1 00:00:03,460 --> 00:00:06,330 Sean Aylmer: Welcome to the Fear And Greed Daily Interview, I'm Sean Aylmer. 2 00:00:06,630 --> 00:00:09,619 Sean Aylmer: It's a big week for the economy. Yesterday, the September 3 00:00:09,619 --> 00:00:13,350 Sean Aylmer: quarter GDP was released, revealing just how much damage the 4 00:00:13,350 --> 00:00:17,700 Sean Aylmer: Delta lockdowns did to the economy. The 1. 9% contraction for 5 00:00:17,700 --> 00:00:20,770 Sean Aylmer: the quarter was perhaps better than expected with many economists 6 00:00:20,770 --> 00:00:25,120 Sean Aylmer: forecasting the economy would shrink by closer to 3%. Felicity 7 00:00:25,120 --> 00:00:27,660 Sean Aylmer: Emmett is a Senior Economist at ANZ and my guest 8 00:00:27,660 --> 00:00:29,630 Sean Aylmer: this morning. Felicity, welcome to Fear And Greed. 9 00:00:30,060 --> 00:00:31,870 Felicity Emmett: Thanks very much for having me, Sean. 10 00:00:32,360 --> 00:00:36,780 Sean Aylmer: So Felicity was yesterday's number, 1. 9%, lower than you expected? 11 00:00:37,330 --> 00:00:39,360 Felicity Emmett: Look, it was a bit of a smaller fall than 12 00:00:39,360 --> 00:00:43,070 Felicity Emmett: we expected and certainly when we look back to expectations, 13 00:00:43,710 --> 00:00:47,040 Felicity Emmett: a couple of months ago, it was certainly a fair 14 00:00:47,040 --> 00:00:51,169 Felicity Emmett: bit better than expectations. And we can all say, " Oh, 15 00:00:51,170 --> 00:00:55,340 Felicity Emmett: this number's old, it's so dated. It's from more than 16 00:00:55,340 --> 00:01:00,010 Felicity Emmett: three months ago, really." Actually what today shows is that 17 00:01:00,050 --> 00:01:03,610 Felicity Emmett: the hole in the economy that Delta has created is 18 00:01:03,610 --> 00:01:06,480 Felicity Emmett: a bit smaller, so the recovery from it will be 19 00:01:06,480 --> 00:01:09,890 Felicity Emmett: a bit quicker. So it is really, quite good news, 20 00:01:09,890 --> 00:01:10,399 Felicity Emmett: I think. 21 00:01:10,660 --> 00:01:13,000 Sean Aylmer: Okay. So if we break it down, what were some 22 00:01:13,000 --> 00:01:15,700 Sean Aylmer: of the details of it, which were either on the 23 00:01:15,700 --> 00:01:18,660 Sean Aylmer: upside or the downside? So we start with households. 24 00:01:18,959 --> 00:01:24,140 Felicity Emmett: Yes. Look really, that's where the surprise was. We saw 25 00:01:24,300 --> 00:01:29,590 Felicity Emmett: household consumption fall 4. 8%, which was less than we were 26 00:01:29,590 --> 00:01:33,520 Felicity Emmett: expecting. We were expecting something more like down 5. 8%. 27 00:01:34,310 --> 00:01:39,020 Felicity Emmett: And that's largely because services held up better than expected. 28 00:01:39,020 --> 00:01:42,610 Felicity Emmett: And now, services were always going to be hard hit 29 00:01:42,610 --> 00:01:46,250 Felicity Emmett: because you obviously can't use those when you are forced 30 00:01:46,250 --> 00:01:50,080 Felicity Emmett: to stay at home. But the declines weren't as large, 31 00:01:50,380 --> 00:01:54,110 Felicity Emmett: they were down about 5%. If we look at non- 32 00:01:54,110 --> 00:01:59,100 Felicity Emmett: retail, down about 5%. So really not too bad a result. 33 00:01:59,530 --> 00:02:03,410 Felicity Emmett: When we look back to the second quarter of last 34 00:02:03,410 --> 00:02:07,560 Felicity Emmett: year, when we had the national lockdown, then services spending 35 00:02:07,920 --> 00:02:13,060 Felicity Emmett: was down something like 13%. So a much better outcome 36 00:02:13,060 --> 00:02:13,910 Felicity Emmett: than that. 37 00:02:14,250 --> 00:02:16,820 Sean Aylmer: Yeah. And I mean, obviously, it was Victoria and New 38 00:02:16,820 --> 00:02:19,760 Sean Aylmer: South Wales and the ACT were locked down this time around and 39 00:02:19,810 --> 00:02:23,620 Sean Aylmer: it wasn't a national economy, notwithstanding that it does seem 40 00:02:23,620 --> 00:02:27,910 Sean Aylmer: that people handled the lockdown better this time around. And as a result, 41 00:02:28,550 --> 00:02:30,869 Sean Aylmer: the economic consequence wasn't quite as bad. 42 00:02:31,520 --> 00:02:37,360 Felicity Emmett: That's absolutely correct. So yes, the lockdowns were really confined to, 43 00:02:37,360 --> 00:02:41,030 Felicity Emmett: as you say, New South Wales, Victoria, and ACT. However, 44 00:02:41,169 --> 00:02:44,810 Felicity Emmett: those lockdowns were much longer than was the case in 45 00:02:45,130 --> 00:02:48,570 Felicity Emmett: the second quarter last year and New South Wales and 46 00:02:48,570 --> 00:02:52,530 Felicity Emmett: Victoria obviously make up the largest proportion of the economy, 47 00:02:52,530 --> 00:02:56,639 Felicity Emmett: accounting for about 50%. So I think the fact that 48 00:02:56,639 --> 00:03:02,160 Felicity Emmett: the decline this quarter was just down 1. 9% compared to down 7% 49 00:03:03,160 --> 00:03:08,210 Felicity Emmett: in the second quarter last year really is because businesses 50 00:03:08,210 --> 00:03:13,119 Felicity Emmett: and households have both managed the shutdown much better. So 51 00:03:13,500 --> 00:03:17,850 Felicity Emmett: businesses now can very easily switch to work from home 52 00:03:18,050 --> 00:03:21,549 Felicity Emmett: and workers have really got used to that sort of system. 53 00:03:21,770 --> 00:03:26,190 Felicity Emmett: Restaurants can easily shift to take away. Lots of businesses 54 00:03:26,190 --> 00:03:29,900 Felicity Emmett: have really managed to adapt very quickly. And we saw 55 00:03:29,900 --> 00:03:32,840 Felicity Emmett: this as well, when we look at measures of things 56 00:03:32,840 --> 00:03:37,380 Felicity Emmett: like business and consumer confidence through the quarter, they didn't 57 00:03:37,380 --> 00:03:40,240 Felicity Emmett: decline anywhere near as much as they did in the 58 00:03:40,240 --> 00:03:43,610 Felicity Emmett: national lockdown last year. Even if we look on a 59 00:03:43,610 --> 00:03:46,990 Felicity Emmett: state by state basis, and I think that's because we've 60 00:03:47,330 --> 00:03:49,550 Felicity Emmett: managed to adapt really well. 61 00:03:49,800 --> 00:03:52,430 Sean Aylmer: Okay. Exports, they're helping things out? 62 00:03:52,900 --> 00:03:56,540 Felicity Emmett: Well, that's a tricky one. So net exports added one 63 00:03:56,540 --> 00:03:59,760 Felicity Emmett: percentage point to growth. So it provided a bit of 64 00:03:59,760 --> 00:04:03,190 Felicity Emmett: an offset to the weakness in demand, but that was 65 00:04:03,190 --> 00:04:08,520 Felicity Emmett: actually mostly because of a 4% fall in imports. It 66 00:04:08,520 --> 00:04:12,430 Felicity Emmett: wasn't because exports were really strong, it's because imports were 67 00:04:12,450 --> 00:04:16,330 Felicity Emmett: super weak. So what will happen is in the third quarter, 68 00:04:16,529 --> 00:04:20,850 Felicity Emmett: when demand picks up, we will get probably a reversal 69 00:04:20,850 --> 00:04:25,690 Felicity Emmett: of that, and net exports will probably subtract from GDP. 70 00:04:25,690 --> 00:04:29,870 Felicity Emmett: So that's probably something to watch out for. But also 71 00:04:29,950 --> 00:04:33,820 Felicity Emmett: there's lots of pluses and minuses in here. The net 72 00:04:33,820 --> 00:04:39,310 Felicity Emmett: exports contribution also partly offset the big drag that we 73 00:04:39,310 --> 00:04:43,630 Felicity Emmett: had from inventories. Now, inventories were run down quite sharply, 74 00:04:43,630 --> 00:04:48,010 Felicity Emmett: particularly in the wholesale sector, now that's also probably a 75 00:04:48,010 --> 00:04:51,800 Felicity Emmett: bit of borrowing or reflecting weak imports. So there's a 76 00:04:51,800 --> 00:04:54,700 Felicity Emmett: bit of give and take in the numbers there. And 77 00:04:54,750 --> 00:04:58,700 Felicity Emmett: as I say, imports will probably bounce back next quarter 78 00:04:58,880 --> 00:05:04,500 Felicity Emmett: and then inventories will probably also, rather than being a drag, 79 00:05:04,730 --> 00:05:07,900 Felicity Emmett: they will likely contribute next quarter as well. 80 00:05:08,150 --> 00:05:10,010 Sean Aylmer: Stay with me, Felicity. We'll be back in a minute. 81 00:05:15,120 --> 00:05:19,290 Sean Aylmer: I'm speaking to Felicity Emmett, ANZ Senior Economist. Okay, so 82 00:05:19,290 --> 00:05:21,880 Sean Aylmer: at the beginning, you said the thing about the economy 83 00:05:21,880 --> 00:05:25,010 Sean Aylmer: not contracting as much as expected during this September means 84 00:05:25,020 --> 00:05:27,350 Sean Aylmer: it didn't put as big a hole in the economy, 85 00:05:27,350 --> 00:05:29,630 Sean Aylmer: which is a better starting point for the December quarter, 86 00:05:29,630 --> 00:05:32,620 Sean Aylmer: the current quarter. What are you expecting this quarter? 87 00:05:33,330 --> 00:05:36,240 Felicity Emmett: Look, I think we'll see a pretty solid bounce. I mean, 88 00:05:36,240 --> 00:05:39,859 Felicity Emmett: it's early days at the moment, but we're expecting a 89 00:05:39,860 --> 00:05:44,100 Felicity Emmett: bounce in the order of about 3% in the December quarter. 90 00:05:44,370 --> 00:05:50,340 Felicity Emmett: We've seen with retail sales, they were up nearly 5% in October. 91 00:05:50,490 --> 00:05:54,279 Felicity Emmett: We know that the Black Friday sales went really well, 92 00:05:54,480 --> 00:06:00,130 Felicity Emmett: so consumers are definitely out there ready to spend. And 93 00:06:00,140 --> 00:06:03,409 Felicity Emmett: consumers are in a really good position to spend. We 94 00:06:03,410 --> 00:06:08,739 Felicity Emmett: saw in the Q3 report that the household saving rate 95 00:06:08,740 --> 00:06:12,359 Felicity Emmett: is now back up to nearly 20%, not as high 96 00:06:12,360 --> 00:06:16,750 Felicity Emmett: as it was in the lockdown last year, but still incredibly high. 97 00:06:16,980 --> 00:06:19,130 Felicity Emmett: So what we've seen is all the way through the 98 00:06:19,130 --> 00:06:23,680 Felicity Emmett: pandemic is that household saving rate has been very elevated. 99 00:06:23,680 --> 00:06:27,690 Felicity Emmett: So every quarter households are saving quite a bit out 100 00:06:27,690 --> 00:06:30,480 Felicity Emmett: of their income. And what they've done with that, or 101 00:06:30,480 --> 00:06:33,220 Felicity Emmett: with some of that is that they've put it into 102 00:06:33,220 --> 00:06:36,409 Felicity Emmett: the bank. And so we've seen a massive increase in 103 00:06:36,440 --> 00:06:41,300 Felicity Emmett: bank deposits, in the order of about $160 billion since 104 00:06:41,300 --> 00:06:44,210 Felicity Emmett: the pandemic started. And so what that means is that 105 00:06:44,240 --> 00:06:48,900 Felicity Emmett: households are in a really, really good position to spend up. 106 00:06:49,140 --> 00:06:53,419 Felicity Emmett: International borders are reopening, but that's likely to be very slow, 107 00:06:53,420 --> 00:06:58,730 Felicity Emmett: especially now with Omicron, but households really are, I think 108 00:06:58,730 --> 00:07:02,400 Felicity Emmett: really ready and willing to spend. And that's why we 109 00:07:02,400 --> 00:07:06,420 Felicity Emmett: think the recovery both in the December quarter and in 110 00:07:06,430 --> 00:07:10,750 Felicity Emmett: 2022 will be largely consumer driven and I think the 111 00:07:10,750 --> 00:07:12,120 Felicity Emmett: outlook there is very positive. 112 00:07:12,580 --> 00:07:14,700 Sean Aylmer: Okay. So if you can bring that back sort of away 113 00:07:14,700 --> 00:07:17,900 Sean Aylmer: from the economists more to people like myself, Felicity, what's 114 00:07:17,900 --> 00:07:19,640 Sean Aylmer: it mean for house prices? What do you think house 115 00:07:19,640 --> 00:07:23,420 Sean Aylmer: prices will do given that the economy will be expanding 116 00:07:23,530 --> 00:07:26,140 Sean Aylmer: into next year, what's your view on house prices? 117 00:07:26,420 --> 00:07:30,470 Felicity Emmett: Well, house prices have had a magnificent run over the 118 00:07:30,470 --> 00:07:34,320 Felicity Emmett: past year or so, new numbers out today showing that 119 00:07:34,320 --> 00:07:38,860 Felicity Emmett: prices have risen, I think 22% or so in the past 120 00:07:38,860 --> 00:07:43,650 Felicity Emmett: year and low rates have really helped to drive that 121 00:07:43,650 --> 00:07:48,500 Felicity Emmett: really amazing sort of performance there. Now, I think that 122 00:07:48,500 --> 00:07:50,960 Felicity Emmett: we're not going to see a repeat of that. And 123 00:07:50,960 --> 00:07:54,080 Felicity Emmett: there's a few reasons for that. We've seen a big 124 00:07:54,080 --> 00:07:58,890 Felicity Emmett: increase in supply coming on stream, last weekend we had 125 00:07:58,890 --> 00:08:02,930 Felicity Emmett: a record weekend for auction volumes. We've had a big 126 00:08:02,930 --> 00:08:06,760 Felicity Emmett: increase in the number of new listings for private sales 127 00:08:07,040 --> 00:08:11,410 Felicity Emmett: after a period when the market was really very tight. And 128 00:08:11,410 --> 00:08:14,880 Felicity Emmett: so this increase in supply is I think taking some 129 00:08:14,880 --> 00:08:17,210 Felicity Emmett: of the heat out of the market, and that's why 130 00:08:17,430 --> 00:08:21,860 Felicity Emmett: we've already seen the monthly price gains start to moderate. 131 00:08:21,910 --> 00:08:24,810 Felicity Emmett: When you look back to March of this year, I 132 00:08:24,810 --> 00:08:30,860 Felicity Emmett: think capital city prices rose 2. 6%, whereas the November numbers 133 00:08:30,860 --> 00:08:35,390 Felicity Emmett: have them up 1. 1%. So we're already seeing a moderation there. 134 00:08:35,760 --> 00:08:39,179 Felicity Emmett: And I think that's likely to continue. And a couple 135 00:08:39,179 --> 00:08:41,809 Felicity Emmett: of other factors are likely to add to that. And 136 00:08:41,809 --> 00:08:46,790 Felicity Emmett: one is the macro- prudential tightening that we had from APRA, 137 00:08:46,790 --> 00:08:50,860 Felicity Emmett: that they announced in early October with an increase in 138 00:08:50,860 --> 00:08:56,580 Felicity Emmett: this mortgage serviceability buffer from 2.5% to 3%. That will 139 00:08:56,580 --> 00:09:01,260 Felicity Emmett: mean people can't borrow quite as much, and that will 140 00:09:01,270 --> 00:09:06,469 Felicity Emmett: flow through into prices. And also we're seeing increases in 141 00:09:06,470 --> 00:09:11,440 Felicity Emmett: fixed mortgage rates. Now, even without the Reserve Bank adjusting 142 00:09:11,440 --> 00:09:15,300 Felicity Emmett: the cash rate, the market rates have lifted and that's 143 00:09:15,300 --> 00:09:19,050 Felicity Emmett: flowing through into higher fixed mortgage rates. So that will 144 00:09:19,050 --> 00:09:22,130 Felicity Emmett: also help I think, to take some of the heat 145 00:09:22,429 --> 00:09:26,270 Felicity Emmett: out of the housing market, but not enough though, to 146 00:09:26,270 --> 00:09:29,270 Felicity Emmett: turn prices negative. And we think that we'll still get 147 00:09:29,470 --> 00:09:33,699 Felicity Emmett: more moderate gains next year. And so we're looking for 148 00:09:34,020 --> 00:09:38,190 Felicity Emmett: a rise of about 6% on average across the capital cities 149 00:09:38,190 --> 00:09:44,439 Felicity Emmett: next year, before higher rates really start to bite in 2023, 150 00:09:44,620 --> 00:09:47,429 Felicity Emmett: when we expect to get a modest decline. Now, we're 151 00:09:47,850 --> 00:09:51,530 Felicity Emmett: looking at about 4% decline at the moment, which is 152 00:09:51,530 --> 00:09:55,120 Felicity Emmett: really not very much when you think that that's following 6% 153 00:09:55,120 --> 00:09:59,939 Felicity Emmett: in 2022 and more than 20% that we've seen this year. 154 00:10:00,290 --> 00:10:02,829 Sean Aylmer: Okay. So what about interest rates? You talked about fixed rate 155 00:10:02,830 --> 00:10:05,960 Sean Aylmer: loans, variable rate loans will rise, certainly when the Reserve 156 00:10:05,960 --> 00:10:09,540 Sean Aylmer: Bank lifts the official cash rate, that's dependent in large 157 00:10:09,540 --> 00:10:12,069 Sean Aylmer: part to inflation and wages. We've seen in the last 158 00:10:12,140 --> 00:10:15,580 Sean Aylmer: 36 hours that the US Federal Reserve Chair, Jerome Powell, 159 00:10:15,980 --> 00:10:21,340 Sean Aylmer: saying that inflation can't really be considered just transitory anymore. 160 00:10:21,530 --> 00:10:24,300 Sean Aylmer: How do you boil that down for Australia in terms 161 00:10:24,300 --> 00:10:26,820 Sean Aylmer: of the inflation outlook and what that means for interest rates? 162 00:10:27,960 --> 00:10:31,319 Felicity Emmett: Yeah. And this is the million dollar question at the moment. Look, 163 00:10:31,730 --> 00:10:36,520 Felicity Emmett: we don't expect the Reserve Bank to start lifting rates 164 00:10:36,520 --> 00:10:40,720 Felicity Emmett: until the first half of 2023. We don't think that 165 00:10:40,720 --> 00:10:45,480 Felicity Emmett: inflation will pick up as much here. We think wages 166 00:10:45,480 --> 00:10:48,820 Felicity Emmett: will take longer to pick up here, than has been 167 00:10:48,820 --> 00:10:52,359 Felicity Emmett: the case around the world. So we think that probably 168 00:10:52,360 --> 00:10:55,050 Felicity Emmett: the markets got a little bit ahead of itself pricing 169 00:10:55,050 --> 00:10:59,460 Felicity Emmett: in around 90 basis points of interest rate hikes over 170 00:10:59,520 --> 00:11:03,120 Felicity Emmett: the coming year. So I think it is a little 171 00:11:03,120 --> 00:11:07,470 Felicity Emmett: bit different here. The Reserve Bank has missed its inflation 172 00:11:07,470 --> 00:11:11,530 Felicity Emmett: target for a long time, and that has largely been 173 00:11:11,530 --> 00:11:16,679 Felicity Emmett: because it has expected wages to pick up when they haven't. 174 00:11:16,679 --> 00:11:21,260 Felicity Emmett: And we've had a lot of global reasons why wages 175 00:11:21,260 --> 00:11:24,700 Felicity Emmett: growth has been slow, but in Australia there's been a 176 00:11:24,700 --> 00:11:27,980 Felicity Emmett: few other reasons. And Phil Lowe outlined some of the 177 00:11:27,980 --> 00:11:32,300 Felicity Emmett: reasons why wages will be slower to pick up here 178 00:11:32,559 --> 00:11:35,630 Felicity Emmett: in a speech a couple of weeks ago. And one 179 00:11:35,630 --> 00:11:38,870 Felicity Emmett: of those is the fact that we have these enterprise 180 00:11:38,870 --> 00:11:42,840 Felicity Emmett: bargaining agreements. Now, the wage rises, they're getting in those 181 00:11:42,840 --> 00:11:46,059 Felicity Emmett: enterprise bargaining agreements at the moment are still in the 182 00:11:46,059 --> 00:11:49,690 Felicity Emmett: sort of low twos. And those agreements go for two 183 00:11:49,690 --> 00:11:53,790 Felicity Emmett: or three years. And so that provides a degree of inertia. 184 00:11:53,950 --> 00:11:58,490 Felicity Emmett: We also have the minimum wage setting system that comes 185 00:11:58,490 --> 00:12:02,069 Felicity Emmett: through annually and sets the minimum wage. And we have 186 00:12:02,170 --> 00:12:06,600 Felicity Emmett: public sector caps on wages growth. So all those things 187 00:12:06,600 --> 00:12:10,230 Felicity Emmett: are going to limit the pickup in wages here. And so 188 00:12:10,230 --> 00:12:13,280 Felicity Emmett: it's unlikely that we're going to see the sorts of 189 00:12:13,540 --> 00:12:16,800 Felicity Emmett: really sharp lifts in wages growth that we've seen in 190 00:12:16,800 --> 00:12:20,370 Felicity Emmett: the US, or in New Zealand, or the UK, here 191 00:12:20,370 --> 00:12:24,939 Felicity Emmett: in Australia. And so that means it's going to be longer before 192 00:12:25,320 --> 00:12:29,780 Felicity Emmett: the Reserve Bank is comfortable that inflation is in the 193 00:12:29,780 --> 00:12:32,540 Felicity Emmett: band sustainably. It's all very well to have some of 194 00:12:32,540 --> 00:12:38,319 Felicity Emmett: these pandemic induced lifts in inflation, but they're not going 195 00:12:38,320 --> 00:12:43,110 Felicity Emmett: to be sustained unless the price pressures sort of transfer 196 00:12:43,110 --> 00:12:46,860 Felicity Emmett: into wages. And I think in Australia that will take 197 00:12:46,860 --> 00:12:49,370 Felicity Emmett: a bit longer than has been the case overseas. So 198 00:12:49,530 --> 00:12:53,370 Felicity Emmett: I think the RBA will lag the other Central Banks. 199 00:12:53,370 --> 00:12:57,870 Felicity Emmett: Perhaps not by as much as they think, after the 200 00:12:57,870 --> 00:13:01,780 Felicity Emmett: latest statement on monetary policy, when Phil Lowe spoke, he 201 00:13:01,780 --> 00:13:05,930 Felicity Emmett: said that he still really felt the forecasts were consistent 202 00:13:06,179 --> 00:13:11,349 Felicity Emmett: with the cash rate staying unchanged until 2024. I don't 203 00:13:11,350 --> 00:13:14,680 Felicity Emmett: think that will be the case, but if it's earlier, that will 204 00:13:14,820 --> 00:13:18,510 Felicity Emmett: be a success story really for the RBA, because it will mean 205 00:13:18,710 --> 00:13:22,069 Felicity Emmett: that they've achieved their goals earlier. 206 00:13:22,610 --> 00:13:23,710 Sean Aylmer: Felicity, thank you for talking to Fear and Greed. 207 00:13:24,809 --> 00:13:25,880 Felicity Emmett: My pleasure. Thank you. 208 00:13:26,190 --> 00:13:29,610 Sean Aylmer: That was Felicity Emmett, ANZ Senior Economist. This is the 209 00:13:29,610 --> 00:13:32,420 Sean Aylmer: Fear and Greed Daily Interview. Join me every morning for 210 00:13:32,420 --> 00:13:34,570 Sean Aylmer: the full Fear and Greed podcast with all the business 211 00:13:34,570 --> 00:13:37,640 Sean Aylmer: news you need to know. I'm Sean Aylmer, enjoy your day.