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Speaker 1: Welcome to Fear and Greed. Q and A, where we

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Speaker 1: ask and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Aylmer. The Australian economy enters twenty twenty six

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Speaker 1: in uncertain territory. There's geopolitical risk, uncertainty of the independence

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Speaker 1: of the world's most important central bank, the US Federal Reserve.

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Speaker 1: It's unclear what will happen to interest rates in Australia

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Speaker 1: while the economy is expanding. It may be best described

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Speaker 1: as a modest clip to make sense of it all,

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Speaker 1: I welcome to Fear and Greed. Paul Bloxham, Chief economist

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Speaker 1: at HSBC Australia. Paul, welcome back to Fear and Greed.

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Speaker 2: Great to be here.

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Speaker 1: The first topic of conversation is the geopolitical outlook, what

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Speaker 1: Donald Trump means, what tariffs mean. Are we going to

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Speaker 1: have a more moderate twelve months do you think? And

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Speaker 1: then I will bring it back to the local economy,

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Speaker 1: but just in terms of how people operate, from markets

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Speaker 1: to business people. What about the global outlook, how do

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Speaker 1: you think it'll go.

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Speaker 3: I think that if the beginning of the year, the

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Speaker 3: first couple of weeks are any guide. I think it's

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Speaker 3: going to become more intense and more complicated. We've seen

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Speaker 3: developments with Venezuela and the questions around Greenland, and these

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Speaker 3: are all starting to play a bigger role in driving

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Speaker 3: global markets as well. You've seen it reflected in gold

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Speaker 3: prices getting to all time highs, and they were already

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Speaker 3: at very high levels as the investors are becoming more

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Speaker 3: and more concerned about global risk. What's most interesting is

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Speaker 3: we had a very eventful twenty twenty five on the

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Speaker 3: trade policy front and on the geopolitical front, and yet

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Speaker 3: the global economy managed to plow through it all in

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Speaker 3: pretty decent shape. So when you look at our set

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Speaker 3: of forecast for the global economy, although these political development

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Speaker 3: geo political developments could very well play a big role

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Speaker 3: in terms of adding volatility, if you look at the

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Speaker 3: actual growth story, it seems to be fairly well supported.

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Speaker 3: And one of the big features of that, of course,

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Speaker 3: is the ongoing positivity around AI, the data center build

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Speaker 3: out that's going on around the world and in the

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Speaker 3: US in particular. The fact that that's been driving more

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Speaker 3: and more of global trade. Is more of the sort

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Speaker 3: of inputs, the components that go into the data center

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Speaker 3: build out are driving global trade as well. So while

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Speaker 3: we have this uncertain geopolitical environment and it's having an

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Speaker 3: effect on markets, we think the growth story is still

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Speaker 3: reasonably well supported, and as I say, by this ongoing

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Speaker 3: structural story that's underway, the positivity around what AI is

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Speaker 3: going to do, and the investment that's associated associated with it.

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Speaker 3: So lots of things to watch and lots of exciting

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Speaker 3: things to watch in twenty twenty six, and as I say,

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Speaker 3: there could be quite a bit of volatility, but I

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Speaker 3: think that the overall story is still one that's fairly solid.

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Speaker 1: Okay, before we leave global economy, how important is it

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Speaker 1: that the US Federal Reserve stays independent?

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Speaker 3: But it's absolutely paramount to the way that mark its function.

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Speaker 3: Independent central banks are the way that we can believe

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Speaker 3: that inflation will mainfully contained, that the way that we

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Speaker 3: believe that that financial markets will remain stable because of that.

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Speaker 3: So it's it's it's a it's a fundamental feature of

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Speaker 3: the way global economies operate to have independent, independent central banks.

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Speaker 3: And so that's going to be, as you're raising implicitly

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Speaker 3: a question this year as to how that all plays out.

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Speaker 3: But so far markets have responded to what's happened to

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Speaker 3: date reasonably well in terms of the way it's pricing,

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Speaker 3: the outlook for inflation, a medium to the medium term

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Speaker 3: outlook for inflation and inflation expectations, and the way that

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Speaker 3: the bond markets have responded. So we'll just have to

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Speaker 3: see how that all plays out. But it is, it is,

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Speaker 3: it is, it is fundamental.

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Speaker 1: Well, what about if green spin steps down in May

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Speaker 1: and his replacement is much more likely to cut interest rates?

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Speaker 1: Is the fact that there are a bunch of people

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Speaker 1: voting on that decision, So it's not afford gone conclusion

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Speaker 1: that there will be rate cuts or is there more

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Speaker 1: to it than that?

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Speaker 3: Ah, There's a lot of things involved in all of this.

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Speaker 3: It's not just the Chairman of the Federal Reserve obviously

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Speaker 3: that determines It's the FOMC, the whole of the committee

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Speaker 3: that determines interest rates. I think the other thing to

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Speaker 3: keep in mind is even what the central bank does well,

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Speaker 3: you know, markets and how markets respond can drive a

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Speaker 3: lot of what of what determines the outcomes in the end.

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Speaker 3: If if actually interest rates were to be lowered too

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Speaker 3: quickly at the short end and inflation were to stay

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Speaker 3: more persistent than obviously that's going to have a bearing

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Speaker 3: on outlook, the outlook for interest rates at the longer

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Speaker 3: end of the curve, and so and so that has

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Speaker 3: an impact on financial conditions. So, you know, we there's

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Speaker 3: a lot of this story yet to play out. I think,

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Speaker 3: I think, you know, just the FED chair is not

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Speaker 3: just that the full story. There's a lot more to it.

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Speaker 1: Okay, let's bring it home interest rates. We all want

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Speaker 1: to know what's going to happen to them.

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Speaker 3: Paul, Well, we think that the RBA is unlikely to

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Speaker 3: be able to cut any further.

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Speaker 2: And the RBA is said as much as them much themselves.

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Speaker 3: We think that Australia's biggest challenge is that the economy

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Speaker 3: is up against its supply constraints. We're in an economy

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Speaker 3: that's already operating it near its full capacity. This is

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Speaker 3: a sort of a challenge because growth is not that strong.

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Speaker 3: We're in a modest growth upswing, but because the supply

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Speaker 3: side of the economy is so weak, because productivity has

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Speaker 3: been so persistently weak. Even a modest upswing in growth,

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Speaker 3: the one we've seen so far has delivered a pick

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Speaker 3: up an inflation inflation is a bit above where the

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Speaker 3: RBA is comfortable, so we don't think they'll cut and

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Speaker 3: we think they will in all likelihood have to lift

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Speaker 3: interest rates this year. The question, of course at the

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Speaker 3: moment is exactly when does that arrive. Our own view

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Speaker 3: is it might take a little bit of time for

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Speaker 3: the RBA to be fully convinced that they need to

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Speaker 3: lift interest rates further, and that it will probably be

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Speaker 3: something that plays out a little bit later in the year.

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Speaker 3: But we do think the next move for the RBA's

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Speaker 3: up and we do think that we're likely to get

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Speaker 3: the RBA lifting rates in twenty twenty six.

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Speaker 1: When you're up against capacity constraints as the Australian economy is,

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Speaker 1: are there any quick fixes or not?

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Speaker 2: No, there aren't quick fixes.

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Speaker 3: It really is that we need to see a reform

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Speaker 3: agenda being delivered that allows the economy to become a

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Speaker 3: bit more competitive to encourage business costs, the cost base

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Speaker 3: to grow a bit more slowly, for businesses to be

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Speaker 3: therefore sort of get a stronger incentive to want to

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Speaker 3: do business investment and innovate. So you need the hurdle

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Speaker 3: rates to come down that these are sort of driven

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Speaker 3: by deeper structural factors in the economy. We need to

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Speaker 3: focus on things like making the tax system more efficient,

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Speaker 3: making the regulatory environment more efficient, So deregulation ought to

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Speaker 3: be a part of this, including I think the industrial

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Speaker 3: relations space. Increasing competition in the economy is another feature.

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Speaker 3: These are all big structural features that you need to

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Speaker 3: fix in order to get the cost base to grow

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Speaker 3: more quickly, businesses to feel more incentivized to invest, and

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Speaker 3: for those things to lead to a pickup in productivity.

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Speaker 3: So I don't think there's a quick fix. I do

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Speaker 3: think though, there another aspect of this, and that is

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Speaker 3: that a lot of what's been driving growth in recent

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Speaker 3: times in the Australian economy has been public spending, and

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Speaker 3: so one element of this ought to be some sort

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Speaker 3: of pullback on public spending to make way for the

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Speaker 3: private sector to be able to expand. If you're operating

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Speaker 3: an economy at full capacity, and if part of that

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Speaker 3: is strong public spending, well, of course the private spending

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Speaker 3: can't grow as quickly because you're already up against that

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Speaker 3: capacity constraint. So one policy option would be more fiscal reform,

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Speaker 3: more of an approach to trying to slow down public

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Speaker 3: spending to make way and allow the private sector to

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Speaker 3: play a bigger role. So yes, I think it's a

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Speaker 3: medium term story, but there are some things you can do,

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Speaker 3: I think, and certainly policy action on the pro pro

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Speaker 3: growth reform agenda is something that's absolutely paramount and needs

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Speaker 3: to be a focus. We've talked, we have written and

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Speaker 3: talked about that for a couple of years now, and

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Speaker 3: certainly more needs to be done this year if we're

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Speaker 3: going to see the economy, the Australian economy able to

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Speaker 3: grow faster than it currently is.

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Speaker 1: Broadly, Paul, what's working for the Australian economy?

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Speaker 2: What is it?

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Speaker 1: Where's our competitive advantage? I'm also going to ask you

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Speaker 1: after this what's working against the Australian economy.

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Speaker 3: So we just put out a big research report on

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Speaker 3: exactly this. The way we described it was Australia. We

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Speaker 3: called it unchaining abundance, right, So that gives the game away.

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Speaker 3: We think that Australia has abundant growth opportunities.

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Speaker 2: You know, we are.

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Speaker 3: We've got a big resource space where, tied to Asia,

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Speaker 3: the Asian economy is the fastest growing region on the planet.

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Speaker 3: We've got opportunities to make the energy transition more quickly, and.

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Speaker 2: To move more into the tech space.

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Speaker 3: There are sort of a long list of things we

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Speaker 3: could be doing to grow if those sectors could get

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Speaker 3: going and grow a bit faster and we could do more,

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Speaker 3: so then the question is why aren't these things happening?

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Speaker 3: And this goes to the point we just made. We

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Speaker 3: were just talking about the primary thing is standing in

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Speaker 3: the way is policy settings. We have suboptimal policy settings.

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Speaker 3: We need more efficient tax system, we need more competition,

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Speaker 3: we need a regulatory environment that's easier to deal with.

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Speaker 2: All these things.

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Speaker 3: If we can get them right, would lower the cost base,

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Speaker 3: lower the hurdle rates, get businesses to invest in these

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Speaker 3: areas where we can see growth opportunities, in advancing tech

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Speaker 3: and investing more in that space, in making the energy

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Speaker 3: transition happen more quickly, In exporting more and trading more

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Speaker 3: with the asy An nations in India, which is some

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Speaker 3: of the fastest growing economies on the planet. They're just

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Speaker 3: to the north of us. We don't trade that much

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Speaker 3: with them. We should probably be aiming to try and

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Speaker 3: trade more, exporting more services, and even potentially developing more

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Speaker 3: of our critical minerals. Both the mining and the processing capacity.

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Speaker 3: These are all a long list of things you can

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Speaker 3: see that could drive Australia's growth, But we need to

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Speaker 3: get there. We need to make change to the way

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Speaker 3: the economic system works in order to encourage the investment

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Speaker 3: that's needed to.

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Speaker 2: Make it happen.

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Speaker 3: So I've sort of answered your question in saying that

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Speaker 3: these are the barriers, these are the opportunities.

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Speaker 2: And I'm sorry I took away your second question.

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Speaker 1: No, no, no, no, I mean I kind of get that.

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Speaker 1: What about it in the shorter term? So what you're

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Speaker 1: talking about, structural changes and fiscal policy takes time. It's

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Speaker 1: implemented over years, not months. Is there anything that we

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Speaker 1: should be really worried about in the next six months

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Speaker 1: twelve months in the Australian economy that's working against a

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Speaker 1: pickup in growth, because you've said that growth is muddling along,

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Speaker 1: to stop a big jump in unemployment, to keep inflation

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Speaker 1: in control in that very short term, what do we

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Speaker 1: have to keep an eye out for.

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Speaker 3: Well, the short term the only thing you can do

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Speaker 3: at the moment, because the economy is up against its

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Speaker 3: supply constraints and inflation is now picked up to being

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Speaker 3: a bit above where the RBA is likely to be comfortable.

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Speaker 3: The only thing you can really do is slow demand down,

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Speaker 3: slow the economy down to get it to grow in

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Speaker 3: line with its capabilities its capacity in the short run.

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Speaker 3: And that's why we talk about the idea that we

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Speaker 3: think the RBA firstly won't be able to cut interest

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Speaker 3: rates and probably very likely we'll have to lift them

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Speaker 3: in order to slow the economy down. Because the supply

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Speaker 3: side is constrained. There's not much you can do to

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Speaker 3: fix that immediately, but there's a lot of things you

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Speaker 3: need to do as soon as possible, So immediately that

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Speaker 3: will give you the longer term fix will allow the

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Speaker 3: economy to grow more quickly as time. As time goes by,

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Speaker 3: the longer you put them off, the less likely it

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Speaker 3: is we're going to be able to lift living standards

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Speaker 3: in the future as much as we have done in

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Speaker 3: the past and grow the economy as fast as we

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Speaker 3: used to. And so we can't keep kicking that can

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Speaker 3: down the role well. If we do, we will have

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Speaker 3: slower growth in living standards going forward than we've had

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Speaker 3: in the past. So we need to make those reforms,

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Speaker 3: take that action, and there's no better time than to

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Speaker 3: get started soon. But it's the outcomes, which is what

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Speaker 3: you're talking about, won't likely arrive in the next three

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Speaker 3: to six months. Their medium term outcomes. That doesn't mean

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Speaker 3: the make them any less important. It makes in fact

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Speaker 3: them in some ways more important to take action. But

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Speaker 3: in terms of managing the short run, the short run

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Speaker 3: is really about interest rates play the big role in

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Speaker 3: managing the cycle and managing the short run of the economy.

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Speaker 1: Paul, thanks for talking to Fearing Greed.

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Speaker 2: Great to be here. Thanks a lot.

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Speaker 1: That's Paul Bloxham, Chief Economist ad HSBC Australia. I'm Suan

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Speaker 1: Alma and this is Far and Greed. He and Da