1 00:00:05,840 --> 00:00:07,600 Speaker 1: Welcome to Fear and Greed. Q and A. Will we 2 00:00:07,680 --> 00:00:11,520 Speaker 1: ask and answer questions about business, investing, economics, politics and more. 3 00:00:11,560 --> 00:00:15,320 Speaker 1: I'm suan Alma. Government spending investment on data centers and 4 00:00:15,360 --> 00:00:18,880 Speaker 1: Black Friday sales have seen the Australian economy grow at 5 00:00:18,880 --> 00:00:22,239 Speaker 1: its fastest pace in almost three years. That December quarter 6 00:00:22,360 --> 00:00:26,720 Speaker 1: GDP figures show the economies expanding faster than expected, but 7 00:00:26,760 --> 00:00:29,320 Speaker 1: that also that that also has implications for the reserve 8 00:00:29,400 --> 00:00:32,400 Speaker 1: banks battle with inflation. Blinda Allen is the head of 9 00:00:32,600 --> 00:00:36,240 Speaker 1: Australian Economics at Commonwealth Bank. Blinda, welcome back to Fear 10 00:00:36,240 --> 00:00:36,640 Speaker 1: and Greed. 11 00:00:37,120 --> 00:00:38,200 Speaker 2: Thanks for having me again. 12 00:00:38,600 --> 00:00:41,599 Speaker 1: What's your takeout from yesterday's numbers? Were you surprised by 13 00:00:41,600 --> 00:00:42,360 Speaker 1: the strength of them? 14 00:00:43,120 --> 00:00:46,600 Speaker 2: Look two minds when I look at the data. First 15 00:00:46,680 --> 00:00:48,400 Speaker 2: of all, if you look at the annual growth rate, 16 00:00:48,440 --> 00:00:51,760 Speaker 2: two point six percent is much stronger than what we 17 00:00:51,840 --> 00:00:54,480 Speaker 2: had expected. It really does highlight the fact that the 18 00:00:54,480 --> 00:00:58,320 Speaker 2: Australian economy has breached its speed limit. That's why we 19 00:00:58,400 --> 00:01:03,880 Speaker 2: saw inflation runs in late twenty twenty five. And another 20 00:01:04,480 --> 00:01:07,240 Speaker 2: way that I look at the data is the household 21 00:01:07,240 --> 00:01:09,720 Speaker 2: sector was actually a little bit softer than what we 22 00:01:09,800 --> 00:01:13,240 Speaker 2: had expected in the December quarter. But when we think 23 00:01:13,360 --> 00:01:16,600 Speaker 2: through what that means, household savings rates are higher, So 24 00:01:16,720 --> 00:01:20,640 Speaker 2: where household sector is entering twenty twenty six with quite 25 00:01:20,640 --> 00:01:22,920 Speaker 2: a bit of buffer, and I think that might give 26 00:01:22,920 --> 00:01:26,279 Speaker 2: the RBA cause for concern as they look at trying 27 00:01:26,319 --> 00:01:27,920 Speaker 2: to bring inflation back into target. 28 00:01:28,560 --> 00:01:30,559 Speaker 1: Okay, so let's talk about it. Miss. Our household spending 29 00:01:30,560 --> 00:01:33,120 Speaker 1: is about fifty percent of GDP, so really really important. 30 00:01:33,360 --> 00:01:36,120 Speaker 1: We care about that one. All sorts of things happened 31 00:01:36,160 --> 00:01:39,440 Speaker 1: in the end of last year, Metallica, OASIS, ACDC, all 32 00:01:39,480 --> 00:01:41,839 Speaker 1: the important stuff, the ASHES series, so that all added 33 00:01:41,880 --> 00:01:46,120 Speaker 1: to household spending. We know that there's also electricity rebates. 34 00:01:46,400 --> 00:01:49,160 Speaker 1: The kind of was a very messy number. How do 35 00:01:49,200 --> 00:01:52,960 Speaker 1: you get a handle on how consumers are feeling? 36 00:01:54,000 --> 00:01:56,960 Speaker 2: It's a really good question. And one of the things 37 00:01:56,960 --> 00:01:59,880 Speaker 2: that we noted through all of twenty twenty five was 38 00:02:00,320 --> 00:02:04,760 Speaker 2: just how resilient spending was. So for a while there, 39 00:02:04,800 --> 00:02:08,000 Speaker 2: I know the Reserve Bank was thinking household spending was 40 00:02:08,040 --> 00:02:10,320 Speaker 2: driven by a lot of one offs. We took a 41 00:02:10,440 --> 00:02:12,560 Speaker 2: very different view. We could see in our own spending 42 00:02:12,639 --> 00:02:16,480 Speaker 2: data here at CBA that we did see very consistent 43 00:02:16,520 --> 00:02:18,799 Speaker 2: spending growth every month, it might have been different, as 44 00:02:18,840 --> 00:02:22,919 Speaker 2: you say, like November in particular, we saw the ashes, 45 00:02:23,120 --> 00:02:25,919 Speaker 2: we saw all those concert series that really brought out 46 00:02:25,960 --> 00:02:30,040 Speaker 2: household spending. But there's also pretty consistent spending growth when 47 00:02:30,040 --> 00:02:32,720 Speaker 2: we look at our data by age and when we 48 00:02:32,720 --> 00:02:35,200 Speaker 2: look at our data by home ownership status as well, 49 00:02:35,240 --> 00:02:38,600 Speaker 2: So it told us it was broad based. It is 50 00:02:38,639 --> 00:02:41,480 Speaker 2: a bit volatile, but generally what we saw was a 51 00:02:41,639 --> 00:02:46,600 Speaker 2: pretty meaningful pickup in household consumption that was driven by 52 00:02:46,800 --> 00:02:52,640 Speaker 2: some pretty big improvements in disposable income from the household sector. 53 00:02:53,320 --> 00:02:56,800 Speaker 2: So it meant households could both lift spending and lift 54 00:02:56,880 --> 00:03:00,440 Speaker 2: savings through twenty twenty five. So, as I said, we're 55 00:03:00,600 --> 00:03:04,240 Speaker 2: entering twenty twenty six in a position where households can 56 00:03:04,280 --> 00:03:09,200 Speaker 2: actually weather higher interest rates and higher inflation in a 57 00:03:09,240 --> 00:03:13,840 Speaker 2: better position than maybe what we had been expecting through 58 00:03:13,880 --> 00:03:17,320 Speaker 2: the second half of twenty twenty five. So the big 59 00:03:17,400 --> 00:03:20,200 Speaker 2: question for us, kind of as you said, is well, 60 00:03:20,240 --> 00:03:23,960 Speaker 2: what does sentiment do, and do households start to shift 61 00:03:24,000 --> 00:03:28,000 Speaker 2: their decision making because they're seeing interest rates go up, 62 00:03:28,760 --> 00:03:32,800 Speaker 2: and does that mean inflation might start to come down. 63 00:03:33,160 --> 00:03:35,640 Speaker 2: I have a few question marks about whether or not 64 00:03:36,360 --> 00:03:39,280 Speaker 2: households will actually make that decision, as I said, because 65 00:03:39,280 --> 00:03:41,720 Speaker 2: household savings rates are so high, so to me, this 66 00:03:41,800 --> 00:03:44,000 Speaker 2: is a really important part of the outlook from here. 67 00:03:44,400 --> 00:03:46,960 Speaker 1: So is that the sixty four dollars question? Is that 68 00:03:47,000 --> 00:03:50,120 Speaker 1: the most important thing you know exactly what households do 69 00:03:50,200 --> 00:03:52,600 Speaker 1: in the next six months or so, particularly if you 70 00:03:52,600 --> 00:03:56,400 Speaker 1: do get a rate hiking in a fortnite, but probably 71 00:03:56,440 --> 00:03:57,240 Speaker 1: more likely in May. 72 00:03:57,880 --> 00:04:00,200 Speaker 2: I think the question we have to ask is the 73 00:04:00,240 --> 00:04:02,640 Speaker 2: economy at two point six percent at the end of 74 00:04:02,680 --> 00:04:05,400 Speaker 2: twenty twenty five is running above the speed limit, which 75 00:04:05,480 --> 00:04:07,320 Speaker 2: we have at around two point one percent. So how 76 00:04:07,320 --> 00:04:09,280 Speaker 2: are you going to bring the economy back into balance. 77 00:04:09,520 --> 00:04:12,720 Speaker 2: The answer is higher interest rates to cool the economy. 78 00:04:13,040 --> 00:04:16,360 Speaker 2: But if you look at the growth drivers, it's household consumption. 79 00:04:16,920 --> 00:04:20,160 Speaker 2: They're in a good position. Business investment, largely driven by 80 00:04:20,240 --> 00:04:25,520 Speaker 2: data centers, is probably insensitive to interest rates at the moment. 81 00:04:26,000 --> 00:04:28,359 Speaker 2: So then it comes down to dwelling investment, which we 82 00:04:28,440 --> 00:04:30,719 Speaker 2: know is sensitive to the interest rates cycle. We have 83 00:04:30,839 --> 00:04:34,840 Speaker 2: that cooling already. Then it's households and public demand. So 84 00:04:34,920 --> 00:04:37,960 Speaker 2: which parts of that are going to start to do 85 00:04:38,160 --> 00:04:40,599 Speaker 2: some more of the heavy lifting. And I think that's 86 00:04:40,640 --> 00:04:44,760 Speaker 2: where the question marks are is can we get some 87 00:04:44,960 --> 00:04:49,320 Speaker 2: tightening in fiscal policy or will the household sector react 88 00:04:49,360 --> 00:04:52,960 Speaker 2: to higher interest rates, higher petrol prices given what we're 89 00:04:52,960 --> 00:04:56,599 Speaker 2: obviously seeing offshore, and will that slow growth? I think 90 00:04:56,880 --> 00:04:59,719 Speaker 2: that's I think where the uncertainties creep in and the 91 00:04:59,760 --> 00:05:02,200 Speaker 2: con so we, howvis, the RBA may have to lean 92 00:05:02,880 --> 00:05:06,520 Speaker 2: a bit more against these tailwinds to bring inflation back down. 93 00:05:07,000 --> 00:05:09,719 Speaker 1: Okay, you mentioned public demand treasure Jim Chalmers yesterday was 94 00:05:09,720 --> 00:05:11,640 Speaker 1: out saying is it wonderful to see the shift from 95 00:05:11,920 --> 00:05:15,040 Speaker 1: public to private sector growth in the economy. Obviously he's 96 00:05:15,080 --> 00:05:17,720 Speaker 1: got a political viewpoint, plenty of people saying that at 97 00:05:17,760 --> 00:05:22,080 Speaker 1: twenty eight percent of the economy, the government spend is 98 00:05:22,240 --> 00:05:25,560 Speaker 1: way way too high. Is it too high or is 99 00:05:25,560 --> 00:05:28,599 Speaker 1: it a political question? I suppose? But is it adding 100 00:05:28,640 --> 00:05:29,200 Speaker 1: to demand? 101 00:05:30,080 --> 00:05:30,279 Speaker 2: Look? 102 00:05:30,320 --> 00:05:30,600 Speaker 1: It is. 103 00:05:30,760 --> 00:05:33,240 Speaker 2: We have seen a transition, though, so when we look 104 00:05:33,279 --> 00:05:36,320 Speaker 2: at the drivers of growth through twenty twenty five, we 105 00:05:36,360 --> 00:05:40,799 Speaker 2: did see that transition take place. But public demand, both 106 00:05:40,880 --> 00:05:44,840 Speaker 2: through the investment side, particularly from state and local governments, 107 00:05:44,960 --> 00:05:48,239 Speaker 2: and then the recurrent side, particularly from the federal government, 108 00:05:48,720 --> 00:05:51,520 Speaker 2: is still relatively strong and certainly stronger than what we 109 00:05:51,640 --> 00:05:55,400 Speaker 2: had been anticipating. So I feel the answer to the 110 00:05:55,480 --> 00:05:58,600 Speaker 2: question is a bit of both. We are certainly seeing 111 00:05:58,680 --> 00:06:03,440 Speaker 2: public demands to support growth. We're obviously a month or 112 00:06:03,480 --> 00:06:06,839 Speaker 2: two out from the federal budget. A lot of I 113 00:06:06,839 --> 00:06:09,200 Speaker 2: guess question marks about whether or not we'll see more 114 00:06:09,240 --> 00:06:13,120 Speaker 2: of a fiscally constrained budget, a lot of talk about 115 00:06:13,160 --> 00:06:16,800 Speaker 2: what they might do on the tax side, but will 116 00:06:16,800 --> 00:06:20,080 Speaker 2: certainly be paying attention to not only the federal government, 117 00:06:20,080 --> 00:06:22,120 Speaker 2: but what state governments are doing as well. And I 118 00:06:22,160 --> 00:06:24,800 Speaker 2: think it's probably important to remember it's a collective effort 119 00:06:25,680 --> 00:06:28,800 Speaker 2: and ideally what we need to see some signs that 120 00:06:28,839 --> 00:06:32,280 Speaker 2: growth is slowing down in the Australian economy. Coming back 121 00:06:32,279 --> 00:06:35,120 Speaker 2: to potential, it's now, well, what's the most likely outcome 122 00:06:35,279 --> 00:06:37,120 Speaker 2: and who's going to drive that. I think that's where 123 00:06:37,160 --> 00:06:39,120 Speaker 2: the debate still is before we. 124 00:06:39,040 --> 00:06:40,760 Speaker 1: Move on to the Middle East and interest rates, because 125 00:06:40,760 --> 00:06:43,360 Speaker 1: we always ends we always end with interest rates. One thing, 126 00:06:43,520 --> 00:06:46,200 Speaker 1: the potential and the economy. Like the long run or 127 00:06:46,240 --> 00:06:49,360 Speaker 1: pre COVID long run growth rate average was like two 128 00:06:49,440 --> 00:06:52,800 Speaker 1: point nine percent or thereabouts. I think we're talking about 129 00:06:53,040 --> 00:06:57,520 Speaker 1: being less than that, yet's still beyond potential. Is that 130 00:06:58,040 --> 00:06:59,200 Speaker 1: all about productivity? 131 00:06:59,800 --> 00:07:03,080 Speaker 2: It is that's been the weakest part of I guess 132 00:07:03,120 --> 00:07:07,880 Speaker 2: what we call the three p's productivity, population and participation. Now, 133 00:07:08,000 --> 00:07:11,240 Speaker 2: the good news in yesterday's National accounts we actually saw 134 00:07:11,280 --> 00:07:14,120 Speaker 2: a productivity growth improve again. It's actually running now at 135 00:07:14,160 --> 00:07:17,640 Speaker 2: about one percent, so there's some good news coming out 136 00:07:17,640 --> 00:07:20,800 Speaker 2: of that. But we also know population growth is now 137 00:07:20,840 --> 00:07:23,880 Speaker 2: slowing as well, so productivity is going to have to 138 00:07:23,920 --> 00:07:26,680 Speaker 2: do more of the heavy lifting, I guess, to lift 139 00:07:26,720 --> 00:07:29,680 Speaker 2: our speed limit to ensure we can continue to grow 140 00:07:29,760 --> 00:07:34,520 Speaker 2: faster without creating these inflation dynamics that we've seen really 141 00:07:34,560 --> 00:07:35,920 Speaker 2: over the last six months. 142 00:07:36,200 --> 00:07:38,240 Speaker 1: Okay, so you put a note out in the last 143 00:07:38,240 --> 00:07:40,600 Speaker 1: twenty four or thirty six hours or so, which I 144 00:07:40,640 --> 00:07:42,600 Speaker 1: must say we stole and ran in the Fear and 145 00:07:42,600 --> 00:07:45,040 Speaker 1: Greece newsletter yesterday morning blind because we thought it was 146 00:07:45,040 --> 00:07:47,400 Speaker 1: so good. But it's actually what does the Middle East 147 00:07:47,520 --> 00:07:51,440 Speaker 1: mean for Australia in the short and medium term? What 148 00:07:51,480 --> 00:07:53,960 Speaker 1: does it in terms of inflationary pressures? 149 00:07:54,680 --> 00:07:57,560 Speaker 2: So the most direct impact, of course is at the 150 00:07:58,000 --> 00:08:02,400 Speaker 2: petrol bowser. So if we look at the numbers and 151 00:08:02,680 --> 00:08:05,239 Speaker 2: if we see the oil price and remain a eighty 152 00:08:05,280 --> 00:08:08,040 Speaker 2: dollars kind of through the rest of this quarter and 153 00:08:08,160 --> 00:08:11,800 Speaker 2: into the second quarter of this year, you see around 154 00:08:11,880 --> 00:08:15,280 Speaker 2: a zero point two percentage point lifting inflation, so headline 155 00:08:15,320 --> 00:08:19,080 Speaker 2: inflation would lift to four percent, So that's a pretty 156 00:08:19,240 --> 00:08:23,960 Speaker 2: direct impact. What we haven't taken account into is any 157 00:08:24,080 --> 00:08:28,440 Speaker 2: impact on broader energy prices, particularly. We know gas prices 158 00:08:28,560 --> 00:08:34,240 Speaker 2: have lifted extensively in recent days. That will have ramifications 159 00:08:34,280 --> 00:08:38,079 Speaker 2: obviously for gas prices here and the broader energy complex, 160 00:08:38,559 --> 00:08:42,200 Speaker 2: but it does impact inflation in the near term. Now, 161 00:08:42,520 --> 00:08:46,559 Speaker 2: generally there is a bank in previous cycles has looked 162 00:08:46,600 --> 00:08:51,000 Speaker 2: through these temporary supply shocks. The challenge this time around 163 00:08:51,040 --> 00:08:54,400 Speaker 2: is inflation is already too high and we're running at capacity. 164 00:08:54,440 --> 00:08:57,040 Speaker 2: And I think that just means the challenges this time 165 00:08:57,120 --> 00:09:03,040 Speaker 2: around with a stronger domestic economy, but offshore global uncertainty 166 00:09:03,600 --> 00:09:04,760 Speaker 2: puts them in a bit of a pickle. 167 00:09:05,440 --> 00:09:08,280 Speaker 1: Okay, then he's the question we want to know, will 168 00:09:08,320 --> 00:09:09,280 Speaker 1: they lift interest rates? 169 00:09:10,200 --> 00:09:12,880 Speaker 2: The answer is yes, we do expect them to lift 170 00:09:12,880 --> 00:09:15,880 Speaker 2: the cash rate in May. A lot of debate about 171 00:09:15,880 --> 00:09:18,200 Speaker 2: March at the moment, and we did see the governor 172 00:09:18,640 --> 00:09:21,720 Speaker 2: address whether or not they would move at these non 173 00:09:21,880 --> 00:09:26,280 Speaker 2: quarterly board meetings at a speech earlier this week, and 174 00:09:26,840 --> 00:09:30,600 Speaker 2: every meeting is live. I think that's fair to say 175 00:09:30,679 --> 00:09:33,559 Speaker 2: we have had a run of stronger data. I think 176 00:09:33,600 --> 00:09:36,880 Speaker 2: the unemployment rate remaining at four point one percent, inflation 177 00:09:37,040 --> 00:09:40,280 Speaker 2: tracking too high. Of course they will consider an interest 178 00:09:40,320 --> 00:09:45,000 Speaker 2: rate hike in March, but just given the offshore uncertainty 179 00:09:45,200 --> 00:09:48,200 Speaker 2: around the duration and the severity of the conflict, I 180 00:09:48,240 --> 00:09:50,880 Speaker 2: do think they'll err on the side of caution and 181 00:09:50,960 --> 00:09:55,120 Speaker 2: lift the casht rate again in May. From there, I 182 00:09:55,160 --> 00:09:58,400 Speaker 2: think the risks are still to the upside, just based 183 00:09:58,400 --> 00:10:01,080 Speaker 2: on the fact that we need growth to slow in Australia. 184 00:10:01,400 --> 00:10:04,840 Speaker 2: We're really relying on the consumer again to do the 185 00:10:04,880 --> 00:10:08,439 Speaker 2: heavy lifting, and some slow down in public sector spending, 186 00:10:08,880 --> 00:10:12,360 Speaker 2: and as we've just spoken about some of that, I 187 00:10:12,440 --> 00:10:14,920 Speaker 2: think there's some big question marks around. So that is 188 00:10:14,960 --> 00:10:17,920 Speaker 2: certainly our view is one more rate hike from here, 189 00:10:18,360 --> 00:10:21,560 Speaker 2: but the risks are certainly with another one unless, of course, 190 00:10:21,600 --> 00:10:25,800 Speaker 2: we see a prolonged conflict in the Middle East and 191 00:10:25,840 --> 00:10:29,480 Speaker 2: we see a relatively big slow down in global growth, which, 192 00:10:29,480 --> 00:10:34,000 Speaker 2: of course, being a small open economy in Australia, we 193 00:10:34,080 --> 00:10:35,040 Speaker 2: will be impacted. 194 00:10:36,200 --> 00:10:39,760 Speaker 1: Okay, so I think you use the word pickle. It 195 00:10:39,800 --> 00:10:42,000 Speaker 1: does seem quite a difficult position for the Reserve being 196 00:10:42,000 --> 00:10:42,959 Speaker 1: to be in right now. 197 00:10:43,559 --> 00:10:48,400 Speaker 2: It is and you know, lots of different offsetting factors 198 00:10:48,440 --> 00:10:51,960 Speaker 2: here for Australia, but I think the domestic side will 199 00:10:51,960 --> 00:10:55,960 Speaker 2: certainly over time take precedence because the economy is running 200 00:10:56,080 --> 00:11:00,559 Speaker 2: above potential, there's some tailwinds there and inflation is too 201 00:11:00,640 --> 00:11:03,800 Speaker 2: high and on our forecast will remain too high for 202 00:11:03,840 --> 00:11:06,319 Speaker 2: too long, and the Reserve Bank have already acted, so 203 00:11:06,760 --> 00:11:08,760 Speaker 2: we think they'll they'll obviously act again. 204 00:11:08,960 --> 00:11:10,679 Speaker 1: Blinda, thank you for talking to Fear and greed. 205 00:11:11,000 --> 00:11:12,360 Speaker 2: Great thanks for having me. 206 00:11:12,520 --> 00:11:15,000 Speaker 1: That was Blinda Allen, head of Australian Economics. That's a 207 00:11:15,040 --> 00:11:17,200 Speaker 1: common North Bank, I'm sure, Elmer and this is fear 208 00:11:17,240 --> 00:11:18,040 Speaker 1: and greed Q and a