, the European project has to reform itself.
Q: What, in your opinion, lies behind the problem of housing affordability in the large capitals such as Sydney and Melbourne, and what can be done to address it?
A: I guess in some ways it’s intergenerational inequality where negative gearing and some of the tax advantages given to Baby Boomers have taken heed and they’ve been able to price everyone else out of the market. So, probably something does have to be done to negative gearing in terms of reform. In some way, some issues have to be [addressed] in terms of supply, particularly in Sydney and Melbourne.
Ultimately, Sydney housing prices are like any world city — Hong Kong, San Francisco, New York or London. Those types of cities are more expensive because that’s where the high incomes are earnt. It’s pretty hard if you’re a teacher or fire fighter in one of those cities, but ultimately that’s what drives housing prices in the inner city.
It’d be good to see capital cities like Adelaide and Hobart doing a bit better in terms of population and economic growth because they’re quite cheap and got pretty good quality of life for most people.