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Speaker 1: Welcome to Fear and Greed. Q and A will be

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Speaker 1: asking answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Michael Thompson and every Monday morning we are joined

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Speaker 1: by economists Stephen Cocoulis to look at the week ahead.

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Speaker 1: You'll find him at the kook dot com that's t

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Speaker 1: h e k o uk dot com and sharing his

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Speaker 1: views on LinkedIn as well. Following there, Stephen Coculist Stephen,

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Speaker 1: good morning.

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Speaker 2: Very good morning, Michael.

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Speaker 1: Now we had a bump a week last week, right

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Speaker 1: in terms of data coming through. The headline was obviously

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Speaker 1: the GDP figures showing that the economy grew faster than

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Speaker 1: expected in the December quarter. At the same time, of course,

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Speaker 1: we have the Middle East conflict causing a lot of

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Speaker 1: volatility and uncertainty this week. I want to start with

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Speaker 1: the GDP figures because I noticed a bit of a

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Speaker 1: theme emerging in your commentary throughout the week last week,

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Speaker 1: and that is that at its heart. But the news

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Speaker 1: on the economy is actually very good, yep. A lot

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Speaker 1: of the economists out there and a lot of the

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Speaker 1: media as well, so we have to shoulder our portion

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Speaker 1: of the blame here too. That we all jumped straight

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Speaker 1: to rate hikes are needed in order to slow things down.

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Speaker 1: I want to ask you, are we too negative about

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Speaker 1: the economy.

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Speaker 2: You picked up something that's a real bugbear of mine, Michael. Look,

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Speaker 2: and it's not just all sweetness and light, you know me.

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Speaker 2: I've been very critical of the economy and economic policy

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Speaker 2: over many, many years. But when we see some good

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Speaker 2: news on the economy, we see the National accounts confirmed

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Speaker 2: that GDP growth in twenty twenty five December quarter on

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Speaker 2: December quarter of the year before two point six percent,

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Speaker 2: strongest in three years, and if we take out that

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Speaker 2: pandemic volatility, one of the strongest results in about eight years.

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Speaker 2: So the economy is recovered, it's growing nicely. You overlay

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Speaker 2: that with the numbers that we saw a week or

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Speaker 2: two back on the labor market, unemployment at four point

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Speaker 2: one percent. It's very rare that we have unemployment that low.

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Speaker 2: In fact, over the last fifty years has really only

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Speaker 2: been two years out of those fifty years where it's

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Speaker 2: actually been lower. And so we look at these sort

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Speaker 2: of things and I think that's great. I think that's

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Speaker 2: good news. I think that's something to be thinking about.

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Speaker 2: It's what the Reserve Bank want to see. I notice

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Speaker 2: a few people say, oh, the Reserve Bank would be

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Speaker 2: disappointed with the GDP numbers. I reckon, they're going to

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Speaker 2: be having an extra ice Vobo and an extra strong

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Speaker 2: Earl Gray tea because they'll be celebrating cutting the fact

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Speaker 2: that they've got the economy growing, which is part of

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Speaker 2: their objective.

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Speaker 1: Well, what about then, productivity? Because I know that you've

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Speaker 1: taken a deeper dive into what these numbers told us

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Speaker 1: last week? What do we learn that about productivity? And

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Speaker 1: there is a bit of positivity there too, which seems

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Speaker 1: to be overlooked a bit.

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Speaker 2: Yeah, the productivity debate, that's been something that, as we know,

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Speaker 2: has been going on for decades. To be frank, and

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Speaker 2: we do want to get productivity rising. And I don't

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Speaker 2: want to get excited about, you know, just one year

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Speaker 2: of productivity growth because it is a long run structural issue.

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Speaker 2: But when productivity is poor, which it has been basically

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Speaker 2: for the past decade, it's very hard to grow the

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Speaker 2: economy more rapidly while keeping inflation low, while keeping the

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Speaker 2: labor market near full employment. So that's why productivity has

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Speaker 2: been on everybody's agenda every Reserve Bank governor, every treasurer,

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Speaker 2: every finance person, every economist wants product.

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Speaker 1: We had a roundtable in Canberra we did.

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Speaker 2: In August last year where a lot of the issues

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Speaker 2: were discussed. Now, it'd be wrong to sort of say

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Speaker 2: that roundtable's caused is to productivity boost. But but we

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Speaker 2: have seen productivity in the National accounts increasing by one

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Speaker 2: percent through the year. And if we look at the

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Speaker 2: long run history of when productivity growth is pretty good,

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Speaker 2: if we can get one percent per adum year in

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Speaker 2: year out for a decade, that's the sort of number

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Speaker 2: that we'd love to see. So that productivity uptick. And

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Speaker 2: again I don't want to get excited. We need to

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Speaker 2: see many, many, many more quarters, if not years of

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Speaker 2: productivity at one percent or more per annum. It does

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Speaker 2: allow the economy to grow a little bit more with

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Speaker 2: inflation on target. And given the other subcomponent of the

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Speaker 2: national accounts, the business investment numbers were pretty good too.

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Speaker 2: That is the catalyst for getting productivity high. As we

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Speaker 2: mentioned a couple of weeks ago on Q and A,

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Speaker 2: you need capital equipment, you need machinery, you need good

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Speaker 2: warehouses and transport infrastructure to grow your economy. Fast using

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Speaker 2: the same amount of inputs.

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Speaker 1: Okay, so this is just an uptick though, as you said,

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Speaker 1: is it enough at this point to change the inflation

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Speaker 1: outlook or is it just moving in the right direction.

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Speaker 2: The RBA would be again pleased to see productivity at

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Speaker 2: one percent. They would be not over egging it. Again,

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Speaker 2: as the governor and everybody who looks at these things,

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Speaker 2: the numbers are subject to The numbers are fickle, and

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Speaker 2: we do want to see again, not just one quarter

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Speaker 2: two quarters. We want to see this locked in for

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Speaker 2: a little bit longer. So we need to see this

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Speaker 2: is the question going forward for twenty twenty six and

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Speaker 2: twenty seven and beyond, is seeing the economy grow it,

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Speaker 2: you know, two and a half percent with employment or

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Speaker 2: hours worked growing at one percent ish yep, and then

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Speaker 2: you get that productivity improvement of one percent plus, which

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Speaker 2: is sort of the actually increases the speed limit of

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Speaker 2: the economy. Can we get back to the good old

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Speaker 2: days where that where GDP growth could be I don't know,

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Speaker 2: three percent, because that's what we used to have. Now

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Speaker 2: we're two and a half if we're lucky.

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Speaker 1: Okay. There are a couple of other things that help

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Speaker 1: paint this picture of an economy that's actually better than

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Speaker 1: a lot of us give it credit for per capita

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Speaker 1: GDP and real unit labor costs take us through kind

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Speaker 1: of perhaps the story that we've been missing there.

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Speaker 2: Well. One of the discussions about GDP growth over well,

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Speaker 2: again many years obviously derailed during the pandemic, but pre

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Speaker 2: pandemic and post pandemic, if we just exclude those couple

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Speaker 2: of years, was that basically the only reason why the

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Speaker 2: economy grew at all was population growth. So when we

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Speaker 2: had population growth at one point five percent, a little

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Speaker 2: bit of natural increase, but a lot of immigration one

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Speaker 2: point five one point six percent, and GDP was only

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Speaker 2: growing at one one and a half percent, per capita

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Speaker 2: GDP was falling, so our living standards were declining. That

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Speaker 2: was the sort of pressure that we're all feeling, Oh

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Speaker 2: the economy. Yes, the headline numbers one hul percent GDP,

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Speaker 2: it's okay, but I'm feeling rotten. I'm not benefiting from that.

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Speaker 2: And that's where the per capita side comes through. And

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Speaker 2: again that the data that came out in the National

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Speaker 2: accounts confirmed that per capita GDP had increased in each

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Speaker 2: of the last three quarters. Again, a turning point coming through.

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Speaker 2: One of the things that gets me excited, as some economists,

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Speaker 2: when I look at my graphs and there's a turning

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Speaker 2: point either up or down, there's something happening. And so

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Speaker 2: that gives me a lot of encouragement about per cap

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Speaker 2: a GDP family rising and brilliant at labor costs, they're

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Speaker 2: what do we call it, a more comprehensive measure of wages.

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Speaker 2: You know, we saw the wage price index numbers recently

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Speaker 2: and they were sort of middle of the road. Brilliant

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Speaker 2: labor costs incorporate the cost to business. So it's not

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Speaker 2: just the wage that we get paid. It's the superannuation cost,

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Speaker 2: it's overtime costs, it's payold taxes that they have to

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Speaker 2: pay if they're a big enough business. These sorts of

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Speaker 2: things which are part of real unit labor.

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Speaker 1: Costs a lot more comprehensive.

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Speaker 2: And it matters to the business rather than the wage

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Speaker 2: they pay you and meat that's only a part of

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Speaker 2: their labor costs.

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Speaker 1: Yeah.

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Speaker 2: Yeah, And so these showed, and this is important for inflation.

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Speaker 2: These showed that brilliant labor costs fell fell by zero

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Speaker 2: point one percent, so not a big fall but they

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Speaker 2: had been rising very strongly over the last few years.

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Speaker 2: They were a reason that the RBA was a little bit,

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Speaker 2: you know, unsure about whether the labor cost side of

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Speaker 2: the economy was going to help them with their inflation targeting.

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Speaker 2: But this is another just a snippet of news that's

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Speaker 2: again pointing in the right direction.

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Speaker 1: Okay, all right, So we put all of this together, right,

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Speaker 1: and then you look at say, household spending, which did

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Speaker 1: rise in January. It's good, not great, right, And consumer

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Speaker 1: sentiment though is still it's still pretty miserable. So why

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Speaker 1: then does the economy, I suppose, feel worse than the

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Speaker 1: data suggests.

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Speaker 2: That's the sixty four million billion dollar question because consumer sound,

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Speaker 2: you're quite right, is very weak. It's about a good

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Speaker 2: ten to fifteen points below the equilibrium level. So there's

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Speaker 2: a lot more pessimists, the an optimist optimists amongst the

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Speaker 2: consumer side of the economy, and that tends to be

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Speaker 2: a leading indicator of future consumer spending because when we're

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Speaker 2: feeling pretty glum, we tend not to spend as much.

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Speaker 2: We're feeling very nervous about our jobs or interest rates,

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Speaker 2: and these sorts of things so hard to pinpoint the

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Speaker 2: reason why consumeer sentiment remains weak. And it was week

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Speaker 2: before that rate hike that occurred in early February came through.

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Speaker 2: So when house prices are going up, when stock market

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Speaker 2: until recently was sort of rocketing along and all the

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Speaker 2: rest of it, we've sort of had reasons to be

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Speaker 2: pretty happy. Unemployment was low. That's a good thing. But

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Speaker 2: I think it comes through to this a couple of things.

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Speaker 2: Cost of living is still an issue out there. We've

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Speaker 2: seen petrol prices now being a dominant media issue, and

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Speaker 2: the intergenerational issues. The affordability of housing, I think has

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Speaker 2: caused a lot of people, particularly the younger folk, to

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Speaker 2: be pretty annoyed with their lot in the economic life

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Speaker 2: that they've got. In Australia, dwelling rents are accelerating again,

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Speaker 2: so there's just a big squeeze occurring. And that's why

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Speaker 2: I think when people answer that survey, they say, oh god,

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Speaker 2: I'm not that happy.

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Speaker 1: We are nearly out of time. So I'm going to

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Speaker 1: ask you. I'm going to cheat a little bit and

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Speaker 1: ask you two questions in one. Here. Looking ahead, we've

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Speaker 1: got a lot of volatility overseas and we've got there

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Speaker 1: are pressures domestically as well. If the situation in the

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Speaker 1: Middle East continues, is that the biggest risk, for instance,

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Speaker 1: to the economy throughout the year. And Part B is

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Speaker 1: is there a chance that the growth that we saw

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Speaker 1: in the December quarter, the economic growth, is that perhaps

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Speaker 1: the peak and it actually starts to slip back.

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Speaker 2: Now, look, global issues are always important for Australia. Now,

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Speaker 2: be at a conflict in the Middle East, or a

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Speaker 2: disruption to oil from some other shock, or a US

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Speaker 2: policy misstep perhaps, or something happening in China. What happens

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Speaker 2: in the global economy and global stock markets for example,

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Speaker 2: and bond markets can have a huge impact on us.

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Speaker 2: So that's clearly the biggest issue domestically sourced mistakes. Look,

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Speaker 2: I think we're still okay. The reserve back had shown

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Speaker 2: how pragmatic they are. If the wheels fell off for

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Speaker 2: some reason, they would cut rates. If we still get

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Speaker 2: it persistent inflation, they're going to high rates on apologies

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Speaker 2: to saying they could they could cut, but you know

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Speaker 2: they're pragmatic and really responsive. So I think it will

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Speaker 2: be an external issue that would cause us to be

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Speaker 2: completely derailed from the growth path. And look, we've got

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Speaker 2: a few little partial indicators for January. So the start

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Speaker 2: of the March quarter, you're saying, did we peak at

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Speaker 2: two point six percent in the December quarter twenty twenty five?

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Speaker 2: Partially indicators for January household spending was only plus point

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Speaker 2: three that's not a good kickoff to the quarter. Building

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Speaker 2: approvals minus seven percent in January not a good kickoff

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Speaker 2: for the quarter. So we've got this early experts were

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Speaker 2: a bit weaker in January two, just by the way,

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Speaker 2: So we've got this sort of you know, inability to

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Speaker 2: lock in this strength. So I'm not yet willing to

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Speaker 2: throw in the towel. One month's numbers doesn't change it.

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Speaker 2: But I'm just worried that once we get a few

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Speaker 2: more of these indicators, with consumer sentiment bening week, we'll

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Speaker 2: be back getting GDP growth on a quarterly basis, back

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Speaker 2: at two sorry, ero point five percent annual GDP in

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Speaker 2: the low twos.

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Speaker 1: So in short, then, while we've got a good set

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Speaker 1: of figures from last week, we should be a little

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Speaker 1: bit more positive while we can.

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Speaker 2: Right while we can. And I'm older, I remember when

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Speaker 2: John Howard was criticizing the Keating government, we had five

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Speaker 2: minutes of economic sunshine coming out of the early nineties recession,

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Speaker 2: and then we had the RBA hiking interstrates. Maybe this

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Speaker 2: is our five minutes of economic sunshine. I hope it

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Speaker 2: lasted a lot longer than five minutes me too.

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Speaker 1: Well, enjoy it and thank you for your time today, Stephen.

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Speaker 2: Thank you, Michael.

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Speaker 1: That was economist Stephen Cocolis, better known as the Kok.

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Speaker 1: You can find him at the Kok dot com and

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Speaker 1: follow him on LinkedIn Stephen Cooculis. I'm Michael Thompson and

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Speaker 1: this is Fear and Greed Q and a