1 00:00:04,080 --> 00:00:07,740 Sean Aylmer: Welcome to the Fear and Greed Daily interview. I'm Sean Aylmer. It's a 2 00:00:07,740 --> 00:00:10,200 Sean Aylmer: massive week for the economy. On Tuesday, we had the 3 00:00:10,200 --> 00:00:13,260 Sean Aylmer: Reserve Bank board meeting with the official cash rate rising 4 00:00:13,260 --> 00:00:16,890 Sean Aylmer: by 50 basis points. Then yesterday, the GDP data for 5 00:00:16,890 --> 00:00:20,280 Sean Aylmer: June quarter was released. The economy grew by 0. 9% 6 00:00:20,790 --> 00:00:23,970 Sean Aylmer: during the quarter and 3. 6% last financial year, which 7 00:00:23,970 --> 00:00:27,180 Sean Aylmer: was pretty much in line with expectations. So what's it 8 00:00:27,180 --> 00:00:30,990 Sean Aylmer: all mean? Jo Masters is the chief economist at Barrenjoey. 9 00:00:31,230 --> 00:00:32,520 Sean Aylmer: Welcome back to Fear and Greed, Jo. 10 00:00:33,240 --> 00:00:34,320 Jo Masters: It's great to be with you. 11 00:00:35,040 --> 00:00:36,780 Sean Aylmer: So let's start with the GDP and then we'll get 12 00:00:36,780 --> 00:00:41,130 Sean Aylmer: onto interest rates and where we are going. The GDP is backward 13 00:00:41,400 --> 00:00:44,490 Sean Aylmer: looking. Not withstanding that, how is the economy tracking? 14 00:00:45,150 --> 00:00:48,300 Jo Masters: The economy was in really good shape in the June 15 00:00:48,300 --> 00:00:52,650 Jo Masters: quarter, which is the period that the GDP data measured it for. Growth 16 00:00:52,650 --> 00:00:57,900 Jo Masters: was 0. 9% and, particularly, the domestic economy was really 17 00:00:57,900 --> 00:01:01,050 Jo Masters: strong. That was up 1% in the quarter and 4. 7% 18 00:01:01,050 --> 00:01:06,000 Jo Masters: over the year. Within that, the big drivers of growth 19 00:01:06,000 --> 00:01:10,139 Jo Masters: were again, the almighty consumer, and I call it almighty 20 00:01:10,140 --> 00:01:14,339 Jo Masters: because it is just under 60% of total economic activity. 21 00:01:14,580 --> 00:01:17,459 Jo Masters: So when the consumer is firing, the economy typically looks 22 00:01:17,459 --> 00:01:20,700 Jo Masters: pretty good. And also our export sector, of course, were 23 00:01:20,700 --> 00:01:24,090 Jo Masters: an energy and food exporter, and prices and volumes for 24 00:01:24,090 --> 00:01:25,679 Jo Masters: those two items have been really high. 25 00:01:26,370 --> 00:01:31,020 Sean Aylmer: Okay. The consumer is that a result of restrictions ending 26 00:01:31,020 --> 00:01:34,110 Sean Aylmer: or easing, at least, and all that pent up demand, all 27 00:01:34,110 --> 00:01:36,240 Sean Aylmer: those savings we had being spent? 28 00:01:37,830 --> 00:01:41,430 Jo Masters: There isn't elements still of recovering from that, not just 29 00:01:41,430 --> 00:01:45,509 Jo Masters: pandemic disruption, but also remember earlier this year we had 30 00:01:45,510 --> 00:01:48,840 Jo Masters: the floods, we had lots of rainy days. We've also 31 00:01:48,840 --> 00:01:52,650 Jo Masters: had a very big influenza season, so that flows into 32 00:01:52,650 --> 00:01:54,780 Jo Masters: the economy in a variety of ways. So first of 33 00:01:54,780 --> 00:01:58,170 Jo Masters: all, as that disruption fades, you're quite right, households are 34 00:01:58,170 --> 00:02:00,150 Jo Masters: really keen to get out of the house. And we 35 00:02:00,150 --> 00:02:04,770 Jo Masters: saw really, really strong growth in traveling. We all know 36 00:02:04,770 --> 00:02:07,950 Jo Masters: someone that's been to Europe this year, or been to 37 00:02:07,950 --> 00:02:10,740 Jo Masters: Byron Bay or somewhere domestically, so that was really, really 38 00:02:10,740 --> 00:02:14,880 Jo Masters: strong. We also saw really strong spending in eating out 39 00:02:14,880 --> 00:02:19,290 Jo Masters: at cafes and restaurants and also in recreation. So there is 40 00:02:19,440 --> 00:02:21,959 Jo Masters: a big element of that. The other thing that supported 41 00:02:21,960 --> 00:02:25,170 Jo Masters: the consumers also related to that disruption, and that is 42 00:02:25,380 --> 00:02:27,810 Jo Masters: the number of hours worked in the economy picked up. 43 00:02:28,230 --> 00:02:30,690 Jo Masters: So remember if you are casual and you don't go 44 00:02:30,690 --> 00:02:33,210 Jo Masters: to work because you are unwell or because your work's 45 00:02:33,210 --> 00:02:36,030 Jo Masters: flooded, you don't get paid. So there was a boost 46 00:02:36,030 --> 00:02:39,810 Jo Masters: to household income from increase in hours worked. And at 47 00:02:39,810 --> 00:02:42,150 Jo Masters: the same time, we reduced the amount of savings that 48 00:02:42,150 --> 00:02:43,680 Jo Masters: we're putting away each and every month. 49 00:02:46,889 --> 00:02:48,000 Sean Aylmer: Okay. So is that the best we're going to get, or at least for the next couple of years? 50 00:02:48,389 --> 00:02:52,260 Jo Masters: I think it could be. I think timing is always 51 00:02:52,260 --> 00:02:55,590 Jo Masters: difficult. We think the Australian consumer is going to remain 52 00:02:55,590 --> 00:02:59,490 Jo Masters: quite resilient over the balance of this year. And that 53 00:02:59,490 --> 00:03:02,070 Jo Masters: really reflects the fact that we've got that big stock 54 00:03:02,070 --> 00:03:05,310 Jo Masters: of household savings. The savings rate, or the amount that 55 00:03:05,310 --> 00:03:07,829 Jo Masters: you're putting away each month is still above pre- pandemic 56 00:03:07,830 --> 00:03:11,880 Jo Masters: levels. We've got a labor market that's very strong, unemployment at 3. 57 00:03:11,880 --> 00:03:16,800 Jo Masters: 4%. Job security is very, very high. Hours worked are 58 00:03:16,800 --> 00:03:19,710 Jo Masters: picking up. And we're expecting wage growth to pick up, 59 00:03:19,710 --> 00:03:23,700 Jo Masters: so that will support incomes. When we look into 2023, 60 00:03:23,700 --> 00:03:27,180 Jo Masters: though, it's a much, much weaker picture. And there we've got 61 00:03:27,210 --> 00:03:31,440 Jo Masters: rate hikes that really start to bite, either because you're 62 00:03:31,440 --> 00:03:34,650 Jo Masters: on a variable mortgage and it's finally flowing through, or 63 00:03:34,650 --> 00:03:37,080 Jo Masters: we know three quarters of fixed rate mortgages roll off 64 00:03:37,080 --> 00:03:39,750 Jo Masters: next year, so those people will have to refinance at a 65 00:03:39,750 --> 00:03:43,680 Jo Masters: much higher rate. We've also got house prices falling. The 66 00:03:43,680 --> 00:03:47,730 Jo Masters: decline in Sydney house prices peak- to- trough already is 67 00:03:47,730 --> 00:03:51,120 Jo Masters: the fourth largest contraction on record. And we know that 68 00:03:51,120 --> 00:03:54,090 Jo Masters: wealth effect takes time to play through. So when we 69 00:03:54,090 --> 00:03:57,090 Jo Masters: add all those things together, we have a materially weaker 70 00:03:57,090 --> 00:04:01,619 Jo Masters: consumption number for 2023 and a materially weaker economy. 71 00:04:02,220 --> 00:04:05,760 Sean Aylmer: Okay. We are seeing some signs of that and I'll 72 00:04:05,760 --> 00:04:09,030 Sean Aylmer: lead the GDP data after this, but the building construction 73 00:04:09,030 --> 00:04:13,470 Sean Aylmer: activity, for example, or the construction sector, isn't anywhere near 74 00:04:13,470 --> 00:04:16,020 Sean Aylmer: as robust, for example, as exports or households. 75 00:04:16,529 --> 00:04:18,839 Jo Masters: That's right. I mean, we've had some mixed data on 76 00:04:18,839 --> 00:04:22,740 Jo Masters: that. The construction work done data last week suggested very, 77 00:04:22,740 --> 00:04:27,000 Jo Masters: very weak residential construction, in particular. The GDP data was 78 00:04:27,000 --> 00:04:30,000 Jo Masters: weak, but not quite as weak. Now, there's a few 79 00:04:30,000 --> 00:04:32,279 Jo Masters: things going on there. The first one is that we 80 00:04:32,279 --> 00:04:36,779 Jo Masters: know that a lot of resi and non- resi construction in the March 81 00:04:36,779 --> 00:04:40,860 Jo Masters: quarter couldn't get completed, either because you couldn't get workers, 82 00:04:41,339 --> 00:04:43,950 Jo Masters: you couldn't get inputs, or you were impacted by the 83 00:04:43,950 --> 00:04:47,880 Jo Masters: weather. So a lot of that shunted projects into the 84 00:04:47,880 --> 00:04:50,370 Jo Masters: March quarter and even into the remainder of this year. 85 00:04:50,910 --> 00:04:53,190 Jo Masters: What we are seeing though, and you alluded to this, 86 00:04:53,220 --> 00:04:55,859 Jo Masters: is the pipeline that's not being added to, so building 87 00:04:55,860 --> 00:04:59,460 Jo Masters: approvals have all but collapsed. We can also see in 88 00:04:59,460 --> 00:05:02,250 Jo Masters: the housing finance for the construction of new homes has 89 00:05:02,250 --> 00:05:06,240 Jo Masters: collapsed. And so we're expecting a very weak residential construction 90 00:05:06,240 --> 00:05:09,989 Jo Masters: picture, again, to hit in 2023. Now, it's not just a 91 00:05:09,990 --> 00:05:12,270 Jo Masters: big part of our economy, it's also really big employer, 92 00:05:12,630 --> 00:05:14,880 Jo Masters: so it flows through into consumption, as well. 93 00:05:15,270 --> 00:05:17,220 Sean Aylmer: Stay with me, Jo, we'll be back in a minute. 94 00:05:23,670 --> 00:05:26,250 Sean Aylmer: My guest this morning is Jo Masters, chief economist at 95 00:05:26,250 --> 00:05:29,700 Sean Aylmer: Barrenjoey. Okay. Now, you mentioned the interest rates, let's get 96 00:05:29,700 --> 00:05:32,190 Sean Aylmer: onto those. Five months in a row of higher interest 97 00:05:32,190 --> 00:05:34,680 Sean Aylmer: rates. The last four it's been 50 basis points each 98 00:05:34,740 --> 00:05:38,520 Sean Aylmer: time. It's 2. 25 percentage points more now than it 99 00:05:38,520 --> 00:05:42,599 Sean Aylmer: was back at the very beginning of May. What's that do 100 00:05:42,600 --> 00:05:45,089 Sean Aylmer: to an economy, firstly? And how much further do you 101 00:05:45,089 --> 00:05:46,110 Sean Aylmer: think the Reserve Bank will go? 102 00:05:46,110 --> 00:05:50,729 Jo Masters: So higher rates slow an economy. That's what they're designed 103 00:05:50,730 --> 00:05:52,919 Jo Masters: to do, and that's what the RBA is trying to 104 00:05:52,920 --> 00:05:55,890 Jo Masters: do. We've got a supply shop, but we've also got 105 00:05:55,890 --> 00:05:58,470 Jo Masters: an economy that was running too hot and hitting capacity 106 00:05:58,470 --> 00:06:03,000 Jo Masters: constraints. Now, with the rate height that we got yesterday, 107 00:06:03,060 --> 00:06:06,089 Jo Masters: it would appear the bank own assessment, and certainly ours, 108 00:06:06,089 --> 00:06:09,750 Jo Masters: here at Barrenjoey, is the cash rate is now broadly 109 00:06:09,779 --> 00:06:14,039 Jo Masters: in neutral territory. That is, it's not pushing extra economic 110 00:06:14,040 --> 00:06:17,339 Jo Masters: activity, but it's not yet contracting it. And we do 111 00:06:17,339 --> 00:06:20,370 Jo Masters: want to see a slightly weaker domestic economy to help 112 00:06:20,370 --> 00:06:23,849 Jo Masters: with the inflation challenge. So we do expect some further 113 00:06:23,850 --> 00:06:27,419 Jo Masters: tightening. We are actually a little below consensus on that. 114 00:06:27,720 --> 00:06:30,570 Jo Masters: We've got a 25 basis point move in October and 115 00:06:30,570 --> 00:06:34,620 Jo Masters: November, and then the bank to pause from there. And 116 00:06:34,620 --> 00:06:37,109 Jo Masters: there's a few reasons for that. On our assessment that 117 00:06:37,110 --> 00:06:41,790 Jo Masters: does put the interest rate into restrictive territory. We also 118 00:06:41,940 --> 00:06:45,000 Jo Masters: know that it takes some months for interest rates to 119 00:06:45,000 --> 00:06:48,570 Jo Masters: feed through. And so we've had such a sharp tightening 120 00:06:48,570 --> 00:06:51,839 Jo Masters: cycle, there's actually still a lot to come through. I mean, you might 121 00:06:51,839 --> 00:06:54,450 Jo Masters: have heard some of the major banks saying their customers 122 00:06:54,450 --> 00:06:58,169 Jo Masters: have only experienced the first 75 basis points of tightening. So 123 00:06:58,170 --> 00:07:01,469 Jo Masters: between now and Christmas, those mortgage repayments are going to 124 00:07:01,470 --> 00:07:05,100 Jo Masters: get a lot more. It also flows through to credit 125 00:07:05,100 --> 00:07:08,850 Jo Masters: cards and other personal lending, and, of course, into business 126 00:07:08,850 --> 00:07:12,180 Jo Masters: lending. Now, I think there's a lot of uncertainty at 127 00:07:12,180 --> 00:07:16,140 Jo Masters: the moment, particularly offshore, but even onshore. There's a few 128 00:07:16,140 --> 00:07:19,830 Jo Masters: moving parts around how quickly we can bring inflation down. 129 00:07:20,370 --> 00:07:23,610 Jo Masters: But we think that a terminal cash rate of 2. 85 130 00:07:23,640 --> 00:07:27,210 Jo Masters: will be enough to achieve that narrow path that the 131 00:07:27,210 --> 00:07:30,600 Jo Masters: Reserve Bank governor talks about. And that is, narrow path 132 00:07:30,600 --> 00:07:33,840 Jo Masters: to slow the economy just enough to bring inflation down 133 00:07:33,840 --> 00:07:37,950 Jo Masters: just enough, the Goldilocks picked the right porridge bowl first. 134 00:07:38,760 --> 00:07:42,090 Sean Aylmer: Okay. It's a tight rope though. I mean, using monetary 135 00:07:42,090 --> 00:07:45,450 Sean Aylmer: policy is a blunt instrument. And as you've just been 136 00:07:45,450 --> 00:07:48,150 Sean Aylmer: explaining to us, it takes a while to flow through. 137 00:07:48,360 --> 00:07:50,670 Sean Aylmer: So it must be hard to manage the economy when 138 00:07:50,670 --> 00:07:52,650 Sean Aylmer: you really don't know how much of the effect has 139 00:07:52,650 --> 00:07:54,060 Sean Aylmer: hit the real economy yet? 140 00:07:54,780 --> 00:07:57,840 Jo Masters: I think there's a lot of uncertainties at the moment. 141 00:07:58,230 --> 00:08:01,110 Jo Masters: So as you said, we don't have enough real time 142 00:08:01,110 --> 00:08:03,660 Jo Masters: data, and we don't quite know when interest rates hit. 143 00:08:04,290 --> 00:08:08,340 Jo Masters: We talk about, in economics, the lag from monetary policy 144 00:08:08,340 --> 00:08:11,490 Jo Masters: as being long and variable. So we know it takes 145 00:08:11,490 --> 00:08:14,280 Jo Masters: time, but it's very variable how long it does take. 146 00:08:14,970 --> 00:08:19,710 Jo Masters: We've never seen a tightening cycle where household debt is 147 00:08:19,710 --> 00:08:22,590 Jo Masters: as high as it is today. We haven't seen a 148 00:08:22,590 --> 00:08:25,140 Jo Masters: tightening cycle for a long time that's had such a 149 00:08:25,320 --> 00:08:29,310 Jo Masters: high portion of mortgages that are fixed. And we've never 150 00:08:29,310 --> 00:08:31,890 Jo Masters: been through a global pandemic. And remember, we're still trying 151 00:08:31,890 --> 00:08:34,290 Jo Masters: to work out what the new normal is from there. 152 00:08:35,280 --> 00:08:39,150 Jo Masters: We've also never... We haven't seen an unemployment rate this 153 00:08:39,150 --> 00:08:43,500 Jo Masters: low since the early 1970s. So there's a lot of 154 00:08:43,500 --> 00:08:46,800 Jo Masters: uncertainties about the household reaction function and that does make 155 00:08:46,800 --> 00:08:50,100 Jo Masters: setting policy very difficult. And as you said, in Australia, 156 00:08:50,130 --> 00:08:54,360 Jo Masters: we set one interest rate, not just across every segment 157 00:08:54,360 --> 00:08:57,030 Jo Masters: of our economy, but across every state, and different states 158 00:08:57,240 --> 00:09:01,470 Jo Masters: are facing different pressures. For example, in New South Wales 159 00:09:01,470 --> 00:09:04,679 Jo Masters: and Victoria, house prices are falling more rapidly. They're more 160 00:09:04,679 --> 00:09:08,370 Jo Masters: leveraged cities in Sydney and Melbourne. And so, rate hikes 161 00:09:08,370 --> 00:09:11,040 Jo Masters: hurt a little bit earlier and a bit faster and harder 162 00:09:11,040 --> 00:09:13,650 Jo Masters: there than they do, perhaps, in some leverage cities. So 163 00:09:13,650 --> 00:09:15,300 Jo Masters: there's a lot of uncertainty and I think it's a 164 00:09:15,300 --> 00:09:17,640 Jo Masters: really hard task for policy makers at the moment. 165 00:09:18,510 --> 00:09:20,640 Sean Aylmer: You mentioned house prices there. I can't let you go 166 00:09:20,640 --> 00:09:23,280 Sean Aylmer: Jo, without getting your prediction on that. Earlier on you 167 00:09:23,280 --> 00:09:27,870 Sean Aylmer: said the peak- to- trough already is the fourth largest 168 00:09:27,870 --> 00:09:30,720 Sean Aylmer: fall on record. How far are they going to go? 169 00:09:32,160 --> 00:09:36,540 Jo Masters: So we think peak- to- trough somewhere between 15 and 20% for 170 00:09:36,540 --> 00:09:39,750 Jo Masters: national house prices. And it'll be a much bigger fall 171 00:09:39,809 --> 00:09:43,140 Jo Masters: in Sydney, in particular. That market is already leading the 172 00:09:43,140 --> 00:09:46,590 Jo Masters: way. And we expect about half of that decline to 173 00:09:46,590 --> 00:09:49,770 Jo Masters: happen in this calendar year. So we've already seen house 174 00:09:49,770 --> 00:09:52,860 Jo Masters: prices falling for a few months now. Those declines have 175 00:09:52,860 --> 00:09:57,150 Jo Masters: been accelerating. We expect pretty significant weakness over the balance 176 00:09:57,210 --> 00:09:59,700 Jo Masters: of this year. And we can see that in housing 177 00:09:59,700 --> 00:10:03,390 Jo Masters: finance, which is really weakened quite dramatically. House prices are 178 00:10:03,390 --> 00:10:07,290 Jo Masters: falling. Interest rates are rising. That impacts the amount you 179 00:10:07,290 --> 00:10:10,319 Jo Masters: can borrow. So even those people brave enough to step 180 00:10:10,320 --> 00:10:12,959 Jo Masters: into the market can borrow less. So it's going to 181 00:10:12,960 --> 00:10:17,190 Jo Masters: be a pretty significant drag on the economy directly through 182 00:10:17,190 --> 00:10:19,199 Jo Masters: the income channel, so how much money you've got to 183 00:10:19,200 --> 00:10:22,110 Jo Masters: spend on other things through the wealth effect, which is 184 00:10:22,110 --> 00:10:25,350 Jo Masters: very powerful, and, of course, through residential construction. 185 00:10:26,730 --> 00:10:29,250 Sean Aylmer: Do you like being an economist at this particular point 186 00:10:29,520 --> 00:10:31,770 Sean Aylmer: in the economic cycle, Jo? It must be pretty cool. 187 00:10:33,330 --> 00:10:35,910 Jo Masters: Look, it's pretty cool. I don't always wake up at 5: 188 00:10:35,910 --> 00:10:38,010 Jo Masters: 00 AM before the market and think it's really cool. 189 00:10:38,010 --> 00:10:38,370 Sean Aylmer: No. 190 00:10:38,370 --> 00:10:41,160 Jo Masters: Look, I do think that the last few years have 191 00:10:41,160 --> 00:10:44,850 Jo Masters: been an incredibly interesting time to be an economist. And 192 00:10:44,850 --> 00:10:47,730 Jo Masters: certainly, since I joined Barrenjoey, which is almost six months 193 00:10:47,730 --> 00:10:50,670 Jo Masters: ago, it's been a truly extraordinary time. 194 00:10:51,390 --> 00:10:51,449 Sean Aylmer: Yeah. 195 00:10:51,450 --> 00:10:53,970 Jo Masters: I don't think, in my whole career, I've seen so 196 00:10:53,970 --> 00:10:57,630 Jo Masters: many parts of the economy moving and so much uncertainty 197 00:10:57,690 --> 00:11:00,569 Jo Masters: across all of them. And look, I hope that it 198 00:11:00,570 --> 00:11:04,710 Jo Masters: inspires lots of people to study economics, particularly females. We 199 00:11:04,710 --> 00:11:07,500 Jo Masters: know that we need more diversity. And we're setting policies 200 00:11:07,500 --> 00:11:10,470 Jo Masters: that are going to be really critical for Australia's medium- 201 00:11:10,470 --> 00:11:14,340 Jo Masters: term economic prospects and our own livelihood. So I hope 202 00:11:14,340 --> 00:11:17,130 Jo Masters: that young kids out there, and young Australians, are finding 203 00:11:17,130 --> 00:11:18,329 Jo Masters: this debate interesting too. 204 00:11:18,660 --> 00:11:20,370 Sean Aylmer: I hope so, Jo, thank you for talking to Fear 205 00:11:20,370 --> 00:11:20,850 Sean Aylmer: and Greed. 206 00:11:21,510 --> 00:11:23,250 Jo Masters: It's always a pleasure. Thanks for having me. 207 00:11:23,970 --> 00:11:27,360 Sean Aylmer: That was Jo Masters, chief economist at Barrenjoey. This is 208 00:11:27,360 --> 00:11:29,880 Sean Aylmer: the Fear and Greed Daily interview. Remember, this information is 209 00:11:29,880 --> 00:11:32,880 Sean Aylmer: general in nature, and you should seek professional advice before 210 00:11:32,880 --> 00:11:35,640 Sean Aylmer: making any investment decisions. Join us every morning for the 211 00:11:35,640 --> 00:11:38,280 Sean Aylmer: full episode of Fear and Greed, Australia's most popular business 212 00:11:38,280 --> 00:11:40,559 Sean Aylmer: podcast. I'm Shawn Aylmer. Enjoy your day.