1 00:00:05,790 --> 00:00:08,099 Sean Aylmer: Welcome to the Fear and Greed Business Interview. I'm Sean 2 00:00:08,099 --> 00:00:11,039 Sean Aylmer: Aylmer. The Australian economy is in a bit of trouble. 3 00:00:11,130 --> 00:00:15,120 Sean Aylmer: Gross domestic product rose by just 0. 1% in the 4 00:00:15,120 --> 00:00:17,400 Sean Aylmer: March quarter. For the full year to the end of 5 00:00:17,400 --> 00:00:20,160 Sean Aylmer: March it came in at just 1. 1%. Outside the 6 00:00:20,160 --> 00:00:23,190 Sean Aylmer: pandemic, it's the worst six months of the local economy 7 00:00:23,190 --> 00:00:26,730 Sean Aylmer: in decades. Gareth Aird is Commonwealth Bank's Head of Australian 8 00:00:26,730 --> 00:00:28,740 Sean Aylmer: Economics. Gareth, welcome back to Fear and Greed. 9 00:00:29,040 --> 00:00:30,360 Gareth Aird: G'day. It's nice to be back. 10 00:00:30,870 --> 00:00:35,070 Sean Aylmer: Economists were expecting a pretty miserable outcome yesterday, and miserable 11 00:00:35,070 --> 00:00:38,610 Sean Aylmer: being 0. 2% for the quarter. It was even worse 12 00:00:38,610 --> 00:00:41,580 Sean Aylmer: than that. Why was the number so low yesterday and 13 00:00:41,580 --> 00:00:42,300 Sean Aylmer: what do you make of it? 14 00:00:42,930 --> 00:00:45,598 Gareth Aird: Well, look, we thought it would come in at 0.1% on the 15 00:00:45,598 --> 00:00:49,860 Gareth Aird: quarter, so we actually picked that one correctly albeit our 16 00:00:49,860 --> 00:00:53,909 Gareth Aird: forecast relative to the market wasn't too dissimilar. The reality 17 00:00:53,910 --> 00:00:56,520 Gareth Aird: is that the economy is basically ground to a halt. 18 00:00:56,730 --> 00:00:59,970 Gareth Aird: There's very little growth going on at the moment. The 19 00:00:59,970 --> 00:01:03,990 Gareth Aird: economy's felt the impact of significantly higher interest rates now 20 00:01:03,990 --> 00:01:07,380 Gareth Aird: for an extended period of time. That's weighing on household 21 00:01:07,380 --> 00:01:11,969 Gareth Aird: disposable income. The consumer's pretty soft. We have also seen 22 00:01:11,969 --> 00:01:16,440 Gareth Aird: residential construction fall again, which has some pretty negative implications 23 00:01:16,440 --> 00:01:20,069 Gareth Aird: for the housing market overall. And then also we had 24 00:01:20,069 --> 00:01:22,289 Gareth Aird: a drag on net exports. I mean, we can slice 25 00:01:22,289 --> 00:01:25,679 Gareth Aird: and dice the various components, but the bottom line is 26 00:01:25,679 --> 00:01:28,709 Gareth Aird: that we've got no real growth at the moment in 27 00:01:28,709 --> 00:01:31,890 Gareth Aird: the economy, and that means, on a per person basis, 28 00:01:31,890 --> 00:01:33,300 Gareth Aird: it's actually going backwards. 29 00:01:34,200 --> 00:01:39,330 Sean Aylmer: And that was five quarters of negative per capita GDP. 30 00:01:39,809 --> 00:01:40,709 Sean Aylmer: Is that unusual? 31 00:01:41,160 --> 00:01:44,818 Gareth Aird: Yeah, it is outside of a major negative economic shock, 32 00:01:44,940 --> 00:01:47,039 Gareth Aird: and that's not what we have at the moment. We're 33 00:01:47,039 --> 00:01:49,380 Gareth Aird: technically not in a recession. We're in a per capita 34 00:01:49,380 --> 00:01:53,160 Gareth Aird: recession, but normally you would get a policy response to 35 00:01:53,160 --> 00:01:56,670 Gareth Aird: a recession, which would be to stimulate the economy. In 36 00:01:56,670 --> 00:01:59,280 Gareth Aird: other words, if you've got a monetary policy response, the 37 00:01:59,280 --> 00:02:02,220 Gareth Aird: central bank would be cutting rates to an economy that's 38 00:02:02,460 --> 00:02:06,600 Gareth Aird: barely growing, but they actually want the economy to be 39 00:02:06,600 --> 00:02:11,370 Gareth Aird: soft so that inflation comes down and then they can 40 00:02:11,370 --> 00:02:16,050 Gareth Aird: eventually ease policy and see growth accelerate. So we're in an 41 00:02:16,050 --> 00:02:23,219 Gareth Aird: unusual period where policymakers actually want weak outcomes, ideally without 42 00:02:23,219 --> 00:02:26,340 Gareth Aird: seeing too much damage done to the labor market, to 43 00:02:26,340 --> 00:02:29,970 Gareth Aird: get inflation down. And then we can ultimately look forward 44 00:02:29,970 --> 00:02:34,410 Gareth Aird: to growing again and seeing an increase in living standards. 45 00:02:34,410 --> 00:02:37,320 Gareth Aird: But we're not there yet and we're probably not going 46 00:02:37,320 --> 00:02:38,910 Gareth Aird: to be there for a couple more quarters. 47 00:02:39,540 --> 00:02:41,609 Sean Aylmer: I think Michele Bullock, yesterday, the governor of the Reserve 48 00:02:41,609 --> 00:02:46,200 Sean Aylmer: Bank, in Senate estimates, characterized it as a narrow path. 49 00:02:46,470 --> 00:02:48,960 Sean Aylmer: What chance of a recession, given all that? 50 00:02:49,560 --> 00:02:52,860 Gareth Aird: Well, look, it depends how you define a recession. If 51 00:02:52,860 --> 00:02:56,728 Gareth Aird: we take the standard definition used in Australia of two 52 00:02:57,240 --> 00:03:02,250 Gareth Aird: negative quarters of growth consecutively, that's a pretty low probability 53 00:03:02,250 --> 00:03:05,638 Gareth Aird: of getting that because we've got this tailwind of incredibly 54 00:03:05,639 --> 00:03:10,290 Gareth Aird: strong population growth which, basically, inflates the aggregates. So I 55 00:03:10,290 --> 00:03:13,710 Gareth Aird: think, in many respects, it's not really the right definition 56 00:03:13,710 --> 00:03:16,590 Gareth Aird: to use in Australia. It's more helpful to look at 57 00:03:16,590 --> 00:03:19,710 Gareth Aird: what's going on on a per person basis. And there 58 00:03:19,710 --> 00:03:23,489 Gareth Aird: you can clearly see we've been in a recession because 59 00:03:23,490 --> 00:03:26,820 Gareth Aird: consumers have been spending less and less, in a volume 60 00:03:26,820 --> 00:03:31,260 Gareth Aird: sense, per person for five quarters now. That, on our 61 00:03:31,410 --> 00:03:36,779 Gareth Aird: calculations, will continue again through the June quarter. Hopefully things 62 00:03:36,779 --> 00:03:39,540 Gareth Aird: pick up in the second half of this year, but 63 00:03:39,840 --> 00:03:43,650 Gareth Aird: it's probably going to require rates to come down, and 64 00:03:43,650 --> 00:03:45,719 Gareth Aird: for rates to come down we need inflation to come 65 00:03:45,719 --> 00:03:47,849 Gareth Aird: down. So we're just in this period at the moment 66 00:03:47,849 --> 00:03:52,590 Gareth Aird: where things have gotten worse rather than better, and they 67 00:03:52,590 --> 00:03:55,560 Gareth Aird: won't get better until the Reserve Bank is comfortable that 68 00:03:55,560 --> 00:03:57,870 Gareth Aird: inflation is on its way back to the target band 69 00:03:57,870 --> 00:03:58,890 Gareth Aird: and they're not quite there yet. 70 00:03:59,550 --> 00:04:02,010 Sean Aylmer: Is this just a normal economic cycle? Is this how 71 00:04:02,010 --> 00:04:06,810 Sean Aylmer: economics works and we're just at a particularly poor point 72 00:04:07,020 --> 00:04:09,630 Sean Aylmer: of the economic cycle where we're feeling crunch, but we 73 00:04:09,630 --> 00:04:11,819 Sean Aylmer: will come out of it? Or do you think this 74 00:04:11,820 --> 00:04:12,360 Sean Aylmer: is different? 75 00:04:12,930 --> 00:04:15,780 Gareth Aird: This is certainly different, and the reason it's different is 76 00:04:15,780 --> 00:04:18,630 Gareth Aird: because we had the big, negative shock which was COVID, 77 00:04:19,260 --> 00:04:23,610 Gareth Aird: and that was a recession by both technical standards and 78 00:04:23,730 --> 00:04:27,689 Gareth Aird: unemployment went up. But the unusual thing during the pandemic 79 00:04:27,690 --> 00:04:32,400 Gareth Aird: was that government stimulated the economy so much by pushing 80 00:04:32,400 --> 00:04:35,729 Gareth Aird: money into the household sector, but households just couldn't spend 81 00:04:35,730 --> 00:04:38,040 Gareth Aird: it because they were told to stay at home. So 82 00:04:38,040 --> 00:04:41,280 Gareth Aird: we then came out of what was the negative shock, 83 00:04:41,639 --> 00:04:44,159 Gareth Aird: but because there was so much juice in the system 84 00:04:44,490 --> 00:04:48,779 Gareth Aird: and unemployment went so low, we then saw an explosion, 85 00:04:48,779 --> 00:04:53,909 Gareth Aird: basically, in demand and then, by extension, inflation and wages 86 00:04:53,910 --> 00:04:57,000 Gareth Aird: growth picked up too, which wasn't a bad thing, but 87 00:04:57,000 --> 00:05:01,289 Gareth Aird: then the economy effectively overheated. And so the RBA has 88 00:05:01,349 --> 00:05:04,769 Gareth Aird: been trying to slow it down. And so we've gone into 89 00:05:04,770 --> 00:05:09,690 Gareth Aird: a manufactured slowdown which policymakers want to be over as 90 00:05:09,690 --> 00:05:13,500 Gareth Aird: quickly as possible. But really the way it ends is 91 00:05:13,500 --> 00:05:16,650 Gareth Aird: for inflation to be on a path that the RBA 92 00:05:16,650 --> 00:05:20,969 Gareth Aird: considers back to target. Normally, if we've got growth figures 93 00:05:20,969 --> 00:05:23,879 Gareth Aird: like today against an uptrend in the unemployment rate, which 94 00:05:23,879 --> 00:05:28,200 Gareth Aird: is what's going on, interest rates would be cut. But 95 00:05:28,380 --> 00:05:32,250 Gareth Aird: because the starting point was such low unemployment and high 96 00:05:32,250 --> 00:05:37,229 Gareth Aird: inflation, the RBA is, basically, running restrictive policy to continue 97 00:05:37,230 --> 00:05:40,080 Gareth Aird: to slow things down to hopefully get to the point 98 00:05:40,080 --> 00:05:43,140 Gareth Aird: where we can get out of this. So the short 99 00:05:43,140 --> 00:05:46,200 Gareth Aird: answer to your question is this is a very unusual period. 100 00:05:46,710 --> 00:05:48,600 Sean Aylmer: Stay with me, Gareth, we'll be back in a minute. 101 00:05:55,740 --> 00:05:58,919 Sean Aylmer: I'm speaking to Gareth Aird, Commonwealth Bank's Head of Australian 102 00:05:58,920 --> 00:06:03,960 Sean Aylmer: Economics. Do you think the Reserve Bank and fiscal policy can 103 00:06:03,960 --> 00:06:07,080 Sean Aylmer: land it such that we, well, I mean, it's a 104 00:06:07,080 --> 00:06:09,059 Sean Aylmer: per capita recession so we're in that already, but I 105 00:06:09,059 --> 00:06:14,009 Sean Aylmer: suppose without worsening it too much, we can get through 106 00:06:14,009 --> 00:06:17,339 Sean Aylmer: the next quarter and perhaps the September quarter and come 107 00:06:17,339 --> 00:06:20,490 Sean Aylmer: out the other side without too much damage to the economy? 108 00:06:20,760 --> 00:06:24,270 Gareth Aird: Yeah, so look, I think you measure the damage at 109 00:06:24,270 --> 00:06:28,260 Gareth Aird: this stage through the labor market. It's absolutely true that 110 00:06:28,260 --> 00:06:33,419 Gareth Aird: households have been pulling back on spending and that's unpleasant. 111 00:06:33,570 --> 00:06:37,170 Gareth Aird: And lots of people are cutting back on discretionary spending, 112 00:06:37,170 --> 00:06:40,950 Gareth Aird: they're eating out less, they're doing the things that they 113 00:06:40,950 --> 00:06:45,570 Gareth Aird: like to do less, that cost money, but unemployment is 114 00:06:45,570 --> 00:06:49,020 Gareth Aird: still relatively low. So the way we get out of 115 00:06:49,020 --> 00:06:51,630 Gareth Aird: this where we say we've had, basically, a soft landing 116 00:06:52,109 --> 00:06:55,830 Gareth Aird: is for rates to start coming down, growth to pick 117 00:06:55,830 --> 00:06:58,800 Gareth Aird: up, and for the unemployment rate to have not risen 118 00:06:58,950 --> 00:07:01,678 Gareth Aird: by too much more from where we are now. Our 119 00:07:01,680 --> 00:07:04,770 Gareth Aird: base case at Commonwealth Bank is that we actually end 120 00:07:04,770 --> 00:07:09,509 Gareth Aird: up seeing that happen, but it is a tightrope. And 121 00:07:09,570 --> 00:07:12,180 Gareth Aird: the risk in all of this is that inflation gets 122 00:07:12,180 --> 00:07:16,050 Gareth Aird: a little bit stuck above target and unfortunately the unemployment 123 00:07:16,050 --> 00:07:19,170 Gareth Aird: rate has to go up by more than is desired 124 00:07:19,620 --> 00:07:21,600 Gareth Aird: in order to get inflation back to target. 125 00:07:22,349 --> 00:07:25,889 Sean Aylmer: So what's the best case we can hope for here? 126 00:07:25,889 --> 00:07:29,520 Sean Aylmer: Is it an unemployment rate of 4.5% and interest rates starting 127 00:07:29,520 --> 00:07:31,680 Sean Aylmer: to fall later in the year? When I say best 128 00:07:31,680 --> 00:07:34,110 Sean Aylmer: case, I'm talking very personal here. I'm not talking about 129 00:07:34,110 --> 00:07:37,170 Sean Aylmer: bureaucrats or economists or anything like that, but person on 130 00:07:37,170 --> 00:07:39,570 Sean Aylmer: the street, what is the best case? 131 00:07:40,050 --> 00:07:42,780 Gareth Aird: Well, the best case I think from this point is 132 00:07:42,780 --> 00:07:46,529 Gareth Aird: that we see the next couple of inflation prints suggesting 133 00:07:46,529 --> 00:07:49,560 Gareth Aird: that inflation is actually going to get back to the target 134 00:07:49,560 --> 00:07:53,700 Gareth Aird: band in the not too distant future and that unemployment 135 00:07:53,910 --> 00:07:56,400 Gareth Aird: won't have risen too much over that period of time. 136 00:07:56,820 --> 00:08:00,330 Gareth Aird: And then rates can start coming down because it's clear 137 00:08:00,330 --> 00:08:02,849 Gareth Aird: that things have got to soften a little bit further for inflation 138 00:08:02,849 --> 00:08:05,939 Gareth Aird: to come down. I take comfort though from the wages 139 00:08:05,940 --> 00:08:09,630 Gareth Aird: data because we have seen wages growth moderate in a 140 00:08:09,630 --> 00:08:13,800 Gareth Aird: way which is, basically, consistent with the inflation target. The 141 00:08:13,800 --> 00:08:16,560 Gareth Aird: most recent quarterly wages print came in at 0. 8% on 142 00:08:17,820 --> 00:08:19,620 Gareth Aird: the quarter. So you annualize that and you're a little 143 00:08:19,620 --> 00:08:23,669 Gareth Aird: bit over 3%. That's a totally fine number. What we 144 00:08:23,670 --> 00:08:27,450 Gareth Aird: need to see though is some of the stickier elements of inflation come 145 00:08:27,450 --> 00:08:31,380 Gareth Aird: down just so that central bank is then sure that we're 146 00:08:31,380 --> 00:08:34,710 Gareth Aird: going to land in time within the 2- 3% band. 147 00:08:34,710 --> 00:08:36,179 Gareth Aird: They don't have to wait for us to get there 148 00:08:36,179 --> 00:08:39,389 Gareth Aird: before cutting rates, but they need to be confident that 149 00:08:39,389 --> 00:08:41,910 Gareth Aird: we're going to get there and then they can ease 150 00:08:41,910 --> 00:08:44,699 Gareth Aird: policy and that'll limit the lift in the unemployment rate. 151 00:08:44,700 --> 00:08:48,150 Gareth Aird: But, as the governor rightly says, it's a narrow path. 152 00:08:48,150 --> 00:08:52,439 Gareth Aird: It's arguably getting narrower the longer it goes on, but 153 00:08:52,440 --> 00:08:54,328 Gareth Aird: I think there's still a chance we can pull this 154 00:08:54,330 --> 00:08:58,259 Gareth Aird: off here if the next couple of inflation prints are 155 00:08:58,320 --> 00:09:01,770 Gareth Aird: somewhere around 0. 8% on the quarter. That's our forecast, 156 00:09:01,770 --> 00:09:03,630 Gareth Aird: but there's obviously a lot of risk around that. 157 00:09:04,440 --> 00:09:07,380 Sean Aylmer: Now, national accounts are very backwards looking. The great thing 158 00:09:07,380 --> 00:09:10,049 Sean Aylmer: about talking to someone from the Commonwealth Bank is you 159 00:09:10,050 --> 00:09:12,809 Sean Aylmer: have a lot of real- time data. So I presume 160 00:09:12,960 --> 00:09:15,240 Sean Aylmer: what you are talking about here and the fact that 161 00:09:15,240 --> 00:09:18,630 Sean Aylmer: this quarter will probably be weak as well, the June 162 00:09:18,630 --> 00:09:23,370 Sean Aylmer: quarter is also informed by real- time data, Gareth. 163 00:09:23,970 --> 00:09:26,429 Gareth Aird: Yeah, that's right. So we've got more timely data on 164 00:09:26,429 --> 00:09:29,218 Gareth Aird: spending, and that's quite soft at the moment, and that's 165 00:09:29,219 --> 00:09:33,120 Gareth Aird: suggesting another weak GDP print. Now, what I would say 166 00:09:33,120 --> 00:09:36,030 Gareth Aird: is that the national accounts are backward looking to the extent 167 00:09:36,420 --> 00:09:39,238 Gareth Aird: they tell us what happened on the production front or 168 00:09:39,240 --> 00:09:45,630 Gareth Aird: the spending front, but economic growth leads employment growth which 169 00:09:45,630 --> 00:09:49,169 Gareth Aird: then, by extension, leads the unemployment rate. So you can 170 00:09:49,170 --> 00:09:52,920 Gareth Aird: actually take signal from the national accounts as to what's 171 00:09:53,010 --> 00:09:56,309 Gareth Aird: likely to happen to employment growth from here, and that 172 00:09:56,309 --> 00:10:00,030 Gareth Aird: is that it will continue to slow and then, by extension, 173 00:10:00,059 --> 00:10:03,299 Gareth Aird: the unemployment rate will rise a little bit. So even 174 00:10:03,300 --> 00:10:06,809 Gareth Aird: though it's a coincident indicator of, basically, spending, and this 175 00:10:06,809 --> 00:10:09,088 Gareth Aird: is slightly backward looking, telling us what happened in the 176 00:10:09,089 --> 00:10:11,400 Gareth Aird: March quarter, it does give you a bit of a 177 00:10:11,400 --> 00:10:14,340 Gareth Aird: steer of where the labor market's heading. And the other 178 00:10:14,340 --> 00:10:17,160 Gareth Aird: thing I'd say, too, in the national accounts, which is 179 00:10:17,280 --> 00:10:19,559 Gareth Aird: a little bit forward- looking today, it told us that 180 00:10:19,559 --> 00:10:23,010 Gareth Aird: the savings rate is very low, and we know that 181 00:10:23,010 --> 00:10:26,400 Gareth Aird: households built up some savings during the pandemic, and we 182 00:10:26,400 --> 00:10:30,240 Gareth Aird: could calculate, basically, how much it's got left outside of 183 00:10:30,270 --> 00:10:34,350 Gareth Aird: what's sitting in mortgage offset and redraw accounts, and it's 184 00:10:34,350 --> 00:10:37,348 Gareth Aird: not a lot now. So that's basically telling you that 185 00:10:37,350 --> 00:10:40,830 Gareth Aird: the tailwind that's been there, which has partly offset the 186 00:10:40,830 --> 00:10:44,250 Gareth Aird: impact of these really big increases in interest rates, that's 187 00:10:44,580 --> 00:10:48,630 Gareth Aird: run its course. So, again, I think that's telling you 188 00:10:48,630 --> 00:10:52,350 Gareth Aird: that the period of softness that we've had will continue 189 00:10:52,350 --> 00:10:54,840 Gareth Aird: a bit. Tax cuts will help with the margin, that 190 00:10:54,840 --> 00:10:57,389 Gareth Aird: kick in on 1 July, but really I think we 191 00:10:57,389 --> 00:11:00,779 Gareth Aird: need some rate relief to get things moving directionally more 192 00:11:00,780 --> 00:11:02,189 Gareth Aird: the way we'd like to see them go. 193 00:11:02,910 --> 00:11:06,270 Sean Aylmer: And your base case for when we'll get lower rates? 194 00:11:06,900 --> 00:11:09,780 Gareth Aird: Look, our base case is we're looking for a November 195 00:11:09,780 --> 00:11:13,890 Gareth Aird: rate cut. That's arguably best case at the moment. It's 196 00:11:13,890 --> 00:11:17,968 Gareth Aird: hard to see the central bank cutting rates before then, and 197 00:11:17,969 --> 00:11:20,130 Gareth Aird: we still need a few things to go right for 198 00:11:20,130 --> 00:11:23,279 Gareth Aird: them to cut rates by then, notably on the inflation 199 00:11:23,279 --> 00:11:26,280 Gareth Aird: front. But we're sticking with that at the moment because, 200 00:11:26,400 --> 00:11:29,940 Gareth Aird: as I said, the wages dynamics look favorable for getting 201 00:11:29,940 --> 00:11:34,290 Gareth Aird: inflation down. The labor market is loosening which, up until 202 00:11:34,290 --> 00:11:37,740 Gareth Aird: a point, is desired. The growth picture looks pretty weak. 203 00:11:38,099 --> 00:11:41,189 Gareth Aird: We think if you package that up, all of that together, 204 00:11:41,309 --> 00:11:43,710 Gareth Aird: and then you just see that inflation data that gives 205 00:11:43,710 --> 00:11:46,290 Gareth Aird: you the green light to take rates away from restrictive 206 00:11:46,290 --> 00:11:48,900 Gareth Aird: territory, then we can see a rate cut by the 207 00:11:48,900 --> 00:11:53,250 Gareth Aird: end of this year. But I'd probably say, at the moment, that's base 208 00:11:53,250 --> 00:11:57,929 Gareth Aird: case and best case. And worst case from here is 209 00:11:57,929 --> 00:12:00,569 Gareth Aird: that rates are stuck at the levels they are at 210 00:12:00,570 --> 00:12:04,530 Gareth Aird: the moment, and that this period of weakness continues and 211 00:12:04,530 --> 00:12:08,189 Gareth Aird: the jobless rate rises that bit higher than we'd like 212 00:12:08,190 --> 00:12:08,578 Gareth Aird: to see. 213 00:12:09,150 --> 00:12:10,890 Sean Aylmer: Gareth, thank you for talking to Fear and Greed. 214 00:12:11,280 --> 00:12:12,480 Gareth Aird: It's nice to chat, as always. 215 00:12:12,840 --> 00:12:16,230 Sean Aylmer: That is Gareth Aird, Commonwealth Bank's Head of Australian Economics. 216 00:12:16,708 --> 00:12:18,840 Sean Aylmer: This is the Fear and Greed Business Interview. Join us 217 00:12:18,840 --> 00:12:21,059 Sean Aylmer: every morning for the full episode of Fear and Greed, 218 00:12:21,059 --> 00:12:23,580 Sean Aylmer: daily business news for people who make their own decisions. 219 00:12:23,850 --> 00:12:25,559 Sean Aylmer: I'm Shaun Aylmer. Enjoy your day.