1 00:00:03,870 --> 00:00:06,519 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:06,590 --> 00:00:09,970 Sean Aylmer: Aylmer. Yesterday's wages data was one of the most- watched 3 00:00:09,970 --> 00:00:12,530 Sean Aylmer: releases in a long time. The missing piece in the 4 00:00:12,530 --> 00:00:16,100 Sean Aylmer: discussion over inflation and interest rates, or so we thought. 5 00:00:16,500 --> 00:00:19,970 Sean Aylmer: Wages grew at 0.7% over the March quarter, lower than 6 00:00:19,970 --> 00:00:24,410 Sean Aylmer: most economists expected, and 2. 4% over the year. So what's 7 00:00:24,410 --> 00:00:27,020 Sean Aylmer: it mean now for interest rates, for the election campaign, 8 00:00:27,020 --> 00:00:29,340 Sean Aylmer: and for the cost of living? We've spoken to Jo 9 00:00:29,340 --> 00:00:32,460 Sean Aylmer: Masters many times before, she's now Chief Economist at Barrenjoey. 10 00:00:32,460 --> 00:00:34,580 Sean Aylmer: Jo, welcome back to Fear and Greed. 11 00:00:34,960 --> 00:00:35,880 Jo Masters: Thanks for having me on. 12 00:00:36,600 --> 00:00:40,150 Sean Aylmer: What did you make of the Bureau of Statistics figures yesterday? 13 00:00:40,150 --> 00:00:41,860 Sean Aylmer: How did it compare with what you're expecting? 14 00:00:42,510 --> 00:00:45,840 Jo Masters: So we were at consensus with the expectation of a 15 00:00:45,840 --> 00:00:48,930 Jo Masters: rise of 0. 8% in the quarter. The number was obviously 16 00:00:49,370 --> 00:00:52,360 Jo Masters: a little bit below that and in annual terms at 2. 4%. 17 00:00:54,450 --> 00:00:57,820 Jo Masters: It doesn't change the outlook for me though. This data 18 00:00:58,090 --> 00:01:00,980 Jo Masters: is for the March quarter. And we know since then 19 00:01:00,980 --> 00:01:04,670 Jo Masters: that the labor market is continuing to tighten, the leading 20 00:01:04,670 --> 00:01:09,220 Jo Masters: indicators still point to jobs growth. The RBA's Business Liaison 21 00:01:09,220 --> 00:01:13,620 Jo Masters: is clearly telling them that wage growth is accelerating. You 22 00:01:13,620 --> 00:01:16,360 Jo Masters: can see it in the average wage rises in the 23 00:01:16,380 --> 00:01:20,730 Jo Masters: WPI data. So from my perspective, it's a question of 24 00:01:20,730 --> 00:01:23,929 Jo Masters: timing. And I think for the RBA, they'd already started 25 00:01:23,930 --> 00:01:25,650 Jo Masters: to raise rates. So in a way they'd sort of 26 00:01:25,950 --> 00:01:28,700 Jo Masters: hurdled past this data and we're looking forward, not backwards. 27 00:01:29,350 --> 00:01:31,819 Sean Aylmer: Okay. One thing that the Reserve Bank has said over the past couple 28 00:01:31,819 --> 00:01:35,420 Sean Aylmer: of years is that it wanted wage growth to be sustainably 29 00:01:35,770 --> 00:01:40,690 Sean Aylmer: in that three to 4% range. This doesn't quite get 30 00:01:40,690 --> 00:01:41,700 Sean Aylmer: them there though, does it? 31 00:01:42,220 --> 00:01:44,970 Jo Masters: No, it's still a fair way short actually at 2. 4% 32 00:01:46,080 --> 00:01:49,010 Jo Masters: annually. I mean that rule of thumb of we need 33 00:01:49,010 --> 00:01:51,300 Jo Masters: wage growth at three and a half for inflation to 34 00:01:51,300 --> 00:01:53,820 Jo Masters: be at two and a half is a long running 35 00:01:53,950 --> 00:01:56,090 Jo Masters: rule of thumb. I think what we're seeing at the 36 00:01:56,090 --> 00:01:58,690 Jo Masters: moment is two factors, that mean we've got a bit 37 00:01:58,690 --> 00:02:02,140 Jo Masters: of a mismatch. One is a large portion of the 38 00:02:02,140 --> 00:02:05,910 Jo Masters: inflation is being driven by things outside of our control. 39 00:02:06,200 --> 00:02:11,669 Jo Masters: So particularly, the Ukraine crisis, lockdown in China, supply disruptions 40 00:02:12,070 --> 00:02:15,609 Jo Masters: that obviously not related to domestic wage pressures. The other 41 00:02:15,610 --> 00:02:19,270 Jo Masters: thing is that it's just highlighted how rigid our wage- 42 00:02:19,270 --> 00:02:22,389 Jo Masters: setting structure is in Australia and just how long it 43 00:02:22,389 --> 00:02:26,620 Jo Masters: takes for a tight labor market to flow through to broad- 44 00:02:26,620 --> 00:02:30,610 Jo Masters: based wage pressures across the economy. And also of course 45 00:02:30,610 --> 00:02:33,240 Jo Masters: the wage price index is quite a narrow measure of 46 00:02:33,240 --> 00:02:36,410 Jo Masters: wages. It's a wage rate measure, and we are seeing 47 00:02:36,620 --> 00:02:39,190 Jo Masters: faster income growth when we look at the national accounts 48 00:02:39,190 --> 00:02:41,340 Jo Masters: measure. We won't get that for March for another couple of weeks. 49 00:02:42,230 --> 00:02:44,730 Sean Aylmer: Okay. So what you are saying though, is that you 50 00:02:44,730 --> 00:02:49,330 Sean Aylmer: expect that these number will rise over coming quarters then 51 00:02:49,330 --> 00:02:52,359 Sean Aylmer: as things catch up effectively, wages catch up. 52 00:02:52,820 --> 00:02:55,120 Jo Masters: That's right. I think we can be very confident that 53 00:02:55,120 --> 00:02:58,579 Jo Masters: we're going to see wage growth accelerate. So we've got 54 00:02:58,919 --> 00:03:01,780 Jo Masters: increase in the annual reset of the minimum wage, which 55 00:03:01,780 --> 00:03:05,590 Jo Masters: flows through to awards that typically comes out towards the 56 00:03:05,590 --> 00:03:08,820 Jo Masters: end of June and is effective one July. We also 57 00:03:08,820 --> 00:03:11,400 Jo Masters: know that in the private sector, a lot of wages 58 00:03:11,400 --> 00:03:14,850 Jo Masters: are reset in the new financial year. So again, effective 59 00:03:14,850 --> 00:03:17,579 Jo Masters: from the third quarter and we would expect all of 60 00:03:17,580 --> 00:03:20,620 Jo Masters: those to be reflecting the tightness in the labor market 61 00:03:20,620 --> 00:03:24,680 Jo Masters: that we can see in job vacancy data, job ads, 62 00:03:24,930 --> 00:03:27,260 Jo Masters: and of course, some of the business surveys and also 63 00:03:27,260 --> 00:03:28,950 Jo Masters: the Business Liaison from the RBA. 64 00:03:29,490 --> 00:03:31,570 Sean Aylmer: Are there some sectors that are doing better than others 65 00:03:31,570 --> 00:03:32,350 Sean Aylmer: or is it very sort of broad-based? 66 00:03:34,000 --> 00:03:38,450 Jo Masters: We're not seeing too much divergence across sectors. Of the 67 00:03:38,470 --> 00:03:42,309 Jo Masters: 18 industries that we split the economy into, eight out 68 00:03:42,310 --> 00:03:45,100 Jo Masters: of 18 had wage growth that was over two and 69 00:03:45,140 --> 00:03:48,650 Jo Masters: a half percent annually. Only one had wage growth above 70 00:03:48,650 --> 00:03:52,020 Jo Masters: 3%. That does move around quite a bit quarter to 71 00:03:52,020 --> 00:03:55,940 Jo Masters: quarter, particularly for those industries that use awards or EBAs. 72 00:03:56,280 --> 00:03:57,670 Sean Aylmer: Okay. What was the one, by the way? 73 00:03:58,050 --> 00:04:01,770 Jo Masters: It was rental hiring and real estate services. So last 74 00:04:01,770 --> 00:04:03,660 Jo Masters: quarter there was... Sorry, in the December quarter there was 75 00:04:03,660 --> 00:04:06,820 Jo Masters: also only one and that was accommodation and food services. 76 00:04:06,820 --> 00:04:09,060 Jo Masters: So that rebound in that sector coming out of the 77 00:04:09,060 --> 00:04:09,550 Jo Masters: Delta lockdowns. 78 00:04:10,330 --> 00:04:12,050 Sean Aylmer: Stay with me Jo. We'll be back in a minute. 79 00:04:17,980 --> 00:04:20,440 Sean Aylmer: My guest this morning is Jo Masters, Chief Economist at 80 00:04:20,640 --> 00:04:24,930 Sean Aylmer: Barrenjoey. Okay, can we bring onto real wages. The Reserve 81 00:04:24,930 --> 00:04:27,270 Sean Aylmer: Bank has said that we won't see an increase in 82 00:04:27,270 --> 00:04:30,050 Sean Aylmer: real wages for a little while yet. Can you just 83 00:04:30,050 --> 00:04:33,900 Sean Aylmer: explain what real wages are? And this kind of goes 84 00:04:33,900 --> 00:04:36,720 Sean Aylmer: to the heart of the political debate about whether or 85 00:04:36,720 --> 00:04:40,390 Sean Aylmer: not Anthony Albanese's suggestion that you should have a wage 86 00:04:40,390 --> 00:04:42,820 Sean Aylmer: increase of 5. 1% is sensible or not. I don't 87 00:04:42,820 --> 00:04:45,170 Sean Aylmer: want to get into the politics of it, but just 88 00:04:45,170 --> 00:04:49,169 Sean Aylmer: explain real wages and why it's going to take so 89 00:04:49,170 --> 00:04:52,469 Sean Aylmer: long before people in real terms actually can spend or 90 00:04:52,470 --> 00:04:53,610 Sean Aylmer: buy more for their dollar? 91 00:04:54,270 --> 00:04:58,859 Jo Masters: Right. So real wages effectively are the annual growth in 92 00:04:58,860 --> 00:05:02,770 Jo Masters: wages minus the annual growth in the prices in the 93 00:05:02,770 --> 00:05:06,659 Jo Masters: economy or inflation. So it's wages less inflation. And the 94 00:05:06,660 --> 00:05:09,200 Jo Masters: reason that we look at that is it's a measure 95 00:05:09,200 --> 00:05:11,880 Jo Masters: of you're purchasing power. So when you take home your 96 00:05:11,880 --> 00:05:15,040 Jo Masters: pay packet, how much of the goods and services that 97 00:05:15,040 --> 00:05:17,760 Jo Masters: you need and you want to buy can you actually 98 00:05:17,760 --> 00:05:21,609 Jo Masters: purchase? And when real wage growth is negative or real 99 00:05:21,610 --> 00:05:25,130 Jo Masters: wages are going backwards, that means your purchasing power is 100 00:05:25,130 --> 00:05:28,700 Jo Masters: going backwards. And actually, that means that your standard of living 101 00:05:28,700 --> 00:05:31,520 Jo Masters: is falling, which is obviously something we don't want in 102 00:05:31,520 --> 00:05:34,620 Jo Masters: our economy. Now, as you said, we do think that 103 00:05:34,620 --> 00:05:37,729 Jo Masters: real wage growth is going to remain negative for some 104 00:05:37,730 --> 00:05:41,460 Jo Masters: time, for a year or so. Partly because inflation's so 105 00:05:41,460 --> 00:05:43,930 Jo Masters: high because of some of these, I hate to say 106 00:05:44,020 --> 00:05:48,469 Jo Masters: transitory impacts, but transitory and economics can be two years. 107 00:05:48,470 --> 00:05:51,450 Jo Masters: So things like global oil prices, we do expect they 108 00:05:51,450 --> 00:05:55,529 Jo Masters: will come down over time, not imminently, but it does 109 00:05:55,529 --> 00:05:57,710 Jo Masters: mean for the next year inflation is going to remain 110 00:05:57,710 --> 00:06:00,940 Jo Masters: really high. And as we've discussed wage growth just takes 111 00:06:01,010 --> 00:06:03,589 Jo Masters: a long time in Australia to pick up. And so 112 00:06:03,589 --> 00:06:07,270 Jo Masters: it's going to remain a very challenging period for Australian households. 113 00:06:07,800 --> 00:06:10,599 Sean Aylmer: Okay. And this obviously flows through to that whole cost of 114 00:06:10,600 --> 00:06:13,010 Sean Aylmer: living debate within the election campaign. 115 00:06:13,490 --> 00:06:17,670 Jo Masters: It is central to that debate. And we've seen real 116 00:06:17,720 --> 00:06:20,839 Jo Masters: periods of real wages falling before, but it's extreme at the 117 00:06:20,839 --> 00:06:23,250 Jo Masters: moment. The sorts of declines we've got when we've got 118 00:06:23,250 --> 00:06:28,010 Jo Masters: headline inflation running at 5.1% are pretty significant and Australian 119 00:06:28,010 --> 00:06:29,900 Jo Masters: households are feeling it. We can see that in the 120 00:06:29,900 --> 00:06:30,940 Jo Masters: Consumer Confidence Survey. 121 00:06:31,820 --> 00:06:34,080 Sean Aylmer: Okay. So this is all happening before the election obviously 122 00:06:34,080 --> 00:06:38,560 Sean Aylmer: on Saturday. Once we get beyond the election, whoever wins, 123 00:06:38,740 --> 00:06:41,880 Sean Aylmer: what type of economy are they going to be taking 124 00:06:41,880 --> 00:06:44,670 Sean Aylmer: over, if it's labor or continuing on, if it's a 125 00:06:44,670 --> 00:06:47,750 Sean Aylmer: coalition, what are the big challenges they'll be facing for 126 00:06:47,750 --> 00:06:48,620 Sean Aylmer: the rest of the year? 127 00:06:49,060 --> 00:06:53,370 Jo Masters: Yeah, there's actually numerous challenges, even though economic growth is 128 00:06:53,370 --> 00:06:56,859 Jo Masters: quite solid and we've had a robust recovery from the 129 00:06:56,860 --> 00:07:00,580 Jo Masters: pandemic crisis. So some of the issues that governments are 130 00:07:00,580 --> 00:07:05,120 Jo Masters: going to be facing are cyclical. So things like how 131 00:07:05,120 --> 00:07:07,580 Jo Masters: do we make sure that consumption growth which is the 132 00:07:07,580 --> 00:07:12,380 Jo Masters: largest part of GDP spending remains strong in the face 133 00:07:12,380 --> 00:07:15,830 Jo Masters: of high inflation and rising interest rates and falling house 134 00:07:15,830 --> 00:07:20,010 Jo Masters: prices and the like. So elongating that economic recovery, making 135 00:07:20,010 --> 00:07:23,250 Jo Masters: sure that the private sector has the conditions it needs 136 00:07:23,250 --> 00:07:25,170 Jo Masters: to pick up the baton of growth and that we're not 137 00:07:25,200 --> 00:07:29,010 Jo Masters: continuing to rely on public spending. So that's one, then 138 00:07:29,010 --> 00:07:33,560 Jo Masters: there's societal issues around cost of living and purchasing power, 139 00:07:33,900 --> 00:07:37,210 Jo Masters: the distribution of wage growth that we see. We also 140 00:07:37,210 --> 00:07:40,340 Jo Masters: know that low income families are still doing it really 141 00:07:40,340 --> 00:07:42,740 Jo Masters: tough. And of course the big one when we talk 142 00:07:42,740 --> 00:07:47,100 Jo Masters: about societal issues and equity, of course, is around housing 143 00:07:47,100 --> 00:07:50,630 Jo Masters: affordability. And then there's other structural issues. When we think 144 00:07:50,630 --> 00:07:56,040 Jo Masters: about the aging population about energy transition and decarbonization around 145 00:07:56,040 --> 00:08:00,130 Jo Masters: the future of work, around immigration, for example. So there's 146 00:08:00,130 --> 00:08:03,880 Jo Masters: actually a lot of really big issues that we haven't 147 00:08:03,880 --> 00:08:06,220 Jo Masters: done much about in the last couple of years because 148 00:08:06,270 --> 00:08:08,660 Jo Masters: of the pandemic. Now we need to make sure that 149 00:08:08,660 --> 00:08:10,490 Jo Masters: we turn our attention to these big issues. 150 00:08:11,000 --> 00:08:13,270 Sean Aylmer: And this is all going to have to happen in a 151 00:08:13,270 --> 00:08:14,530 Sean Aylmer: rising interest rate environment. 152 00:08:15,350 --> 00:08:18,330 Jo Masters: That's exactly right. Today's data, even though it was a 153 00:08:18,330 --> 00:08:22,760 Jo Masters: bit below expectations, doesn't change the trajectory for interest rates. 154 00:08:22,760 --> 00:08:26,810 Jo Masters: We clearly no longer need crisis settings and interest rates 155 00:08:26,810 --> 00:08:29,520 Jo Masters: are on the March higher. We're expecting a series of 156 00:08:29,520 --> 00:08:32,210 Jo Masters: rate hikes, and we expect that by the end of 157 00:08:32,280 --> 00:08:36,740 Jo Masters: this year or early 2023, mortgage interest payments as a 158 00:08:36,830 --> 00:08:40,329 Jo Masters: percent of disposable income will be at levels that historically 159 00:08:40,330 --> 00:08:42,280 Jo Masters: have started to slow consumption growth. 160 00:08:43,010 --> 00:08:45,010 Sean Aylmer: Okay. Where do you think growth will be in 12 months 161 00:08:45,010 --> 00:08:47,470 Sean Aylmer: time? I mean, we hear lots in the US people 162 00:08:47,470 --> 00:08:51,040 Sean Aylmer: already predicting a recession because the federal reserve will have 163 00:08:51,040 --> 00:08:56,569 Sean Aylmer: to shift so quickly to tempo down inflation. Is there 164 00:08:56,570 --> 00:08:58,950 Sean Aylmer: any fears of that in Australia or are you reasonably 165 00:08:58,950 --> 00:09:01,580 Sean Aylmer: confident in 12 months, two years, we'll be okay? 166 00:09:02,090 --> 00:09:04,940 Jo Masters: I think we'll be okay if you define that as 167 00:09:04,980 --> 00:09:06,110 Jo Masters: not having a recession. 168 00:09:06,420 --> 00:09:06,610 Sean Aylmer: Yeah. 169 00:09:06,690 --> 00:09:09,300 Jo Masters: So I guess a couple of things there, the US economy actually 170 00:09:09,300 --> 00:09:12,579 Jo Masters: has quite a lot relatively large number of recessions. It's 171 00:09:12,580 --> 00:09:17,530 Jo Masters: a more dynamic, flexible market driven economy. We also have 172 00:09:17,530 --> 00:09:21,780 Jo Masters: some protection because of commodity prices, which remain very, very 173 00:09:21,780 --> 00:09:25,330 Jo Masters: high and that gives us a national income boost. That 174 00:09:25,330 --> 00:09:28,370 Jo Masters: makes it harder to get a recession here in Australia. 175 00:09:28,840 --> 00:09:31,929 Jo Masters: I think growth will slow and we might be getting 176 00:09:31,929 --> 00:09:34,360 Jo Masters: growth back at that sort of two, two and a 177 00:09:34,360 --> 00:09:37,670 Jo Masters: half percent level that we saw pre- crisis. And I 178 00:09:37,670 --> 00:09:39,410 Jo Masters: guess that's a challenge. We don't want to come out 179 00:09:39,410 --> 00:09:42,059 Jo Masters: of this crisis and just go back to what we 180 00:09:42,059 --> 00:09:46,000 Jo Masters: had before. We want to build back better, more resilient, 181 00:09:46,340 --> 00:09:49,900 Jo Masters: improving living standards, improving some of those equity issues. 182 00:09:50,500 --> 00:09:51,970 Sean Aylmer: Jo, thank you for talking to Fear and Greed. 183 00:09:52,640 --> 00:09:53,329 Jo Masters: It's been my pleasure. 184 00:09:53,950 --> 00:09:57,280 Sean Aylmer: That was Jo Masters, Chief Economist at Barrenjoey. This is 185 00:09:57,280 --> 00:09:59,540 Sean Aylmer: the Fear and Greed Daily Interview. Join us every morning for 186 00:09:59,540 --> 00:10:02,330 Sean Aylmer: the full episode of Fear and Greed, Australia's most popular 187 00:10:02,570 --> 00:10:05,449 Sean Aylmer: business podcast. I'm Sean Aylmer, enjoy your day.