The year has brought no shortage of economic challenges. These three are the most likely to affect Australia’s financial services industry, and they highlight how we can do better at innovating.
As a global business working with numerous local and international clients, it’s little surprise that Accenture has a keen interest in world events and, from my side in particular, their possible impact on Australia.
Many macro forces affect businesses here, but today I’d like to look at three that are particularly relevant to our financial services industry:
- The economy of China, which is far and away Australia’s largest trading partner
- How the US and China interact
- The economy of Europe, whose key engines—Germany, France and the UK—are struggling
We’ll start with China, a critical player in Australia’s economy: In 2018, China bought about one-third of our merchandise exports, while its exports comprised about one-quarter of our imports.1 In both cases that’s more than the next three countries combined.2
When it comes to Australia’s exports, China is a core market: coal, and iron ores and concentrates are our two key exports, and cumulatively earned about A$126 billion in 2018.3 Yet with China’s economy slowing,4 and with the uncertain impact of the new coronavirus, what affects China will affect Australia, too.
From the US to Europe
The second force is the interaction between the US and China. The recent “phase one” trade agreement between the two countries is a welcome first step. After all, theirs is a relationship that Australia cannot control and a trade war that damages China’s economy will harm Australia’s, too.
The third factor, perhaps less well-appreciated, is Europe’s economy, where growth has slowed.5 Take the eurozone manufacturing purchasing managers’ index (PMI), for instance: It was lower than expected in January 2020, at 50.9.6 (A number below 50 means the activities of most polled firms have shrunk.)
In addition, there is a significant public finance issue: Although the stock of negative-yield government debt in the eurozone at the end of November 2019 was at its lowest ratio in five months—€4.52 trillion, or 57 percent of the total €8 trillion market—it still comprises a substantial portion.7
A range of factors has driven the emergence of negative-yield gilts and corporate bonds in recent years, including geopolitical factors and macroeconomic forces that have coupled with deglobalisation and a general sense of putting up barriers. All of these have combined to change the landscape, and have put the squeeze on banks.
Globalisation and its discontents
The rise of deglobalisation, a recent phenomenon, has been driven by the gap between the haves and the have-nots, particularly by the perception within countries that most people are losing out in this globalised world.
That perception of unfairness has caused deep discontent, with some people feeling they cannot change the system using available tools. That leads them to believe that disruption is the only solution.
How does that affect Australia? A lot of what happens in Europe and the US tends to percolate down to the southern hemisphere, which leads me to think that political, social and economic changes seen in those regions could work their way to Australia, too.
Looking at financial services, a large portion of banks’ profits have come from interest-rate margins, which are at an historical low. Additionally, banks are facing a more intense regulatory regime—some of it inflicted as a consequence of their own misdemeanours.
But that’s not the end of it. On top of that, banks are operating in an environment of technological disruption. For many, that means their business model is no longer viable. Survival requires that they move away from their vertically integrated business that manufactures and sells its own products through its own channels under its own brand and instead integrate with partners.
The challenge for banks is how to move ahead in this environment while serving shareholders, governments and other stakeholders—and at the same time serve the court of public opinion.
Mining human capital
That brings us to a broader question: What must Australia do in an age of deglobalisation? Although the country’s natural resources have provided a buffer that has meant most citizens haven’t experienced a recession, it’s vital to ask how we will generate wealth and prosperity in the future.
Undoubtedly, trade will remain key. But skills are increasingly important and that’s an area in which Australia’s performance is mixed—as shown by the annual Global Innovation Index, which ranks “world economies’ innovation capabilities and results”.8
In 2013, Australia scored 53.1 points, putting it in 19th place.9 Since then, its trajectory has been broadly sideways: In 2019, it recorded 50.3 points, putting it in 20th place.10 (By comparison, China moved from 35th place with a score of 44.7 in 2013 to 14th place with a score of 54.8 in 2019).11
Digging deeper, Australia scores highly in areas like human capital and research (10th place), and information and communication technologies (13th).12 Yet it does far worse when it comes to converting ideas into value-generating solutions.
In short, Australia must do more to build itself as an innovation economy, and ensure prosperity by developing and generating products and services that can provide value domestically and abroad. That requires developing a long-term mindset, as well as investment by government and industry in areas like digital and skills.
Finally, such investment should be done in a manner that lets people feel secure, so that they don’t feel they need to disrupt the system in order to generate change. What’s needed, in other words, is for Australia’s systems to evolve. In a changing world, that may be the best way forward to insulate the country from any destabilising macro forces, both current and future, wherever they might emerge.
To hear more, listen to the podcast, in which my Accenture colleagues Simon Whitehouse and Tim Broome explore the topic further. The first episode of our series is called Tackling the big questions facing global economies and reflecting on the impacts for Australia.
[1] Australia fact sheet, DFAT
[2] Ibid.
[3] Australia’s Top 25 Exports, Goods & Services, Department of Foreign Affairs and Trade (DFAT), Australian Government
[4] Slowing Chinese growth delivers blow to global economy, Financial Times (10/18/2019)
[5] Eurozone makes weak start to year as services stall, Financial Times (1/24/2020)
[6] Ibid.
[7] Pool of negative-yielding euro zone govt bonds shrinks in November, Reuters (12/3/2019)
[8] History of the Global Innovation Index, GII
[9] Ibid.
[10] Ibid.
[11] Ibid.
[12] Ibid.
