A former Australian ambassador to the US observes that investors are operating in the most unpredictable climate for geopolitics he has witnessed.
In the late 1970s, when Michael Thawley arrived in Rome on his first posting as a young public servant working for Australia’s Department of Foreign Affairs and Trade, Europe was in thrall to hard-line political militant groups: Italy’s Red Brigades, the Baader-Meinhof Group in Germany and the Irish Republican Army (IRA). The region was turbulent, unsettling and at times violent. Yet Thawley, a political economist who draws a clear distinction between the state of upheaval then and now, thinks the current period is the most uncertain time for investors he has lived through.
“I’ve been doing this sort of thing for 40 years and I can’t think of a time where I’ve been more uncertain about where we are heading and what might happen,” the senior vice-president of Capital Strategy Research for Capital Group told Investment Magazine.
Prior to serving as Australia’s ambassador to the US – including playing a key role in negotiating Australia’s free trade agreement – Thawley served as an adviser on international affairs to Australian prime ministers John Howard and Paul Keating, before being appointed secretary of the Department of the Prime Minister and Cabinet.
He says the current geopolitical outlook is especially problematic because of the unique confluence of three shifts: a new, much diminished pattern of global economic growth propped up by ongoing government intervention in the form of credit and quantitative easing; the “nervous crisis” that Western political systems find themselves in; and the changing role of the United States in preserving global stability.
“Nothing as big as China is going to happen to the world economy. India is not going to have the same dramatic effect,” he says. “We are now having to think about what it is that produces growth and prosperity. That economic pattern [of credit and quantitative easing] is – exhausted is probably too strong a word, but it has to change.”
Rise of populism
Thawley sees the rise of populism in politics as symptomatic of this and likely to continue for some time.
“Because of the instability at a geopolitical level, and because of the economic challenges we face, countries are taking decisions on a very narrow nationalist basis,” he explains.
That, in turn, increases friction and plays into populist attitudes. And the trend is not confined to the West: rising nationalism in China and the Middle East suggest there is now a global shift.
For now, it means politics will dominate and overrule economic rationality. Thawley believes the single most important – and unknowable – question is how China is going to manage its population while implementing economic change, and what sort of global role it wants.
“It is quite clear in most countries that governments are doing things they wouldn’t do if they were free to act in what they considered the best economic interests of the country as a whole,” he says.
Speaking from London, where he spends three months of the year, Thawley says the UK’s leaders and commentators need to think about Brexit in a different context. They see it as a market access and trade negotiation issue, rather than as a means for the UK to reassess the long-term trajectory of its economy.
“What you don’t see is the leadership talking about what sort of changes would be necessary in Britain for it to be able to compete internationally and lift its productivity.”
For those still optimistic about the whole deal falling through, he prescribes a more cautious outlook, given that Europe will likely be in a different place in a few years, economically and politically.
“Even if [Britain] would, or could, try to get back in, I think it probably wouldn’t want to because if the euro zone is strengthened, which is what [French President Emmanuel] Macron and [Germany’s Angela] Merkel want… people not in the euro zone will increasingly be second-class EU members.
“That was always going to be a problem for Britain looking ahead, even if it was staying in the EU.”
Fair questions, bad answers
Thawley, a member of the US Studies Centre Council of Advisors, is also less pessimistic than most about President Trump, despite acknowledging that he heralds in a difficult period for the US and globally.
“He’s put his finger on a lot of issues that need to be dealt with, it’s just the solutions are contradictory and not sustainable,” Thawley says. “The US is going to have to re-learn some lessons of history and re-learn the interests it has in being a pillar of global stability. But it may take a rocky few years and a few crises to get back to that point.”
Despite the growing list of risks and uncertainties, Thawley makes an effort to remain positive. The world is richer, more people are living better lives than ever before, and there are no major global wars underway.
However, there’s no guarantee it will stay that way.
“The risks are higher than they have been,” he says. “We’re going to have to re-learn why [alliance management] is important, and the United States is going to have to re-learn why it is important to make a commitment to defending the liberal economic order. But the rest of us have to learn that we can’t be free riders.
“The question is how close to a crisis do we have to get before we learn that we all have an interest in managing it?”
Michael Thawley will deliver a keynote address at the Investment Management Consultants Association annual conference 2017, to be held in Melbourne on September 19 and Sydney on September 20. For more details or to register, visit the event website.