Australia’s most influential economist, Ross Garnaut, forecasts that China is at an historic economic and social turning point that will lead to an even bigger appetite for resources at higher prices.

“In 20 years time China is likely to consume more energy and metals than all of the industrialised economies today,” Garnaut says. “Stronga, longa, donga” is the summary

Rowan Callick reports this analysis from a paper published by the Rio Tinto-Australian National University China Partnership, that was “handily ready for distribution soon after Rio Tinto chairman Paul Skinner and chief executive Tom Albanese presented the firm’s results” yesterday. (Revenues up, costs up more was the summary)

What might go wrong? Global pollution/climate change, geopolitical accident or act of bast-rdry, and global inflation are three candidates.

The first provides great opportunities as well as risks. The doom-mongers imagine widespread closure of coal-powered power stations and extremely high petrol prices (in both cases due to the sudden introduction of a carbon tax of, say, $50 per ton). But such a tax, with relevant safeguards as to timing and any offsetting subsidies, would lead to many interesting opportunities as well as environmental benefits.

Consider the profits to be made from viable alternative low polluting energy — geothermal, hydro, solar, wind and, if all else fails, nuclear. It is no coincidence that such a bright bloke as Ross Garnaut is working for Australia’s premiers (and anyone else who will take note) on Australia’s very own Stern report.

A geopolitical accident is always possible. The terrorists will always be with us, but provided we remain vigilant and true to our democratic principles the free world will win in the end. Rogue states provide risks, but the US seems to be making some sensible progress (eg, North Korea) and the next US president will intensify this trend. Growing prosperity will in time transform armed struggle into economic struggle. After all, we mostly cope with our urban terrorists in 4WDs on our roads.

Global inflation is now clearly on the rise and it is becoming clearer by the week that the very easy money initiated by the US Fed early this century sowed some unhelpful seeds. Central banks are gradually tightening monetary policies and the hope is that inflation can be nipped in the bud without a prolonged or severe global recession.

A visiting heavy-weight economist — IMF deputy managing director, John Lipsky — earlier this week noted that adjustment is underway; witness China’s inflationary, run-away growth and the USA’s sub-prime debt crisis. Global inflation will be an inevitable part of this adjustment, and putting inflation back in the bottle may be costly. The IMF’s forecast for global growth was recently raised from 4.9% to 5.2%, and “some countries needed to raise interest rates” despite the market turmoil.

Will the RBA make its contribution to the global monetary tightening when it’s board meets early next week? We will report as usual on board day but have not yet finalised our view. The number of “trusties” saying a rate hike is a done deal is in fact the strongest indicator, but continued market volatility may provide a reason to sit on the fence (and disappoint the trusties), as Treasurer Peter Costello has said.

Read more at Henry Thornton

Peter Fray

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