1 00:00:08,310 --> 00:00:10,899 Sean Aylmer: Welcome to Fear and Greed - The Week Ahead. I'm Sean 2 00:00:10,900 --> 00:00:14,330 Sean Aylmer: Aylmer, and as always, I'm joined by economist Stephen Koukoulas 3 00:00:14,530 --> 00:00:19,419 Sean Aylmer: this fine Monday morning. You'll find him at thekouk. com, T- H-E- K- O- U- K. 4 00:00:19,690 --> 00:00:23,430 Sean Aylmer: com and on Twitter using the handle # TheKouk. Stephen, good morning. 5 00:00:23,700 --> 00:00:24,740 Stephen Koukoulas: Good morning, Sean. 6 00:00:25,140 --> 00:00:27,810 Sean Aylmer: So much going on in the world of economics. Let's start 7 00:00:27,810 --> 00:00:31,270 Sean Aylmer: with last week, national accounts figures. Did you enjoy them? 8 00:00:32,020 --> 00:00:34,140 Stephen Koukoulas: I did. There was lots of information in there. When 9 00:00:34,140 --> 00:00:37,930 Stephen Koukoulas: you cut beneath the surface numbers and dig into them, 10 00:00:38,290 --> 00:00:41,740 Stephen Koukoulas: they were actually reflecting a pretty good economy. We know 11 00:00:41,740 --> 00:00:45,199 Stephen Koukoulas: that growth in the March quarter itself was 0.8%, so 12 00:00:45,200 --> 00:00:48,560 Stephen Koukoulas: that was a little above expectations but a solid result. 13 00:00:48,560 --> 00:00:50,070 Stephen Koukoulas: The annual figure was around about 3. 3% growth in 14 00:00:51,470 --> 00:00:55,570 Stephen Koukoulas: GDP. Again, that's a pretty good result. You can see 15 00:00:55,770 --> 00:00:58,940 Stephen Koukoulas: there quite clearly that the economy was growing and growing 16 00:00:58,940 --> 00:01:03,150 Stephen Koukoulas: quite nicely. The composition of that growth was okay, too. 17 00:01:03,150 --> 00:01:06,300 Stephen Koukoulas: We had a very strong lift in household spending, so 18 00:01:06,300 --> 00:01:08,870 Stephen Koukoulas: we consumers are out there spending pretty well. Growth was 19 00:01:08,870 --> 00:01:13,840 Stephen Koukoulas: around about 4% in annual terms. Government demand, maybe this was pre- 20 00:01:13,840 --> 00:01:15,920 Stephen Koukoulas: election stuff, but the government was spending like crazy, it 21 00:01:15,920 --> 00:01:20,120 Stephen Koukoulas: was up 8% in annual terms. So those two parts 22 00:01:20,120 --> 00:01:22,440 Stephen Koukoulas: of the domestic economy were strong. We had a negative 23 00:01:22,480 --> 00:01:26,440 Stephen Koukoulas: from the net export side because we're importing lots of 24 00:01:26,450 --> 00:01:29,339 Stephen Koukoulas: machinery and equipment and these things as the economy recovers. 25 00:01:29,660 --> 00:01:32,090 Stephen Koukoulas: That subtracted a little bit from bottom line GDP. But 26 00:01:32,090 --> 00:01:36,230 Stephen Koukoulas: overall a pretty nice solid result. The RBA and Treasury 27 00:01:36,230 --> 00:01:38,320 Stephen Koukoulas: would be pretty happy with that. 28 00:01:38,340 --> 00:01:42,160 Sean Aylmer: Now, just something Michael and I were talking about this during the week. 29 00:01:42,400 --> 00:01:43,970 Sean Aylmer: So before we get onto the Reserve Bank this week, 30 00:01:43,970 --> 00:01:46,580 Sean Aylmer: I just wanted to ask you a question. We were talking 31 00:01:46,900 --> 00:01:49,529 Sean Aylmer: about the international trade figures and the current count deficit 32 00:01:49,530 --> 00:01:54,460 Sean Aylmer: came out and how economists forecast those massive numbers. I 33 00:01:54,460 --> 00:01:58,610 Sean Aylmer: think in one case, the forecasts were for about, I 34 00:01:58,610 --> 00:02:00,720 Sean Aylmer: think it was 10.5 and came in at 7. 5 or 35 00:02:00,720 --> 00:02:03,620 Sean Aylmer: vice versa, a billion we're talking about here. I'm just 36 00:02:03,620 --> 00:02:06,410 Sean Aylmer: worried. We were just talking about how economists actually do 37 00:02:06,420 --> 00:02:12,210 Sean Aylmer: it, particularly around trade figures and current account figures how 38 00:02:12,870 --> 00:02:15,810 Sean Aylmer: different the actuals can be from the forecasts. 39 00:02:16,639 --> 00:02:19,589 Stephen Koukoulas: I'm going to expose my colleagues and myself on this one. 40 00:02:20,360 --> 00:02:22,070 Sean Aylmer: None of us can do it. None of us have 41 00:02:22,070 --> 00:02:22,650 Sean Aylmer: a clue. 42 00:02:23,160 --> 00:02:26,430 Stephen Koukoulas: Look, well, on the trade side, the international trade, current accounts and the numbers, 43 00:02:26,430 --> 00:02:29,440 Stephen Koukoulas: there's a lot of moving parts. This is not to 44 00:02:29,440 --> 00:02:31,560 Stephen Koukoulas: make an excuse, but just to show how it can 45 00:02:31,560 --> 00:02:35,250 Stephen Koukoulas: be so wrong from time to time. Obviously, on the 46 00:02:35,250 --> 00:02:38,470 Stephen Koukoulas: goods side, that is international trade in goods rather than 47 00:02:38,470 --> 00:02:41,690 Stephen Koukoulas: services, we have a fair idea for what the price 48 00:02:41,690 --> 00:02:43,150 Stephen Koukoulas: of a lot of commodities are, the things that we 49 00:02:43,150 --> 00:02:45,320 Stephen Koukoulas: export, so the iron ore price, the coal price, the 50 00:02:45,320 --> 00:02:47,989 Stephen Koukoulas: LNG price, and we have a fair estimate on what 51 00:02:48,050 --> 00:02:51,139 Stephen Koukoulas: the volumes of those particular products happen to be. So 52 00:02:51,500 --> 00:02:55,920 Stephen Koukoulas: we can get them pretty accurate. Where we have problems 53 00:02:56,260 --> 00:02:58,590 Stephen Koukoulas: is on the import side. Australia imports a lot of 54 00:02:58,650 --> 00:03:03,130 Stephen Koukoulas: machinery and equipment, chemicals, these sorts of things. Again, we 55 00:03:03,130 --> 00:03:07,080 Stephen Koukoulas: don't really know how many trucks, cars, all the inputs 56 00:03:07,080 --> 00:03:09,169 Stephen Koukoulas: into the business sector that are going on at the moment. We 57 00:03:09,169 --> 00:03:10,670 Stephen Koukoulas: can have a stab and have a look what happened 58 00:03:10,990 --> 00:03:13,230 Stephen Koukoulas: the last few months, what's happened to trends, what's happened 59 00:03:13,230 --> 00:03:16,169 Stephen Koukoulas: to various surveys on what firms are telling us about 60 00:03:16,169 --> 00:03:19,160 Stephen Koukoulas: what their intentions are to spend and invest. You can 61 00:03:19,160 --> 00:03:20,410 Stephen Koukoulas: have a stab at it, but if you get a 62 00:03:20,669 --> 00:03:24,710 Stephen Koukoulas: smallish error on all of the components, they compound into 63 00:03:25,120 --> 00:03:27,380 Stephen Koukoulas: what's a pretty big miss. So that's on the goods 64 00:03:27,380 --> 00:03:29,730 Stephen Koukoulas: side. On the services side, it's very difficult to know what 65 00:03:29,730 --> 00:03:32,380 Stephen Koukoulas: exact tourism numbers are. People starting to come and go 66 00:03:32,380 --> 00:03:35,370 Stephen Koukoulas: in and out of Australia now. That was another reason 67 00:03:35,370 --> 00:03:38,350 Stephen Koukoulas: why that forecast was a long way from what the 68 00:03:38,350 --> 00:03:39,450 Stephen Koukoulas: consensus view was. 69 00:03:41,340 --> 00:03:43,330 Sean Aylmer: Big week, tomorrow the Reserve Bank meets. 70 00:03:44,170 --> 00:03:47,190 Stephen Koukoulas: They do. The only discussion is what sort of interest 71 00:03:47,190 --> 00:03:49,960 Stephen Koukoulas: rate hike are they going to deliver? I think, well, 72 00:03:49,960 --> 00:03:52,300 Stephen Koukoulas: as we're just touching on the GDP numbers, they were nice 73 00:03:52,300 --> 00:03:54,680 Stephen Koukoulas: and strong. So the RBA would be pretty happy with that. 74 00:03:54,690 --> 00:03:57,780 Stephen Koukoulas: We know that inflation pressures are still building. And we 75 00:03:57,780 --> 00:04:00,710 Stephen Koukoulas: know those national accounts actually, Sean, they do have what 76 00:04:00,710 --> 00:04:04,650 Stephen Koukoulas: they call these implicit price deflators and their measures of 77 00:04:04,650 --> 00:04:07,660 Stephen Koukoulas: inflation is different to the consumer price index, because that's 78 00:04:07,740 --> 00:04:11,920 Stephen Koukoulas: the consumer by definition. Whereas these price deflates for GDP 79 00:04:11,920 --> 00:04:14,500 Stephen Koukoulas: include a whole lot of other price measures that aren't 80 00:04:14,500 --> 00:04:17,370 Stephen Koukoulas: included in the CPI. And again, they were all very elevated. 81 00:04:17,370 --> 00:04:20,760 Stephen Koukoulas: So RBA board meeting tomorrow, they'll be saying, " Well, we've 82 00:04:20,760 --> 00:04:23,729 Stephen Koukoulas: got a hike." My, hunch is they'll go bigger rather 83 00:04:23,730 --> 00:04:27,230 Stephen Koukoulas: than smaller. We know that the Bank of Canada hiked 84 00:04:27,230 --> 00:04:30,990 Stephen Koukoulas: last week by 50 basis points to 1. 5%. Our friends 85 00:04:31,000 --> 00:04:34,219 Stephen Koukoulas: in New Zealand are already at 2%, all the fed chatter 86 00:04:34,220 --> 00:04:36,510 Stephen Koukoulas: last week, this week will all be about whether they 87 00:04:36,510 --> 00:04:39,380 Stephen Koukoulas: go 50 and then 50 again at their next two 88 00:04:39,380 --> 00:04:41,960 Stephen Koukoulas: meetings. So my view is that they do err on 89 00:04:41,960 --> 00:04:45,810 Stephen Koukoulas: the side of a bigger, rather than smaller move, 40. 90 00:04:45,810 --> 00:04:48,260 Stephen Koukoulas: Points takes it to 0. 75. So that's a nice 91 00:04:48,260 --> 00:04:51,520 Stephen Koukoulas: sort of on that quarter percent type movements. 92 00:04:51,660 --> 00:04:51,680 Sean Aylmer: Yeah. 93 00:04:51,920 --> 00:04:53,610 Stephen Koukoulas: They could easily go 50 and no one would be 94 00:04:53,610 --> 00:04:54,429 Stephen Koukoulas: really surprised. 95 00:04:54,760 --> 00:04:59,400 Sean Aylmer: Okay. So we get that announcement tomorrow afternoon. How important? 96 00:04:59,400 --> 00:05:02,060 Sean Aylmer: I mean, we talked so much about rates, we had 97 00:05:02,060 --> 00:05:04,679 Sean Aylmer: a rate hike a month ago and we talked lots 98 00:05:04,680 --> 00:05:06,230 Sean Aylmer: about it but it doesn't seem to have done that 99 00:05:06,230 --> 00:05:08,670 Sean Aylmer: much to the economy yet. Now I get that it's only 25 100 00:05:08,670 --> 00:05:11,130 Sean Aylmer: basis points. Let's say we get another one on 25 101 00:05:11,130 --> 00:05:14,109 Sean Aylmer: basis points or 40 basis points tomorrow. How long before 102 00:05:14,110 --> 00:05:17,070 Sean Aylmer: we really start seeing the economy slowing down? 103 00:05:18,050 --> 00:05:21,279 Stephen Koukoulas: Yeah, look, we know that, I think the official jargon 104 00:05:21,279 --> 00:05:25,020 Stephen Koukoulas: is there's long and variable leads in terms of monetary 105 00:05:25,020 --> 00:05:27,150 Stephen Koukoulas: policy changes and the impact on the economy. That's a 106 00:05:27,150 --> 00:05:29,110 Stephen Koukoulas: way of saying a bit like our discussion on the 107 00:05:29,200 --> 00:05:32,029 Stephen Koukoulas: international trade numbers. We're not 100% sure how long it takes, 108 00:05:32,660 --> 00:05:35,820 Stephen Koukoulas: but the modeling of that says somewhere between six and 109 00:05:35,880 --> 00:05:39,440 Stephen Koukoulas: 18 months is normally the biggest impact. So, the first 110 00:05:39,440 --> 00:05:41,370 Stephen Koukoulas: trade hikers were saying was just a month ago. So 111 00:05:41,370 --> 00:05:43,469 Stephen Koukoulas: the effect of that will probably be in the latter 112 00:05:43,470 --> 00:05:46,990 Stephen Koukoulas: part of this year. The transmission mechanism, which is what 113 00:05:46,990 --> 00:05:48,500 Stephen Koukoulas: they call it too. So the rate hike and its 114 00:05:48,500 --> 00:05:52,160 Stephen Koukoulas: impact on the economy is probably shortening. There's also apart 115 00:05:52,160 --> 00:05:55,130 Stephen Koukoulas: from the effect on our cash flow as the rates 116 00:05:55,130 --> 00:05:58,040 Stephen Koukoulas: go up, there's also a sentiment effect. So you're seeing 117 00:05:58,040 --> 00:06:00,750 Stephen Koukoulas: that somewhat in housing right now. So even though a 118 00:06:01,020 --> 00:06:03,630 Stephen Koukoulas: quarter of a point last month, probably not going to hurt 119 00:06:03,660 --> 00:06:06,580 Stephen Koukoulas: the housing market that much. The fact that it's happened, 120 00:06:06,880 --> 00:06:09,589 Stephen Koukoulas: the fact that there are more coming down the track 121 00:06:09,589 --> 00:06:13,409 Stephen Koukoulas: that is causing people just to rethink their borrowing capacity 122 00:06:13,410 --> 00:06:15,659 Stephen Koukoulas: and the like. So my hunch is that will start 123 00:06:15,660 --> 00:06:19,160 Stephen Koukoulas: to see the real effects of these raid hikes on 124 00:06:19,160 --> 00:06:23,409 Stephen Koukoulas: the economy in the third quarter of this year, but 125 00:06:23,410 --> 00:06:25,599 Stephen Koukoulas: also remembering too that there are so many other moving 126 00:06:25,600 --> 00:06:28,849 Stephen Koukoulas: parts in the economy right now. This energy price spike, goodness, 127 00:06:29,710 --> 00:06:31,450 Stephen Koukoulas: the impact on the economy of that's going to be 128 00:06:31,450 --> 00:06:33,529 Stephen Koukoulas: very difficult to read. So there are many moving parts, 129 00:06:33,529 --> 00:06:35,940 Stephen Koukoulas: but the rate hikes themselves, they'll probably start to have 130 00:06:35,940 --> 00:06:38,589 Stephen Koukoulas: their effect in three, four or five months from now. 131 00:06:38,930 --> 00:06:40,640 Sean Aylmer: Yeah. I was going to ask with the cost of living 132 00:06:40,640 --> 00:06:43,870 Sean Aylmer: pressures, particularly energy, how much will the reserve bank think about that? 133 00:06:44,270 --> 00:06:46,830 Sean Aylmer: The reserve bank board think about that before making a call? 134 00:06:47,230 --> 00:06:48,779 Stephen Koukoulas: Oh, look that they'll have it in the forefront of 135 00:06:48,779 --> 00:06:52,300 Stephen Koukoulas: their mind. And in fact, when we see the statement tomorrow afternoon from the 136 00:06:52,300 --> 00:06:55,350 Stephen Koukoulas: RBA, there's no doubt they'll have a good paragraph or so 137 00:06:55,670 --> 00:06:59,659 Stephen Koukoulas: on some of these issues. And they're really difficult to 138 00:06:59,660 --> 00:07:03,000 Stephen Koukoulas: incorporate into any model they could reverse just as quickly 139 00:07:03,000 --> 00:07:04,730 Stephen Koukoulas: as they've spiked higher. If you know what I mean, 140 00:07:04,730 --> 00:07:07,170 Stephen Koukoulas: if we happen to get some sort of supply side 141 00:07:07,170 --> 00:07:10,330 Stephen Koukoulas: response or the markets settle down somewhat, in a few 142 00:07:10,330 --> 00:07:12,660 Stephen Koukoulas: months time, we could hopefully be seeing some of these 143 00:07:12,660 --> 00:07:14,850 Stephen Koukoulas: energy prices sort of reverting back to sort of where 144 00:07:14,850 --> 00:07:18,570 Stephen Koukoulas: they were a few months ago. But while they're impacting 145 00:07:18,690 --> 00:07:21,330 Stephen Koukoulas: and while we're seeing these petrol prices, for example, back 146 00:07:21,330 --> 00:07:24,360 Stephen Koukoulas: above $ 2, even with that excise cut that the impact 147 00:07:24,360 --> 00:07:27,080 Stephen Koukoulas: on again, sentiment and your hip pocket to be frank 148 00:07:28,280 --> 00:07:30,170 Stephen Koukoulas: are quite real. And it means that if you're you 149 00:07:30,250 --> 00:07:32,520 Stephen Koukoulas: spending more money, filling up your car, paying your quarterly 150 00:07:32,610 --> 00:07:35,440 Stephen Koukoulas: electricity bill, because you turned your heater on, then you 151 00:07:35,440 --> 00:07:37,380 Stephen Koukoulas: do have less money to spend elsewhere in the economy. 152 00:07:37,380 --> 00:07:40,440 Stephen Koukoulas: And it's actually a contractionary thing on the economy. Even 153 00:07:40,440 --> 00:07:42,820 Stephen Koukoulas: though obviously it feeds into much, much higher inflation 154 00:07:42,910 --> 00:07:43,980 Sean Aylmer: Stephen enjoy the week. 155 00:07:44,130 --> 00:07:44,400 Stephen Koukoulas: Will do. 156 00:07:45,100 --> 00:07:47,900 Sean Aylmer: That was economist Stephen Koukoulas better known as The Kook. 157 00:07:47,900 --> 00:07:50,310 Sean Aylmer: You can find him at thekouk. com and follow him 158 00:07:50,310 --> 00:07:53,330 Sean Aylmer: on Twitter using the handle # TheKouk. I'm Sean Alymer. And this 159 00:07:53,330 --> 00:07:54,940 Sean Aylmer: is Fear and Greed- The Week Ahead.