1 00:00:04,019 --> 00:00:06,389 Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean 2 00:00:06,390 --> 00:00:09,359 Sean Aylmer: Aylmer. The pace of growth of the Australian economy is 3 00:00:09,360 --> 00:00:13,350 Sean Aylmer: slowing, and considering interest rates were hiked again this week, 4 00:00:13,799 --> 00:00:16,799 Sean Aylmer: it's likely to keep going in that direction. So are 5 00:00:16,799 --> 00:00:19,829 Sean Aylmer: we heading towards a recession? And where is the economy 6 00:00:19,829 --> 00:00:23,640 Sean Aylmer: up to? Cherelle Murphy is the EY Oceania Chief Economist. 7 00:00:23,730 --> 00:00:25,530 Sean Aylmer: Cherelle, welcome back to Fear and Greed. 8 00:00:26,309 --> 00:00:27,690 Cherelle Murphy: Thank you. Very nice to be here. 9 00:00:28,679 --> 00:00:31,620 Sean Aylmer: What is going on? We're having higher interest rates. We've 10 00:00:31,620 --> 00:00:35,609 Sean Aylmer: got clearly a slowing in the economy. Households aren't spending 11 00:00:35,609 --> 00:00:38,430 Sean Aylmer: as much, or at least the pace of spending has slowed 12 00:00:38,430 --> 00:00:40,710 Sean Aylmer: appreciably. What's going on, Cherelle? 13 00:00:42,540 --> 00:00:45,360 Cherelle Murphy: I think we're at that really ugly point in the 14 00:00:45,360 --> 00:00:48,839 Cherelle Murphy: business cycle, and by that I mean we're seeing growth 15 00:00:48,840 --> 00:00:54,510 Cherelle Murphy: fall, but prices and labor costs not falling. So we're 16 00:00:54,510 --> 00:01:00,360 Cherelle Murphy: kind of experiencing the fall from the Reserve Bank's deliberate 17 00:01:00,360 --> 00:01:04,649 Cherelle Murphy: attempts to slow the economy down, but it's not yet 18 00:01:04,650 --> 00:01:08,909 Cherelle Murphy: worked in terms of giving downward pressure on inflation. So 19 00:01:09,270 --> 00:01:12,929 Cherelle Murphy: we're sort of at the change point where growth has 20 00:01:12,930 --> 00:01:15,690 Cherelle Murphy: slowed, hasn't yet hit inflation, which means everything is kind 21 00:01:15,690 --> 00:01:15,751 Cherelle Murphy: of ugly. 22 00:01:15,751 --> 00:01:23,520 Sean Aylmer: It sure is. I mean, the GDP data from yesterday, the economy grew by just 0. 23 00:01:23,520 --> 00:01:28,349 Sean Aylmer: 2% in March. That was below most economists' forecasts, though 24 00:01:28,350 --> 00:01:32,399 Sean Aylmer: not hugely below, I think the consensus was 0. 3%. Did 25 00:01:32,400 --> 00:01:35,069 Sean Aylmer: it surprise you and why are we slowing so much, 26 00:01:35,069 --> 00:01:36,211 Sean Aylmer: or why was the number so low? 27 00:01:36,211 --> 00:01:40,170 Cherelle Murphy: Yeah, it was a low number and if you look at it 28 00:01:40,170 --> 00:01:43,379 Cherelle Murphy: on a per capita basis, it's even worse. That actually fell 0. 29 00:01:43,379 --> 00:01:46,830 Cherelle Murphy: 2%. So that means that if it hadn't been for 30 00:01:46,830 --> 00:01:52,260 Cherelle Murphy: strong net overseas migration, including with the international students returning, then GDP 31 00:01:52,260 --> 00:01:56,400 Cherelle Murphy: would actually have contracted. The net exports numbers were actually 32 00:01:56,490 --> 00:02:00,270 Cherelle Murphy: a detraction from growth this time around, and that's not 33 00:02:00,300 --> 00:02:03,538 Cherelle Murphy: necessarily all a bad news story, it's not as bad as it sounds, 34 00:02:03,540 --> 00:02:05,939 Cherelle Murphy: because a lot of that was because we were importing 35 00:02:05,940 --> 00:02:10,260 Cherelle Murphy: more products. So cars and mobile phones were mentioned by 36 00:02:10,260 --> 00:02:13,380 Cherelle Murphy: the ABS. So in some ways that is actually an 37 00:02:13,380 --> 00:02:16,980 Cherelle Murphy: indication of ongoing spending, but just because it's imports, it 38 00:02:16,980 --> 00:02:20,130 Cherelle Murphy: can pull down that GDP number. So that was probably 39 00:02:20,130 --> 00:02:23,129 Cherelle Murphy: part of it. As you say though, also the consumption 40 00:02:23,129 --> 00:02:26,639 Cherelle Murphy: numbers overall were slower and we did start to see 41 00:02:26,639 --> 00:02:31,050 Cherelle Murphy: a pullback, particularly in the discretionary type consumption. Although I will 42 00:02:31,050 --> 00:02:34,770 Cherelle Murphy: note that restaurant meals and transport are still running fairly 43 00:02:34,770 --> 00:02:38,130 Cherelle Murphy: strongly. So these are categories that are just not showing 44 00:02:38,130 --> 00:02:41,698 Cherelle Murphy: many signs of contracting quickly. So there was a few 45 00:02:41,699 --> 00:02:44,310 Cherelle Murphy: things in there that resulted in that slower response. 46 00:02:45,120 --> 00:02:48,600 Sean Aylmer: Okay. So given the ugliness of the situation, I think 47 00:02:48,600 --> 00:02:50,490 Sean Aylmer: that was the word you used, wasn't it? The ugly 48 00:02:50,490 --> 00:02:51,720 Sean Aylmer: part of the business cycle. 49 00:02:51,809 --> 00:02:52,290 Cherelle Murphy: It was. 50 00:02:52,469 --> 00:02:55,470 Sean Aylmer: Will we avoid a recession or are we headed for one? 51 00:03:00,090 --> 00:03:02,850 Cherelle Murphy: It's a tricky one. I'm wondering what the safe word 52 00:03:02,850 --> 00:03:04,111 Cherelle Murphy: is at this point. It's a tricky one. 53 00:03:04,111 --> 00:03:08,370 Sean Aylmer: Oh, what a great reference to one of our old podcasts. 54 00:03:08,970 --> 00:03:15,809 Cherelle Murphy: I know. I know. I was of... Yeah. Anyway, it does suggest 55 00:03:15,809 --> 00:03:21,780 Cherelle Murphy: that the economy is going downhill and does it avoid 56 00:03:21,780 --> 00:03:24,930 Cherelle Murphy: a recession? Well, I think it's more difficult to avoid 57 00:03:24,930 --> 00:03:27,660 Cherelle Murphy: a recession than it's been in the past because the 58 00:03:27,660 --> 00:03:30,448 Cherelle Murphy: Reserve Bank has had to put up interest rates perhaps 59 00:03:30,450 --> 00:03:34,320 Cherelle Murphy: a little higher than it previously anticipated. And it's doing 60 00:03:34,320 --> 00:03:37,050 Cherelle Murphy: that because inflation is not falling as fast as it 61 00:03:37,050 --> 00:03:40,920 Cherelle Murphy: thought. So in other words, that narrow path that we 62 00:03:40,920 --> 00:03:44,190 Cherelle Murphy: keep hearing about is getting narrower, or as I said 63 00:03:44,190 --> 00:03:48,000 Cherelle Murphy: during the week, it's akin to landing an A380 on 64 00:03:48,000 --> 00:03:52,469 Cherelle Murphy: an aircraft carrier. It's extraordinarily difficult to do, maybe even 65 00:03:52,469 --> 00:03:57,059 Cherelle Murphy: impossible. And by that I mean we've got shifting global 66 00:03:57,060 --> 00:04:00,120 Cherelle Murphy: headwinds. We've got demand that has to sort of come 67 00:04:00,120 --> 00:04:02,550 Cherelle Murphy: down enough, but not too much to push us into 68 00:04:02,550 --> 00:04:06,150 Cherelle Murphy: recession and push unemployment up, and an inflation target, which 69 00:04:06,150 --> 00:04:09,780 Cherelle Murphy: still feels quite a long way away. So all these 70 00:04:09,780 --> 00:04:12,930 Cherelle Murphy: things combined means it is very possible that we fall 71 00:04:12,930 --> 00:04:16,620 Cherelle Murphy: into a recession, but we should also keep in mind 72 00:04:16,710 --> 00:04:21,870 Cherelle Murphy: that the RBA can quickly reverse its decisions on interest 73 00:04:21,870 --> 00:04:24,928 Cherelle Murphy: rates. So if it saw inflation quickly start to move 74 00:04:24,928 --> 00:04:29,070 Cherelle Murphy: down as the economy moved into a recessionary position, it 75 00:04:29,070 --> 00:04:32,430 Cherelle Murphy: can drop rates and stimulate the economy again and hopefully 76 00:04:32,430 --> 00:04:33,810 Cherelle Murphy: get us out of it quite quickly. 77 00:04:34,110 --> 00:04:36,420 Sean Aylmer: Stay with me, Cherelle, we'll be back in a minute. 78 00:04:42,330 --> 00:04:47,549 Sean Aylmer: I'm speaking to Cherelle Murphy, EY Oceania Chief Economist. A 79 00:04:47,549 --> 00:04:50,250 Sean Aylmer: couple of the words that we hear lots about in 80 00:04:50,250 --> 00:04:53,279 Sean Aylmer: economics at the moment, one's inflation, the other's productivity. Let's 81 00:04:53,279 --> 00:04:57,030 Sean Aylmer: start with inflation. The reason the bank is raising rates 82 00:04:57,089 --> 00:05:00,089 Sean Aylmer: is to reduce inflation, and you've mentioned it a few 83 00:05:00,089 --> 00:05:04,080 Sean Aylmer: times in the past few minutes. Why isn't inflation coming 84 00:05:04,080 --> 00:05:08,280 Sean Aylmer: down, when we are seeing households certainly spending less? 85 00:05:09,029 --> 00:05:14,760 Cherelle Murphy: Inflation is high because service prices are running strongly. Goods 86 00:05:14,760 --> 00:05:19,558 Cherelle Murphy: prices are actually starting to either fall or rise at 87 00:05:19,559 --> 00:05:22,289 Cherelle Murphy: a slower pace, and that tends to be a lot 88 00:05:22,289 --> 00:05:24,389 Cherelle Murphy: of things that we import from overseas. It might be 89 00:05:24,389 --> 00:05:27,390 Cherelle Murphy: petrol, might be some equipment, mobile phones, that sort of 90 00:05:27,390 --> 00:05:30,779 Cherelle Murphy: thing. So that part of the equation is looking okay, 91 00:05:30,779 --> 00:05:35,400 Cherelle Murphy: but it's those service prices that are starting, or continuing, 92 00:05:35,400 --> 00:05:38,309 Cherelle Murphy: to rise quite quickly. So things like a trip to 93 00:05:38,309 --> 00:05:44,040 Cherelle Murphy: the hairdresser or restaurant meals or holidays at local destinations, 94 00:05:44,040 --> 00:05:46,200 Cherelle Murphy: these things are all rising in price because people are 95 00:05:46,200 --> 00:05:49,770 Cherelle Murphy: demanding them. And that's really where the Reserve Bank is 96 00:05:49,770 --> 00:05:54,570 Cherelle Murphy: most concerned and it is trying to take away that 97 00:05:54,570 --> 00:05:58,678 Cherelle Murphy: discretionary dollar from the household sector so that there is 98 00:05:58,680 --> 00:06:01,080 Cherelle Murphy: less spending in those areas, and that means that there's 99 00:06:01,080 --> 00:06:03,510 Cherelle Murphy: less inclination for prices to rise. 100 00:06:04,260 --> 00:06:08,400 Sean Aylmer: Okay. Productivity. What did the GDP figures from yesterday, the 101 00:06:08,400 --> 00:06:11,700 Sean Aylmer: national accounts figures from yesterday, say about productivity? 102 00:06:12,570 --> 00:06:15,959 Cherelle Murphy: It was pretty horrendous. It did show a big fall 103 00:06:15,960 --> 00:06:20,820 Cherelle Murphy: in productivity growth, around about 4. 5% over the last year. 104 00:06:21,240 --> 00:06:27,480 Cherelle Murphy: That is very soft and shows that essentially employers are 105 00:06:28,260 --> 00:06:31,889 Cherelle Murphy: having to not only pay higher wages, but on average 106 00:06:31,889 --> 00:06:35,099 Cherelle Murphy: across the economy, they're getting less out of their workers 107 00:06:35,100 --> 00:06:40,020 Cherelle Murphy: as well. So it means the effective cost of employment 108 00:06:40,050 --> 00:06:44,309 Cherelle Murphy: to employers is rising very sharply. We call that the 109 00:06:44,309 --> 00:06:49,859 Cherelle Murphy: unit labor costs. So it's bad news for inflation, unfortunately. 110 00:06:49,920 --> 00:06:52,949 Cherelle Murphy: Of course, it's bad news for the economy because falling 111 00:06:52,949 --> 00:06:56,070 Cherelle Murphy: productivity means that the size of the economy doesn't grow 112 00:06:56,070 --> 00:06:59,010 Cherelle Murphy: as quickly, income doesn't grow as quickly, and we simply 113 00:06:59,010 --> 00:07:01,770 Cherelle Murphy: can't afford all the things that we would like. So 114 00:07:01,770 --> 00:07:04,950 Cherelle Murphy: unfortunately, pretty bad news in there. There's probably a little 115 00:07:04,950 --> 00:07:07,709 Cherelle Murphy: bit of pandemic impact in there, and there may even 116 00:07:07,710 --> 00:07:12,300 Cherelle Murphy: be some impact from the floods activity last year, which 117 00:07:12,389 --> 00:07:14,970 Cherelle Murphy: plays around with the numbers a little bit by keeping 118 00:07:15,390 --> 00:07:20,550 Cherelle Murphy: employment lumpy. So there is some impact there and those 119 00:07:20,550 --> 00:07:23,010 Cherelle Murphy: should be temporary. So that's the good news. It may 120 00:07:23,010 --> 00:07:27,870 Cherelle Murphy: fade. But nevertheless, productivity growth is I either very slow 121 00:07:27,870 --> 00:07:29,249 Cherelle Murphy: or falling and that's not welcome. 122 00:07:30,059 --> 00:07:32,340 Sean Aylmer: When I think about economists, Cherelle, is that whenever you 123 00:07:32,340 --> 00:07:35,190 Sean Aylmer: have got some good news, there's always a but. So, 124 00:07:35,190 --> 00:07:39,990 Sean Aylmer: so far, this discussion has been bad news, but surely 125 00:07:39,990 --> 00:07:42,929 Sean Aylmer: there's a but, surely there's something good on the horizon? 126 00:07:43,230 --> 00:07:45,479 Cherelle Murphy: There is, and I'm glad you asked that, Sean, because 127 00:07:46,260 --> 00:07:49,860 Cherelle Murphy: as I've been going through the numbers, being quite surprised 128 00:07:49,860 --> 00:07:53,400 Cherelle Murphy: by these data today because there are lots of different 129 00:07:53,400 --> 00:07:56,520 Cherelle Murphy: stories in there. There is that falling productivity and falling 130 00:07:56,520 --> 00:08:01,049 Cherelle Murphy: growth story, but business investment continues to be actually pretty 131 00:08:01,049 --> 00:08:04,590 Cherelle Murphy: good. So commodity producers, and by that I mean both 132 00:08:04,590 --> 00:08:08,910 Cherelle Murphy: hard commodity producers like the iron ore miners, et cetera, 133 00:08:08,910 --> 00:08:11,940 Cherelle Murphy: as well as agricultural producers, are spending more. They are 134 00:08:11,940 --> 00:08:17,280 Cherelle Murphy: actually lifting their investment in equipment. Infrastructure spending continues to 135 00:08:17,280 --> 00:08:20,250 Cherelle Murphy: rise as well. Again, there are good and bad bits 136 00:08:20,250 --> 00:08:23,549 Cherelle Murphy: about that, can be inflationary, but at same time we 137 00:08:23,549 --> 00:08:26,910 Cherelle Murphy: are seeing a lot of building of roads, infrastructure tunnels, 138 00:08:26,910 --> 00:08:28,770 Cherelle Murphy: as we all know, at least those of us who 139 00:08:28,770 --> 00:08:29,940 Cherelle Murphy: live in the big cities would know. 140 00:08:30,690 --> 00:08:35,309 Sean Aylmer: Yeah. Okay. So wrapping this up, not a great period 141 00:08:35,429 --> 00:08:39,599 Sean Aylmer: going forward for the economy, we, as you put it, 142 00:08:39,599 --> 00:08:42,119 Sean Aylmer: are trying to land an A380, or the Reserve Bank is 143 00:08:42,119 --> 00:08:46,320 Sean Aylmer: trying to land an A380 on a carrier. What about 144 00:08:46,320 --> 00:08:49,260 Sean Aylmer: interest rates? Do you think there's much further to go 145 00:08:49,260 --> 00:08:49,740 Sean Aylmer: on them? 146 00:08:50,670 --> 00:08:53,670 Cherelle Murphy: I think that because the reasons that the Reserve Bank 147 00:08:53,969 --> 00:08:58,769 Cherelle Murphy: pointed to when it lifted interest rates on Tuesday are 148 00:08:59,070 --> 00:09:02,040 Cherelle Murphy: becoming more intense, in other words, there are more pressures 149 00:09:02,040 --> 00:09:05,400 Cherelle Murphy: on inflation, it certainly suggests to me that they're feeling 150 00:09:05,640 --> 00:09:09,509 Cherelle Murphy: like more rate hikes are likely. It may come as 151 00:09:09,510 --> 00:09:13,799 Cherelle Murphy: soon as July. I wouldn't necessarily guarantee that, but they're 152 00:09:13,799 --> 00:09:18,420 Cherelle Murphy: certainly worried about the low productivity, high wages, high services 153 00:09:18,420 --> 00:09:22,410 Cherelle Murphy: costs, and all these things are contributing to that upward 154 00:09:22,410 --> 00:09:25,439 Cherelle Murphy: pressure, which they feel like they really need to act against. 155 00:09:26,550 --> 00:09:29,849 Sean Aylmer: Cherelle, it's been a bit of a dismal morning really, 156 00:09:29,849 --> 00:09:32,580 Sean Aylmer: hasn't it? This hasn't been the most uplifting conversation I've 157 00:09:32,580 --> 00:09:33,990 Sean Aylmer: had with you over the years. 158 00:09:34,679 --> 00:09:37,828 Cherelle Murphy: I'm not having a lot of uplifting conversations at the 159 00:09:37,830 --> 00:09:42,660 Cherelle Murphy: moment with clients either, Sean, I'm afraid. It's a dismal 160 00:09:42,660 --> 00:09:43,620 Cherelle Murphy: science after all. 161 00:09:44,070 --> 00:09:46,589 Sean Aylmer: It is indeed. Cherelle, thank you for talking to Fear 162 00:09:46,590 --> 00:09:47,129 Sean Aylmer: and Greed. 163 00:09:47,460 --> 00:09:48,449 Cherelle Murphy: My pleasure. Thank you. 164 00:09:48,630 --> 00:09:52,559 Sean Aylmer: That was Cherelle Murphy. EY Oceania Chief Economist. This is 165 00:09:52,559 --> 00:09:54,960 Sean Aylmer: the Fear and Greed daily interview. Join us every morning 166 00:09:54,960 --> 00:09:57,390 Sean Aylmer: for the full episode of Fear and Greed, Australia's most 167 00:09:57,390 --> 00:10:00,660 Sean Aylmer: popular business podcast. I'm Sean Aylmer. Enjoy your day.