Will Australia be able to catch the fourth economic wave with China?

The world is about to enter the final phase of the third long economic wave of the 20th century.

The first wave began in 1904 and lasted until 1929, the second ran from 1947 to 1974. The wave we are now in, the one that began in 1982, has been overlayed by two business cycles, one from 1982 to 1990 the other from 1992 to 2000. We are about to go into the third leg which should last until around 2007 or with some luck, a bit later. In fact, the new bull market began on 10 October 2002.

The good news is that this cycle should see synchronised global growth in 2004. The not-so-good news is that this third cycle will be less wealthy than the second one, between 1992 and 2000, which brought with it huge lifts in stock market value.

Over the next half a dozen years, we are going to see people fall out of the labour market in their droves due to retirement. This will produce a profound tightening in the labour market, and will probably lead to strong increases in real wages. Unless productivity is there to pay for those increases, it will otherwise be paid for from profits. If it is paid from profits, investment will fall and a recession will ensue.

The moment central banks around the world get a whiff of wage inflation, they will lift interest rates and the party will end as wage inflation bites into economic activity.

The only caveat I can see to this analysis is China.

What is happening in China today is without precedence in world history. Never before have we seen a billion-and-a-quarter people lifting themselves from poverty at such a pace.

The US will continue to be the world economic driver, but China will be a completely new factor. There is just a chance that China will actually be a big enough influence to extend this third long economic wave beyond 2007-8. The more likely outcome, however, is that China will be the epicentre of the fourth long wave, the one after this.

While the 20th century was the century of the Americas, the chances are the 21st century will be the century of Asia and we may see, for the first time, a substantial eclipse of American economic power; most likely resulting in a checkmate.

China's economy will have eclipsed Japan's in the next half-dozen years and China is going to demand a huge volume of resources. Australian resource industries will be a clear beneficiary.

The decline in commodities we have seen in the world since the middle 1960s, which cut our national income dramatically by the 1980s, may see itself reversed as China changes the commodity equation around the world.

Perhaps more importantly, China will emerge as the second strategic pole in the world. It is the only country with the cultural confidence and the military unity to deal confidently with the US.