1 00:00:05,700 --> 00:00:08,070 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean 2 00:00:08,070 --> 00:00:11,100 Sean Aylmer: Aylmer. Last night the Federal Labor Government handed down its 3 00:00:11,100 --> 00:00:14,370 Sean Aylmer: first budget Since winning the election back in May. Budgets 4 00:00:14,370 --> 00:00:17,310 Sean Aylmer: are often fairly well telegraphed in advance, and this one 5 00:00:17,310 --> 00:00:19,739 Sean Aylmer: was certainly no exception. It seemed to hold very few 6 00:00:19,739 --> 00:00:23,669 Sean Aylmer: surprises with Treasurer Jim Chalmers keen to avoid any major 7 00:00:23,700 --> 00:00:26,310 Sean Aylmer: shocks, but it's a budget that has to walk the 8 00:00:26,310 --> 00:00:30,090 Sean Aylmer: line between fulfilling election commitments, dealing with the debt from 9 00:00:30,090 --> 00:00:33,360 Sean Aylmer: government spending during the pandemic and helping households cope with 10 00:00:33,360 --> 00:00:36,000 Sean Aylmer: a cost of living crisis. And those cost of living 11 00:00:36,000 --> 00:00:40,050 Sean Aylmer: challenges were a key focus last night, from soaring electricity 12 00:00:40,050 --> 00:00:45,330 Sean Aylmer: prices through to a massive home building package. Gareth Aird 13 00:00:45,330 --> 00:00:48,089 Sean Aylmer: is Commonwealth Bank's Head of Australian Economics. Have you had 14 00:00:48,090 --> 00:00:48,900 Sean Aylmer: much sleep, Gareth? 15 00:00:49,920 --> 00:00:53,520 Gareth Aird: G'day Sean. No. Unfortunately for economists, budget night is never 16 00:00:53,820 --> 00:00:55,290 Gareth Aird: a night where you get a lot of sleep, but 17 00:00:55,890 --> 00:00:58,110 Gareth Aird: it's pity in some ways that the government doesn't release 18 00:00:58,110 --> 00:00:59,790 Gareth Aird: the budget until 7: 30 at night. 19 00:01:00,150 --> 00:01:01,950 Sean Aylmer: I wonder if they'll ever change that. Will it ever 20 00:01:01,950 --> 00:01:03,060 Sean Aylmer: become digital? 21 00:01:03,450 --> 00:01:05,940 Gareth Aird: Oh look, who knows? I do think government at the 22 00:01:05,940 --> 00:01:08,430 Gareth Aird: time actually like to make a night of it and 23 00:01:08,970 --> 00:01:10,110 Gareth Aird: we saw that again last night. 24 00:01:10,290 --> 00:01:16,890 Sean Aylmer: Yeah, okay. Before we get into the macro forecast, any major surprises from you out of 25 00:01:16,890 --> 00:01:17,729 Sean Aylmer: the budget last night? 26 00:01:18,510 --> 00:01:21,270 Gareth Aird: Look, not really. And I think that was very much 27 00:01:21,270 --> 00:01:23,580 Gareth Aird: the plan of the government, was to not to deliver 28 00:01:23,580 --> 00:01:27,300 Gareth Aird: any surprises. They telegraphed, I think well in advance what 29 00:01:27,300 --> 00:01:30,479 Gareth Aird: to expect in the budget. They even previewed the economic forecast, 30 00:01:30,569 --> 00:01:33,870 Gareth Aird: which is rare. Normally you might get some insight into 31 00:01:33,870 --> 00:01:37,589 Gareth Aird: some policies and maybe the fiscal projections, but this time 32 00:01:37,590 --> 00:01:41,100 Gareth Aird: they even leaked the economic forecast ahead. It was only 33 00:01:41,430 --> 00:01:43,709 Gareth Aird: probably three or four weeks ago that the treasurer said, 34 00:01:44,130 --> 00:01:46,590 Gareth Aird: expect a bread and butter budget. They were his words 35 00:01:46,680 --> 00:01:48,960 Gareth Aird: and I think that's very much what we got last 36 00:01:48,960 --> 00:01:51,210 Gareth Aird: night. The government at the moment does not want to 37 00:01:51,210 --> 00:01:54,630 Gareth Aird: do anything that would put further upward pressure on inflation 38 00:01:54,780 --> 00:01:57,960 Gareth Aird: and by extension interest rates. I think they delivered that 39 00:01:57,960 --> 00:02:01,080 Gareth Aird: last night. And it's probably also worth keeping in mind too, that 40 00:02:01,080 --> 00:02:03,960 Gareth Aird: we'll get another budget in around six months time. So 41 00:02:03,960 --> 00:02:07,680 Gareth Aird: this isn't the normal full year budget. It's a budget 42 00:02:07,680 --> 00:02:10,320 Gareth Aird: that will be updated in around six months time. 43 00:02:10,530 --> 00:02:13,320 Sean Aylmer: Okay. So let's get onto some of those macroeconomic forecasts. 44 00:02:13,320 --> 00:02:15,480 Sean Aylmer: Inflation is the big one at the moment. It's kind 45 00:02:15,480 --> 00:02:18,090 Sean Aylmer: of heading towards, or the Government thinks it'll head towards 46 00:02:18,090 --> 00:02:21,900 Sean Aylmer: 8%, 7. 75% I think, later this year. And then 47 00:02:21,900 --> 00:02:24,960 Sean Aylmer: back to, is it 3.5% through the next financial year? 48 00:02:25,860 --> 00:02:27,930 Gareth Aird: Yeah, look, they've kept their peak in the inflation rate 49 00:02:27,930 --> 00:02:30,660 Gareth Aird: the same as what they produced in the ministerial statement, 50 00:02:30,690 --> 00:02:33,870 Gareth Aird: which is around 7. 75%. And I guess we're going 51 00:02:33,870 --> 00:02:35,850 Gareth Aird: to find out in a few hours time if that 52 00:02:35,850 --> 00:02:39,810 Gareth Aird: forecast is on track, given we get the Q3 CPI out 53 00:02:39,810 --> 00:02:43,530 Gareth Aird: today at 11: 30. They have forecast though inflation to come 54 00:02:43,530 --> 00:02:47,310 Gareth Aird: down a little bit slower than they previously anticipated. So 55 00:02:47,310 --> 00:02:49,530 Gareth Aird: they have the headline rate as at the middle of 56 00:02:49,530 --> 00:02:52,800 Gareth Aird: next year at 5. 75%, and then in the middle 57 00:02:52,800 --> 00:02:57,330 Gareth Aird: of 2024 running at 3.5%, so they haven't actually forecasted 58 00:02:57,330 --> 00:03:00,360 Gareth Aird: to get back to the Reserve Bank's target or within 59 00:03:00,360 --> 00:03:02,610 Gareth Aird: the target range rather, of 2 to 3% over the 60 00:03:02,610 --> 00:03:05,580 Gareth Aird: next couple of years. I think their forecasts are probably 61 00:03:05,580 --> 00:03:08,040 Gareth Aird: a little bit on the high side as we go through next 62 00:03:08,040 --> 00:03:10,470 Gareth Aird: year. They have said that we are going to get a big 63 00:03:10,470 --> 00:03:14,190 Gareth Aird: lift in electricity prices, but I think they're probably somewhat 64 00:03:14,190 --> 00:03:18,000 Gareth Aird: downplaying the extent to which certain prices won't rise next 65 00:03:18,000 --> 00:03:20,250 Gareth Aird: year and may even fall. And I'm thinking there on 66 00:03:20,250 --> 00:03:22,980 Gareth Aird: the good side, we saw a huge lift in goods 67 00:03:22,980 --> 00:03:25,560 Gareth Aird: inflation over the past 12 months. And I think as 68 00:03:25,560 --> 00:03:28,380 Gareth Aird: we go through next year with slower global demand, we 69 00:03:28,380 --> 00:03:31,829 Gareth Aird: might find that goods inflation undershoots on their implied profile. 70 00:03:33,000 --> 00:03:35,550 Sean Aylmer: Okay, let's hope so. What about employment? They think that the unemployment rate 71 00:03:35,850 --> 00:03:39,090 Sean Aylmer: will rise to 4.5% in the next couple of years. 72 00:03:39,300 --> 00:03:40,260 Sean Aylmer: It's still pretty good though. 73 00:03:41,520 --> 00:03:45,090 Gareth Aird: Well, it's good relative to pre- pandemic, but it's not 74 00:03:45,090 --> 00:03:49,680 Gareth Aird: good for the 125,000 odd people that will become unemployed 75 00:03:49,740 --> 00:03:52,590 Gareth Aird: on that forecast profile. I've got to say in terms 76 00:03:52,590 --> 00:03:54,810 Gareth Aird: of the economic forecast, that was probably the one that 77 00:03:54,810 --> 00:03:58,140 Gareth Aird: stood out to me as being a little bit unusual. 78 00:03:58,500 --> 00:04:02,100 Gareth Aird: The current unemployment rate is 3.5% and the government has 79 00:04:02,100 --> 00:04:05,520 Gareth Aird: forecast it by middle of 2024 to get to 4.5%. 80 00:04:06,750 --> 00:04:08,940 Gareth Aird: So if you back solve how many people that is, 81 00:04:08,940 --> 00:04:11,820 Gareth Aird: that would become unemployed or what kind of increase in 82 00:04:11,820 --> 00:04:17,190 Gareth Aird: unemployment you're looking at, it's around 125,000. And it strikes 83 00:04:17,190 --> 00:04:19,500 Gareth Aird: me as odd that the government would forecast that kind 84 00:04:19,500 --> 00:04:22,950 Gareth Aird: of unemployment rate because it's also above their estimate of 85 00:04:22,950 --> 00:04:26,849 Gareth Aird: full employment, which they put it around 4. 25%. So 86 00:04:26,850 --> 00:04:28,859 Gareth Aird: I would think the government would not want to get 87 00:04:28,860 --> 00:04:31,589 Gareth Aird: the unemployment rate up to that sort of level, which 88 00:04:31,589 --> 00:04:33,960 Gareth Aird: would mean you'd be thinking they'd be having policies that 89 00:04:33,960 --> 00:04:37,109 Gareth Aird: would keep it sort of more anchored around 4%. So that 90 00:04:37,110 --> 00:04:38,550 Gareth Aird: sort of stood out to me as being a little 91 00:04:38,550 --> 00:04:41,460 Gareth Aird: bit unusual. It is different from the Reserve Bank's forecast. 92 00:04:41,460 --> 00:04:43,980 Gareth Aird: They're expecting the unemployment rate to only get up to 4% 93 00:04:45,060 --> 00:04:48,240 Gareth Aird: and I think ultimately the Reserve Bank will not want 94 00:04:48,240 --> 00:04:50,760 Gareth Aird: the unemployment rate to get up to that 4. 5% level. 95 00:04:51,060 --> 00:04:53,040 Sean Aylmer: Stay with me, Gareth, We'll be back in a minute. 96 00:04:59,250 --> 00:05:02,039 Sean Aylmer: I'm speaking to Gareth Aird, Head of Australian Economics at 97 00:05:02,040 --> 00:05:06,029 Sean Aylmer: the Commonwealth Bank. Okay. What about economic growth? So 3. 98 00:05:06,510 --> 00:05:08,940 Sean Aylmer: 25 this financial year and then a big drop to 99 00:05:08,940 --> 00:05:10,980 Sean Aylmer: 1.5% the following financial year? 100 00:05:11,370 --> 00:05:14,610 Gareth Aird: Yeah look, those forecasts look pretty reasonable to us. They're 101 00:05:14,610 --> 00:05:17,640 Gareth Aird: not too dissimilar from our economic forecast. I mean the 102 00:05:17,640 --> 00:05:22,260 Gareth Aird: economy will absolutely slow simply because we're running at basically 103 00:05:22,260 --> 00:05:25,589 Gareth Aird: maximum capacity. We are able though in Australia to still 104 00:05:25,589 --> 00:05:30,180 Gareth Aird: generate reasonably decent economic growth even if capital outcomes are 105 00:05:30,180 --> 00:05:33,089 Gareth Aird: soft because we have strong population growth and the government 106 00:05:33,450 --> 00:05:37,290 Gareth Aird: has basically put in a 1. 4% assumption around population 107 00:05:37,290 --> 00:05:39,779 Gareth Aird: growth. So if you kind of marry up the increasing 108 00:05:39,779 --> 00:05:43,020 Gareth Aird: GDP and you look at it population growth assumption, then 109 00:05:43,020 --> 00:05:45,750 Gareth Aird: effectively the government's saying that we're not actually going to 110 00:05:45,750 --> 00:05:48,930 Gareth Aird: be growing in per capita terms as we go through 111 00:05:49,170 --> 00:05:52,229 Gareth Aird: the next fiscal year. So I think those forecasts look 112 00:05:52,230 --> 00:05:55,110 Gareth Aird: broadly okay. Probably a little bit of upside I think 113 00:05:55,110 --> 00:05:57,870 Gareth Aird: though, on GDP as we go through next fiscal year. 114 00:05:58,230 --> 00:06:00,150 Gareth Aird: We should remember that these are all kind of on 115 00:06:00,150 --> 00:06:03,450 Gareth Aird: an unchanged policy basis from what the government has announced. 116 00:06:03,870 --> 00:06:06,030 Gareth Aird: But I think there's scope here for the Reserve Bank 117 00:06:06,060 --> 00:06:07,860 Gareth Aird: as we head through the second half of next year 118 00:06:07,860 --> 00:06:11,580 Gareth Aird: and into 2024 to actually ease policy. In other words, 119 00:06:11,580 --> 00:06:13,770 Gareth Aird: take the cash rate lower, if it turns out the 120 00:06:13,770 --> 00:06:14,940 Gareth Aird: economy needs some support. 121 00:06:15,540 --> 00:06:18,870 Sean Aylmer: I kind of wanted to move to what this fiscal policy 122 00:06:19,260 --> 00:06:22,920 Sean Aylmer: means for financial markets and then for monetary policy as 123 00:06:22,920 --> 00:06:25,560 Sean Aylmer: well. We're talking about a budget deficit coming in at 124 00:06:25,560 --> 00:06:28,679 Sean Aylmer: about $ 37 billion this financial year much better than the $ 125 00:06:28,680 --> 00:06:33,060 Sean Aylmer: 78 billion forecast back in March, though in the future 126 00:06:33,060 --> 00:06:36,720 Sean Aylmer: years it goes back up. How do you think markets 127 00:06:36,720 --> 00:06:39,839 Sean Aylmer: will respond to it? And I mean, I'm just interested 128 00:06:39,839 --> 00:06:41,339 Sean Aylmer: in diving a little bit deeper in terms of what 129 00:06:41,339 --> 00:06:42,420 Sean Aylmer: it means for monetary policy. 130 00:06:43,620 --> 00:06:46,110 Gareth Aird: Well the market reaction to the budget when it dropped 131 00:06:46,110 --> 00:06:49,470 Gareth Aird: at 7: 30 was very, very muted. And that's what 132 00:06:49,470 --> 00:06:53,070 Gareth Aird: you'd expect given the budget didn't contain any surprises. I 133 00:06:53,070 --> 00:06:56,250 Gareth Aird: think the market was basically expecting a budget that wasn't 134 00:06:56,250 --> 00:06:59,670 Gareth Aird: providing more stimulus into the economy. That's what we got. 135 00:07:00,120 --> 00:07:02,279 Gareth Aird: That's a good thing in the current environment. And we 136 00:07:02,279 --> 00:07:05,640 Gareth Aird: saw over in the United Kingdom, three, four weeks ago, 137 00:07:05,970 --> 00:07:08,580 Gareth Aird: just how wrong things can actually go if the government 138 00:07:08,580 --> 00:07:11,670 Gareth Aird: announces stimulus at a time when you've got elevated inflation 139 00:07:12,030 --> 00:07:14,190 Gareth Aird: and the central bank is trying to drop the rate 140 00:07:14,190 --> 00:07:17,400 Gareth Aird: of inflation down. So I think in that context it 141 00:07:17,400 --> 00:07:20,340 Gareth Aird: made sense given what the government produced, for markets to 142 00:07:20,340 --> 00:07:23,250 Gareth Aird: be basically calm when the numbers drop. I mean the 143 00:07:23,250 --> 00:07:27,060 Gareth Aird: markets aren't too focused on where the fiscal projections are 144 00:07:27,300 --> 00:07:29,310 Gareth Aird: for next year or the year after. I mean they'll 145 00:07:29,310 --> 00:07:33,060 Gareth Aird: take that underlying cash balance forecast to go from $ 37 146 00:07:33,060 --> 00:07:36,930 Gareth Aird: billion to $ 44 billion with a pinch of salt, because 147 00:07:37,170 --> 00:07:40,260 Gareth Aird: it's very hard to actually forecast this stuff accurately. The 148 00:07:40,260 --> 00:07:43,140 Gareth Aird: market is probably more interested in the policy side of 149 00:07:43,140 --> 00:07:45,270 Gareth Aird: things and because there was nothing really in there that 150 00:07:45,270 --> 00:07:47,790 Gareth Aird: will put further upward pressure on inflation and by extension 151 00:07:47,790 --> 00:07:51,360 Gareth Aird: rates, the market's basically, I wouldn't say dismissed it, but 152 00:07:51,660 --> 00:07:53,610 Gareth Aird: they weren't perturbed by it at all. And in fact, 153 00:07:53,610 --> 00:07:55,500 Gareth Aird: markets are just going to be very much focused on 154 00:07:55,500 --> 00:07:56,910 Gareth Aird: how the CPI prints today. 155 00:07:57,150 --> 00:07:59,760 Sean Aylmer: Okay. I'll get onto that in a moment. I just want 156 00:07:59,760 --> 00:08:03,090 Sean Aylmer: to quickly ask about the housing package which the government 157 00:08:03,090 --> 00:08:07,260 Sean Aylmer: outlined last night. Ambitious perhaps shall we say? 158 00:08:08,010 --> 00:08:10,559 Gareth Aird: Yeah, look, ambitious in one sense, but it was a 159 00:08:10,560 --> 00:08:13,560 Gareth Aird: little bit light on detail and I think the idea 160 00:08:13,560 --> 00:08:16,170 Gareth Aird: of that we build 1, 000,000 houses over five years is 161 00:08:16,410 --> 00:08:18,960 Gareth Aird: an aspiration. You can kind of back solve it to 162 00:08:18,960 --> 00:08:21,120 Gareth Aird: say, well, that's going to be implying we're aiming to 163 00:08:21,120 --> 00:08:25,590 Gareth Aird: build 200,000 dwellings a year and haven't been running at 164 00:08:25,800 --> 00:08:28,530 Gareth Aird: levels too dissimilar to that for the last few years 165 00:08:28,530 --> 00:08:31,920 Gareth Aird: anyway. So I think really the government is basically saying 166 00:08:31,920 --> 00:08:34,890 Gareth Aird: there, if we're going to run strong population growth, we 167 00:08:34,890 --> 00:08:36,900 Gareth Aird: better make sure we're going to be building enough dwellings 168 00:08:36,900 --> 00:08:39,600 Gareth Aird: for people. Our aim is to build enough dwellings so 169 00:08:39,600 --> 00:08:41,939 Gareth Aird: that we don't have a rental crisis, if you like. 170 00:08:42,390 --> 00:08:44,819 Gareth Aird: And we're going to do what we can and work 171 00:08:44,820 --> 00:08:47,910 Gareth Aird: with the states and other industry bodies to try and 172 00:08:48,480 --> 00:08:50,580 Gareth Aird: ensure that we can actually get that supply into the 173 00:08:50,580 --> 00:08:54,030 Gareth Aird: market. So wasn't really too many details on how that 174 00:08:54,030 --> 00:08:56,730 Gareth Aird: will actually happen, but clearly they've set a target that 175 00:08:56,730 --> 00:08:59,790 Gareth Aird: they'd like to achieve and that broadly marries up with 176 00:08:59,790 --> 00:09:01,830 Gareth Aird: the fact that they've got a pretty punchy number in 177 00:09:01,830 --> 00:09:03,330 Gareth Aird: there for net overseas migration. 178 00:09:03,510 --> 00:09:06,030 Sean Aylmer: And I'm delighted that we've got another record too, Gareth, 179 00:09:06,030 --> 00:09:07,110 Sean Aylmer: it's important to have records. 180 00:09:07,590 --> 00:09:08,220 Gareth Aird: Absolutely. 181 00:09:08,220 --> 00:09:10,710 Sean Aylmer: Tell me the inflation number. So the third quarter, CPI 182 00:09:10,710 --> 00:09:13,439 Sean Aylmer: is out in a few hours time. This is kind 183 00:09:13,440 --> 00:09:14,610 Sean Aylmer: of the big one for the economy. 184 00:09:15,059 --> 00:09:17,550 Gareth Aird: Look, it is. It's the key piece of domestic economic 185 00:09:17,550 --> 00:09:20,429 Gareth Aird: data ahead of the November board meeting. I mean, we're 186 00:09:20,429 --> 00:09:23,190 Gareth Aird: sitting on consensus for both headline and core, and now 187 00:09:23,190 --> 00:09:24,990 Gareth Aird: a lot of your listeners will be listening to this 188 00:09:24,990 --> 00:09:27,990 Gareth Aird: after the numbers print. So I hope we're not wildly 189 00:09:27,990 --> 00:09:30,990 Gareth Aird: off, but we think it'll come in around 1. 6% on 190 00:09:30,990 --> 00:09:34,320 Gareth Aird: the quarter for headline and 1.5% on the core number. 191 00:09:34,380 --> 00:09:37,470 Gareth Aird: That's pretty much in line with the RBA's implied profile 192 00:09:38,010 --> 00:09:41,160 Gareth Aird: and numbers like that, while strong, certainly wouldn't bring a 193 00:09:41,160 --> 00:09:43,589 Gareth Aird: 50 basis point hike onto the table at the November 194 00:09:43,590 --> 00:09:45,690 Gareth Aird: board meeting. I think it was a big deal that 195 00:09:45,690 --> 00:09:48,150 Gareth Aird: the Reserve Bank slowed the pace of tightening down to 196 00:09:48,150 --> 00:09:51,479 Gareth Aird: 25 basis points in October. That was actually in line 197 00:09:51,480 --> 00:09:53,309 Gareth Aird: with our call at Commonwealth Bank, but it wasn't in 198 00:09:53,309 --> 00:09:56,190 Gareth Aird: line with what the market had priced. So I think 199 00:09:56,460 --> 00:09:59,700 Gareth Aird: in that context, the hurdle to go up to 50 200 00:09:59,700 --> 00:10:02,880 Gareth Aird: basis points is now very high. The labor market data out 201 00:10:02,880 --> 00:10:05,460 Gareth Aird: last week, it showed that the labor market's tight, but 202 00:10:05,460 --> 00:10:08,670 Gareth Aird: we had a flat unemployment rate and no employment growth. 203 00:10:08,670 --> 00:10:11,370 Gareth Aird: So I think provided we don't get a major shock 204 00:10:11,370 --> 00:10:14,250 Gareth Aird: today, the data today will just green light the RBO moving the cash 205 00:10:14,250 --> 00:10:16,260 Gareth Aird: rate up by 25 basis points next week. 206 00:10:16,530 --> 00:10:18,390 Sean Aylmer: Gareth, thank you for talking to Fear and Greed. 207 00:10:18,840 --> 00:10:19,380 Gareth Aird: It's a pleasure. 208 00:10:19,740 --> 00:10:22,170 Sean Aylmer: That was Gareth Aird, Head of Australian Economics at the 209 00:10:22,170 --> 00:10:24,870 Sean Aylmer: Commonwealth Bank. This is the Fear and Greed Daily Interview. 210 00:10:24,870 --> 00:10:27,839 Sean Aylmer: Remember, you should get professional advice before making any investment 211 00:10:27,840 --> 00:10:30,210 Sean Aylmer: decisions. Join us every morning for the full episode of 212 00:10:30,210 --> 00:10:33,840 Sean Aylmer: Fear and Greed, Australia's most popular business podcast. I'm Sean 213 00:10:33,840 --> 00:10:35,130 Sean Aylmer: Aylmer. Enjoy your day.