Rarely has there been a more interesting time to be an economist.

Slowing world growth, extremely low interest rates, the threat of trade protectionism and the rise of political populism have all made for a strange economic mix.

As ANZ's Sydney based chief economist Richard Yetsenga sees it, they all amount to the same thing: globalisation is wearing thin.

"We are in a more sceptical phase of globalisation; whether it is reversing or not is still an open question," he says.


He paints a gloomy for picture of the world's economic outlook.

"If you add up an unsustainable fiscal position in the US, Brexit, Europe's structural issues, China's slowdown, there are not many parts of global economy that look particularly rosy."

He talks also of the end of the postwar demographic dividend - which saw working-age populations increase after WWII - and the deepening and increased sophistication of financial systems that has led to people taking on more debt.

"Many countries are looking to stabilise their debt and to improve their debt to GDP ratios and the largest contributor to the global cycle - China - is facing a decline in the working-age population," he says.

The IMF this week said it was a "delicate moment" for the global economy. Yetsenga, too, has concerns.

"This year will be a little bit better, but against the backdrop of lower rates of growth.

"And that in and of itself is a challenge, but it raises the focus and concern about existing inequities in the system, and that is bringing a range of economic tensions in a range of countries."

The IMF had spent a lot of time saying the global economy would return to normal after the global financial crisis, "so part of their sombreness is about them coming back to reality".


"Certainly there is a new message there that we are in a new 'normal' environment -- getting used to lower rates of growth than we have been used to historically," says Yetsenga.

Desert island economics

Much has been written about the US credit market yield curve, along the lines that the current flat or slightly negative curve suggests a recession may be store for the world's biggest economy.

Yetsenga is not so bearish, but he concedes the US debt markets have in the past been a reliable indicator of what is around the corner.

"If you were marooned on Desert Island Economics and you could take one coconut, that coconut would be the US yield curve. It is the single best indicator of the economic cycle."

When the curve is steep, yields on short-dated paper are low, with progressively higher for longer dated maturities.

"When it's steep, it's easy, because you are being compensated for having cash tied up - compensated for duration risk."


It's not so easy when the curve is flat.

"Typically, when the curve starts to flatten, you need to ease lending standards, and that's what has happened in the US.

"But when you start to get some deterioration in the economic cycle, lending standards start to tighten, and in the last quarter in the US we saw the sharpest tightening in lending since just before the global financial crisis."

The most-cited reason for tightening lending standards was the deteriorating economic outlook.

"Bank lending, or credit, is the lifeblood of any modern economy - you can't function well without it - I think that's a tension that we are going to have to resolve over the next couple of years."

ANZ's view is that the Fed will stay put "but the bond market is signalling very clear risks around that."


China growth

Economists typically fret about a decline in China's growth rate, and Yetsenga - a frequent visitor to the People's Republic - is one of them.

He doesn't doubt that annual growth rates of 6 per cent are possible this year and next.

"The question is, what happens after that?"

The big growth drivers in China have been in exports and the reallocation of workers into more productive parts of the economy.

He says China is making the transition to structurally lower rates of growth.

Big picture

In the big picture, the world economy was hitting natural speed limits.


"We have come to the tail end of three enormous structural forces - globalisation, the postwar demographic dividend, and the deepening and increased sophistication of systems, which has meant people have taken on a lot more debt," he says.

"All three are running into some natural speed limits."

Yetsenga concedes some of big issues faced by the world economy have come and gone. Life goes on.

"I think the things that people worry about are typically not the thing that blows you up, because you get a policy response and some adjustment.

"The European crisis did not bring the world down. It's not that it's not a problem, but I suspect that we will find a way around it," he says.

"In the end we did, but it's a structural necklace to be fair, but it hasn't been the thing to collapse the global economy."


Yetsenga says the rise of political populism cannot not be put down to anti-globalisation.

"It's just the fact that as average rates of growth have come down, post-crisis, existing inequities become more in focus.

"If I'm getting ahead and other people are getting ahead, it's kind of okay, but if other people are getting ahead and I'm going backwards, then I will have an issue about that.

"This is were we find ourselves right now.

"Governments who simply focus on driving economic growth are not going to be able to drive enough growth to camouflage the issues that people are concerned about.

"Governments have no choice but to look at these issues at their root cause.


"People are saying that there are things about their lives that they don't like -- governments should respect that and work out how they are going to manage that."

He says every meaningful economy has had a positive demographic story to tell over the past few decades.

"Working-age population has been rising as a percentage of the total population within each economy.

"We are right on the cusp now where that is transitioning to a declining working-age population."

Korea, Taiwan, Hong Kong and China are now in that decline.

"Quite a number of core European countries have had that for more than a decade and Japan has had that for a few decades.


"That's taking some juice out of the global economy and its partly why rates of economic growth have come down over the last decade."

World trade

Globalisation is also facing a higher level of scepticism.

"Voters everywhere are saying: we are just a bit more cautious about cross-border movement - movement of capital, people and cross-border ownership of business - we are more cautious about that.

"I think governments are increasingly treating technology as a national defence issue.

"From a technology aspect alone, I think the world is de-integrating.

"I think we are splitting into spheres and I can't see how that reverses."


Closer to home

When comes the outlook for Australia and New Zealand, Yetsenga's glass doesn't get any more full.

"We have to work hard to ensure that the resources we have are working at their most productive because generating growth the easy ways, either by adding more people or adding more credit, are running out of runway."

In New Zealand, the household debt to income ratio is 170 per cent. In Australia, it's 200 per cent.

"Effectively, both countries are at the right hand end of that risk distribution - that can't really be an incremental source of further economic growth going forward."

Richard Yetsenga:
• Chief economist and Head of Research at ANZ in Sydney
• Leads ANZ's global economic and markets research efforts, with a focus on Australia, New Zealand and Asia.
• Regularly appears on CNBC, Bloomberg TV and Sky News