Last week's Reserve Bank decision to cut the cash rate to a record low 1.75 per cent on the back of a quarter of consumer price deflation is a symptom of a deeper malaise afflicting the global economy as it spreads to Australia. Whichever party wins the federal election will face a grim reality – it will be governing in an era of weak global growth that is certain to drag down the Australian economy. The global economy has failed to achieve a sustainable recovery from the Great Recession of 2009. Worse, an array of formidable forces is preventing any prospect of a recovery in the foreseeable future. A profound shift in federal government policy-making will be needed if Australia is to be shielded from the most severe effects of global economic torpor.
What if this is as good as it gets? This is the question asked in a major research project undertaken by this columnist for KPMG, which, together with The Australian Financial Review and The Australian, sponsored last year's National Reform Summit. During the course of 2016, all three international economic agencies – the International Monetary Fund, the World Bank and the Organisation for Economic Co-operation and Development – have revised down their global growth forecasts, repeating an annual pattern since the Great Recession's end.
The feeble growth that is occurring is being assisted by unprecedented monetary easing, by cutting official interest rates to zero and below and by successive rounds of quantitative easing. The global economy is on life support. Its prognosis is so poor that serious economists including former Federal Reserve chairman, Ben Bernanke, president of the European Central Bank, Mario Draghi, and The Economist magazine have revived an idea raised by Milton Friedman, known as helicopter money. Proposed modern variants of this radical prescription involve central banks printing money and passing on the new cash to governments either to transfer directly into consumers' bank accounts or to finance new productivity-raising infrastructure. Helicopter money does not involve new debt and, since it bypasses commercial banks, it would not create asset price bubbles as quantitative easing has done.
Economic lethargy in the developed world has revived fears held during and after the Great Depression that the economic system might eventually reach permanent stagnation. Flat real wages of lower and middle income earners in developed countries are choking off consumer spending. High and rising levels of household and government debt will need to be repaid. Population ageing and the end of a one-off period dating from the 1960s of rapid entry of women into the workforce are acting as a brake on growth.
At the same time, developed-world multifactor productivity growth, reflecting the rate of technological progress, has stalled. Technological pessimists do not foresee a new round of big, productivity-raising inventions of the period 1890-1900, notably electricity, the internal combustion engine and running water with indoor plumbing, which spawned urban sanitation, petroleum refining and natural gas reticulation, chemicals, plastics and pharmaceuticals, highways, elevators, skyscrapers, refrigerators and telecommunications. While the computer age replaced clerical workers, the techno-pessimists consider it has produced mainly consumer and entertainment devices such as smartphones and iPads. In their view, not only is the demand side of the global economy weak, so too is the supply side.
Techno-optimists have faith in the emerging power of artificial intelligence and robotics to reboot productivity growth and through it, economic growth. Yet, like their pessimistic counterparts, they predict a sharp social stratification in the developed world, where the inheritors of wealth, the owners of capital and the highly-educated will do well but the middle class is hollowed out and the working poor trying to hold down precarious jobs endure falling living standards.
Australia's challenge in this digital age of disruption will be to lift its sagging multifactor productivity growth rate through scientific research, innovation and aggressive, competitive behaviour to create high-skilled, high-paid jobs. The old normal will be history as existing business models are besieged and social cohesion breaks down from rising inequality. Our education system will need bolstering to enable it to equip young people to perform complex, non-routine tasks that cannot readily be replicated by robots. Governments and businesses that fail to adapt to the digital age will be cast aside by its unstoppable power.