Ticky Fullerton speaks with Saul Eslake and asks what impact the Brexit will have on the Australian economy and its markets.

Transcript

TICKY FULLERTON, PRESENTER: So what does a Brexit mean for Australia’s financial markets and trade relationships and will it have an impact on our own polling day a week from tomorrow? Well the Prime Minister told 7.30 it’s an event that could cause a period of uncertainty.

MALCOLM TURNBULL, PRIME MINISTER: It would be difficult to say precisely how long it will be before equanimity is restored, but I think we could be looking at a period of some uncertainty. … The prospect of a Labor-Greens-independent alliance and all of the instability that brings with it, a Labor Party with no economic plan other than to run up higher deficits.

TICKY FULLERTON: According to Opposition Leader Bill Shorten, the referendum result will have little direct economic impact in the short term, but there is a lesson for Australia.

BILL SHORTEN, OPPOSITION LEADER: It’s all about building sustainable growth and at the heart of sustainable growth is inclusive growth. When working class and middle class families, when working class and middle class citizens of a nation feel disengaged from the political process, then you see the sort of results you see in the United Kingdom.

TICKY FULLERTON: And for more analysis on the result, I was joined by independent economist Saul Eslake from Hobart.

Saul Eslake, thanks for joining us there.

SAUL ESLAKE, ECONOMIST: That’s a pleasure. Thanks for having me.

TICKY FULLERTON: An extraordinary day on markets everywhere. Here in Australia, $42 billion, I think, wiped off the market, over three per cent. Should Australians be worried about their super?

SAUL ESLAKE: Well, perhaps they should. We know from previous experience that the Australian share market isn’t immune from these big, global volatility events. The financial markets around the world were not priced for this. They were expecting, especially on the last day as people were going to vote, expecting that the UK would vote to remain. They didn’t. So there has been a significant reaction. And if some of the dire consequences of this vote that were warned of by most economists come to pass, then this probably won’t be a 24-hour volatility event either, but will persist for some time. And if that’s right, then we’ll certainly feel consequences of that here in Australia.

TICKY FULLERTON: But do you see this as the beginning of some black swan event, for example, something really catastrophic?

SAUL ESLAKE: I think it’s unwise to make bold predictions one way or the other about that. We know again from the experience of the financial market crisis of 2008-’09 that interconnections can be hard to perceive and hard to evaluate. So, for example, if the big fall in sterling that we’ve seen over the last 12 hours is symptomatic of an unwillingness by investors to take on more risk and indeed a desire on their part to shed risk, then the consequences could play out in ways that are very hard to tell in advance and it would also be very difficult to tell in advance how long those consequences might persist for.

TICKY FULLERTON: Yeah. The pound’s fallen over 10 per cent. George Soros, for example, the famous hedge fund manager, warned that it would fall perhaps up to 20 per cent. Now that hasn’t happened. Do you see this as a blip or again something that’s going to go further?

SAUL ESLAKE: I think it could be go further, and I’m saying that, I’m not particularly forecasting that the pound might fall further. Indeed, it could bounce from these extraordinarily low levels. But what matters from an Australian perspective is not so much what happens to the pound exchange rate, but what happens to the exchange rates of other currencies. In particular, we’ve seen the US dollar go up against not only the pound, but against the euro and if this event leads the Federal Reserve yet again to defer interest further increases in US interest rates, and the Fed has shown this year already that it is very sensitive both to movements in the US dollar and to turmoil on global financial markets, then that will likely result in an appreciation of the Australian dollar and additional pressure on the Reserve Bank to cut Australian interest rates again, even though, looking at the domestic economy, there’s probably not a compelling argument for taking our rates down to a new record low.

TICKY FULLERTON: And Janet Yellen of the Fed did warn about a Brexit actually occurring and what she might – might or might not have to do. What about the warnings about Britain from its own Prime Minister, for example, that a Brexit would put a bomb under the British economy? That the – that Britain might lose its status as a major financial centre?

SAUL ESLAKE: Well that’s indeed a risk, although it would seem that all these dire warnings, not only from politicians, but from the Bank of England and bank economists and industry groups, among others, may have backfired because part of the mood that prompted the majority of Britons to vote in the way that they did was a revolt against experts. People say that these were the same experts who failed to foresee the financial crisis, which is in most respects true of course, although that doesn’t invalidate the warnings that they have made about the potential consequences of this for Britain.

TICKY FULLERTON: And now these folk of course are gonna have to try and sort it all out. Now what about free trade though, which is the other big known unknown, if you like, Saul, and particularly what it means for Australia? Do you think we could benefit out of this Brexit?

SAUL ESLAKE: I don’t think we can. I think it’s very hard to be at all precise about how bad this could be for the world and for Australia. But equally, it’s very hard to see anything good coming from it. Many people will interpret this vote in Britain as yet another sign of growing resistance to free trade, globalisation and the like.

TICKY FULLERTON: Saul, finally, the Prime Minister has obviously used this crisis as part of his campaign and he’s talking about the importance of having a strong economy. Do you see Australia as robust enough to handle any shock that might come our way over the next weeks?

SAUL ESLAKE: Well we may be better able to handle those shocks than some other economies, but I think we will feel in full all of the global shocks that may result from this. And it’s important to recognise that we are not in nearly as strong a position to withstand those shocks as we were in 2008-’09. The Reserve Bank can only cut interest rates by another one-and-three-quarters percentage points compared with nearly seven percentage points as they could at the time of the financial crisis and our fiscal position isn’t nearly as robust either, so we certainly won’t be able to stimulate the economy through going further into deficit as we were able to during the GFC. So, while I can understand the point the Prime Minister’s seeking to make, I don’t think we should be complacent about the potential effects of this decision for us.

TICKY FULLERTON: Saul Eslake, thanks very much for joining us.

SAUL ESLAKE: Thank you again for having me, Ticky.

TICKY FULLERTON: And we should point out we spoke to Saul Eslake just before the pound made a slight comeback. Still way off yesterday’s levels though.