The disruptors, identified by Janus Henderson’s Australian fixed income team, extend beyond cyclical factors, with the firm expecting them to have long-term impacts on how policy evolves and the domestic economy.
They include decarbonisation, deglobalisation, debt, digitisation and demography.
The fund manager’s fixed interest strategist - macroeconomics, Emma Lawson, observed that although Australia’s economy remains sluggish, it is free from recession forecasts despite higher interest rates broadening their impact across sectors.
“The RBA needs to balance these risks along their so-called narrow path. The extended period of policy at restrictive levels will slow growth further, rebalance the labour market and subdue inflation,” Lawson said.
“The global economic backdrop remains soft, although there are a myriad of risks which generate volatility.”
Lawson added that the base case is for the Reserve Bank (RBA) to hold current rates steady before commencing an easing cycle in Q1 2025.
“We price a more modest than the historically average easing cycle, of around 110 bps, spread across 2025. We presently have no tilt to the high or low case,” she said.
“We continue to hold a long duration position and look to adjust the position through market volatility.”
Commenting on the Australian labour market, Lawson emphasised that it remains “surprisingly resilient, defying the forward indicators”.
Although the unemployment rate dropped back below 4 per cent for November, wages growth continues to moderate from its highs, suggesting that the level of the unemployment rate consistent with full employment is lower than the RBA believes.
But according to Lawson, the RBA was cautious about the changing nature of the discounting environment and will await further evidence of improvement.
Five ‘D’s’
Discussing the five primary disruptors, Lawson emphasised that each would have distinct implications for Australian policy and financial markets.
These disruptors’ “ebbs and flows” could amplify or counter current economic cycles, she added.
The significant impact of decarbonisation is already evident in the Australian economy, with climate events such as drought, fires and flooding as well as warming factors already influencing domestic inflation patterns.
On the other hand, further deglobalisation is expected to reflect a transition away from the free trade era and highlight the changing global political landscape influencing trade patterns.
Lawson highlighted “friendshoring”, a term referring to aligning international investments with strategic partners rather than traditional economic fundamentals, such as cheap labour or competitive advantage.
The strategist also pointed to a rising government debt, a trend among the G10 economies, which results from a lack of significant fiscal discipline since the global financial crisis, compounded by the global pandemic.
“Financial markets are taking a less tolerant approach to a lack of fiscal containment, as the interest rate on government debt starts to rise above nominal GDP growth rates,” Lawson said.
Finally, the last two disruptors are the rise of AI and the changes in demography.
While equity markets have already priced in potential AI gains, Lawson warned that productivity improvements “may take time”.
“This next fundamental step of productivity gains may take time, as the wholesale rollout of AI through the economy requires the necessary capital investment to utilise it to its full potential,” she said, noting that investment in data centres and warehousing has already begun, as the initial rollout for everyday tasks is underway.
Lastly, shifts in Australia’s demographics, particularly ageing populations, will have fundamental implications for both inflation and economic growth, Lawson said.
Moreover, immigration has been a unique driver of demographic change domestically, but she expects migration rates to slow as global policies shift to limit the post-pandemic surge.
