Markets 
Richard Yetsenga is the chief economist of the ANZ Bank. He refuses to be alarmist about the global economy, but he does sound one big alarm. I spoke to him this week.
Fitz: Richard, I know you as my friend, but much of the world knows you as the chief economist of ANZ. How did you get to this weird world, where you can not only make sense of the endless blizzard of numbers, but presumably enjoy doing so?
RY: Happenstance. I fell into a commerce degree in the late ’80s at Griffith University, that was just starting to make a name for itself in Brisbane, and halfway through the first year, through a process of elimination, figured economics was about the only thing I really wanted to major in. And look, I quite like the numbers side of economics, but I don’t love it. I like the fact that economics is about trying to understand human behaviour in aggregate and what motivates people.
Fitz: Is your specific job to be up on the bridge of the institutional ship with your binoculars in hand and telling the skipper CEO, “Iceberg ahead on the starboard quarter, so steer nor-by-nor’east?”
RY: I don’t think I’m on the bridge. I’m probably manning the galley behind the bridge, making sure everyone has the right sort of sustenance and is being considered, about what’s going on. When I speak to the bank’s customers, I think of my role as trying to help them make decisions. If I can leave a meeting having helped someone understand their own business and the strategic environment in which it operates, then I’ll give myself a tick.
Fitz: Your tick from us will come if you can give us the good oil on interest rates, but we’ll get to that. From here on, can we assume that my economic understanding is not much more than if I was 12 years old, as generally the numbers and concepts you gravitated to bored me rigid. But I am interested in a few things now, including the American bond market, by which I don’t mean who is going to be the next James Bond – as they’ve just named him.
RY: [Suddenly animated] Do we know who’s going to be new 007?
Fitz: Trust you to be excited by some numbers! Yes, they’ve named him, but I don’t care. When it comes to the “American bond market”, this is investors taking on American government debt, yes? And that debt is now up to 40 trillion American dollars, having grown an extraordinary 10 per cent in just this first part of Trump’s second term?
RY: Yes. The investors buy bonds because they’re a good investment, and sometimes “bond yields” – the percentage that the US government pays for them to hold that debt – need to rise because investors have other choices about where to put their money. It’s much more in the news now, but the US fiscal situation is on an unsustainable track. US net public debt is now 100 per cent of GDP. Australia, for context, is 32 per cent of GDP.
Fitz: Is there a danger that those taking on that American debt will just say, “I can no longer trust that the Americans will ever be able to pay it back,” at which point the whole system risks collapsing?
RY: There’s a lot of things to happen before system collapse. What does seem to be happening – and I use the word “seem” on purpose because other people may have a very different take – is the level of debt is causing investors enough concern that they’re pulling back from buying as much US debt as they used to, and so the bond yield is rising. There is also a new chair of the Federal Reserve that sets US interest rates, and investors have some questions about how committed that institution is to keeping inflation as low as it used to. All of these things are creating an uncomfortable cocktail for the US bond market.
Fitz: I know from talking to you previously, you are always judicious in your remarks about Australian politics. Are you less so when it comes to American politics? Is Trump an economic disaster from your viewpoint, or a full-on catastrophe?
RY: I shy away from those terms because they’re quite absolute. They’re all or nothing. But I do think that the broad economic policy being pursued by the current US administration is going to affect the prosperity of the US economy in a negative manner in time, and that the US budget situation is currently unsustainable, which the markets are recognising. I don’t expect tariffs to result in the economic advantages that the proponents seem to expect.
Fitz: Go on …
RY: You can rebuild domestic productive capacity with tariffs, but the cost is that consumers will probably be paying higher prices for things. So you need to be willing to withstand the higher prices for the tariffs to have that effect. And what we’ve actually seen in the US is domestic inflationary pressure was a consequence. Exemptions to the tariffs were then introduced to try and protect certain areas from the higher prices that resulted. So this kind of push-me-pull-you-Doctor-Dolittle-tariff-dance has been going on, which I think shows you that it’s not at all clear that the administration had a particularly strong handle on the inflationary reality of tariffs.
Fitz: So despite the high stock market in America, the underlying economic malaise is a worry?
RY: There are lots of economic things in the world that people are worried about that I’m not. But the one thing I am most worried [about], I repeat, is the unsustainability of the US budget position.
Fitz: Meantime, STOP PRESS. #Breaking. Trump has just promised – no, really – a $5000 “dividend”, read “bribe” if the GOP wins the House and Senate in the midterms. What would be the likely effect of that if it happens, and can we go with a binary response? “Catastrophic inflation and increase on debt” or, “you know, these things happen”?
RY: It will increase debt from a level that is already too high. Investors are already nervous. I suspect markets have struggled to really accept the announcement given how unprecedented it is. But as we get closer to the midterms, you will I am sure see more discussion of it in the market commentary.
Fitz: What are the chances of another GFC in the next 12 months?
RY: Very low. Right now, I don’t think you have the interconnected nature of financial risk that was at the base of the last GFC. It is very clear that a number of governments are building up financial vulnerabilities, but in most economies, the private sector is in very good shape, and so that limits the ability for stresses and strains which arise periodically to be transmitted easily through the system.
Fitz: And what about the overall state of the Australian economy? What I see from an inexpert distance is that our unemployment’s fairly low – close to historically low. Inflation is trending down and not far from RBA’s target range. Interest rates are mid-range compared with the horrors we’ve known. We’re obviously not “boom”, but it doesn’t seem to be as “gloom and doom” in the room as some make out. What’s your position?
RY: Australia is the 13th wealthiest economy on Earth, the 13th wealthiest economy in history. But it depends where you sit. If you’re a young person, you’re probably worried about things like AI and the future of the labour market. Youth unemployment is around 10 per cent, so that’s quite elevated. If you’re looking to start a family, the cost of living is clearly an issue more than it has been for many decades.
Fitz: And what about the overall impact of the federal government pulling back the advantages of the capital gains tax and negative gearing for investors, which have seen real estate prices fall across the country?
RY: The recent falls in house prices take back, on average, about half of one year’s average increase over the last 30 years. So clearly, even though there’s a lot of hand-wringing about the fall in property prices, house prices can’t keep rising faster than income forever, and they’ve done so in Australia for quite a number of decades. In the last 30 years, house prices have risen about 6½ per cent a year and made Australia one of the most unaffordable housing markets in the world. That’s clearly part of the fraying of the social compact in Australia. I support efforts by government to try and tackle Australia’s unaffordable housing from both the supply side, which governments are doing quite intently, but also on the demand side by reallocating demand towards those for whom housing is a need rather than an investment.
Fitz: OK, and so to the question everybody wants to know the answer to – interest rates. Some boffin on the ABC the other day was opining that they might go up to 10 per cent?
RY: That doesn’t sound realistic to me. I see one more interest rate hike in the next 12 months. But after that hike, that will probably be enough to slow the economy and bring inflation back to target. And so, I expect we will be able to get a small number of interest rate cuts, perhaps 18 or 24 months down the track.
Fitz: Meantime, the economic news du jour is Pauline Hanson’s mob saying we should be able to access our super. Is that – to use the technical term – batshit crazy, and automatically inflationary as it pours otherwise-locked-away money into the economy?
RY: I’m always cautious about looking at one particular policy proposal from any party in isolation and saying the effect will be X, Y or Z. It’s the package that matters. I think also, look, super’s become one of Australia’s largest exports, if you like. If you travel to New York these days and speak to money managers, they talk about the Australian superannuation funds as a kind of a force in global markets because of their scale, but I can’t recall the superannuation system in Australia ever sitting still. There’s always a bit of tinkering here or there in the system, and this is just another proposal.
Fitz: But we know that, broadly, the Australian superannuation system is a wonder of the modern economic world, and it’s built on compulsory contributions. So, surely, it is insane to fiddle with that base requirement?
RY: You love the binary phrasing, don’t you? Is it your rugby background? Either you’ve scored or you haven’t? There’s no grey areas for you, Fitz. I think with economic policy, it’s all about the grey, and it’s all about the specifics of the policy and what else you’re also doing.
Fitz: What does that boil down to when you get off the fence? Batshit crazy or not batshit crazy?
RY: It depends!
Peter FitzSimons is a journalist and columnist with The Sydney Morning Herald.Connect via X.From our partners
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