1 00:00:03,460 --> 00:00:06,700 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. The 2 00:00:06,700 --> 00:00:10,619 Sean Aylmer: Board of the Reserve Bank held its monthly meeting yesterday and, 3 00:00:10,619 --> 00:00:13,550 Sean Aylmer: as expected, left interest rates on hold and indicated it 4 00:00:13,550 --> 00:00:17,370 Sean Aylmer: would continue its bond buying program until at least February. I 5 00:00:17,370 --> 00:00:20,360 Sean Aylmer: wanted to see what EY's Chief Economist Jo Masters made 6 00:00:20,360 --> 00:00:22,140 Sean Aylmer: of it all and what the next few months will 7 00:00:22,140 --> 00:00:24,650 Sean Aylmer: look like as we emerge from lockdowns. Jo, welcome back 8 00:00:24,650 --> 00:00:25,300 Sean Aylmer: to Fear and Greed. 9 00:00:25,570 --> 00:00:26,759 Jo Masters: Great to be talking to you. 10 00:00:26,950 --> 00:00:29,250 Sean Aylmer: First, what were the key messages out of the Reserve 11 00:00:29,250 --> 00:00:29,980 Sean Aylmer: Bank yesterday? 12 00:00:30,540 --> 00:00:32,990 Jo Masters: As you would expect, there wasn't a huge amount of 13 00:00:32,990 --> 00:00:36,140 Jo Masters: change in the statement. They told us a month ago 14 00:00:36,140 --> 00:00:40,020 Jo Masters: that they wouldn't review the bond buying program until February, 15 00:00:40,310 --> 00:00:43,780 Jo Masters: and the economy has largely performed as they had expected 16 00:00:43,850 --> 00:00:48,099 Jo Masters: over the last month. In fact, if anything, they sounded 17 00:00:48,140 --> 00:00:51,830 Jo Masters: more confident about the recovery. I think there were some 18 00:00:51,830 --> 00:00:56,080 Jo Masters: interesting comments from their business liaison, which is always insightful. 19 00:00:56,470 --> 00:01:00,370 Jo Masters: They talked about businesses planning for the easing of restrictions 20 00:01:00,370 --> 00:01:04,160 Jo Masters: in New South Wales and Victoria and, most importantly, that 21 00:01:04,160 --> 00:01:08,340 Jo Masters: firms are looking to hire ahead of those restrictions easing. 22 00:01:08,620 --> 00:01:11,589 Jo Masters: And of course, the labour market is critical to the economic and 23 00:01:11,590 --> 00:01:12,880 Jo Masters: monetary policy outlook. 24 00:01:13,120 --> 00:01:14,950 Sean Aylmer: It seems to me the Reserve Bank being a little 25 00:01:15,040 --> 00:01:18,300 Sean Aylmer: bit more upbeat, yet relative to many of its peers 26 00:01:18,300 --> 00:01:21,750 Sean Aylmer: around the world, it certainly has no interest in doing 27 00:01:21,750 --> 00:01:24,479 Sean Aylmer: anything on interest rates for a while. Compare that to 28 00:01:24,480 --> 00:01:28,369 Sean Aylmer: the Fed and Norwegian Central Bank, not that we talk about them that often, 29 00:01:28,550 --> 00:01:30,789 Sean Aylmer: having lifted rates. It just seems to me that they 30 00:01:30,790 --> 00:01:33,790 Sean Aylmer: are upbeat about the economy but they're still very reticent 31 00:01:34,010 --> 00:01:36,310 Sean Aylmer: about doing anything too much on monetary policy. 32 00:01:36,630 --> 00:01:39,270 Jo Masters: I think that difference is going to be laid bare 33 00:01:39,330 --> 00:01:42,240 Jo Masters: this week with the Reserve Bank of New Zealand expected 34 00:01:42,240 --> 00:01:45,440 Jo Masters: to raise rates. So very close neighbour and one where 35 00:01:45,440 --> 00:01:49,830 Jo Masters: our economy is often compared to. In fact, it's interesting 36 00:01:49,830 --> 00:01:52,080 Jo Masters: that in the statement they didn't talk about the global 37 00:01:52,080 --> 00:01:55,230 Jo Masters: environment at all, either the positives or the negatives there. 38 00:01:56,080 --> 00:02:00,020 Jo Masters: I think one of the big discussion points amongst central 39 00:02:00,020 --> 00:02:03,960 Jo Masters: banks and among economists, of course, is inflation, and whether 40 00:02:03,960 --> 00:02:08,070 Jo Masters: the spike that we're seeing in headline inflation is transitory. 41 00:02:08,490 --> 00:02:12,020 Jo Masters: Is it going to feed through to broad- based inflation pressures? 42 00:02:12,470 --> 00:02:15,070 Jo Masters: Is it going to be entrenched? How is it going 43 00:02:15,070 --> 00:02:17,590 Jo Masters: to sit against the tide of money that is still 44 00:02:17,590 --> 00:02:21,760 Jo Masters: flowing through household balance sheets? Here in Australia, I guess 45 00:02:21,760 --> 00:02:25,080 Jo Masters: the focus is still on the impact of Delta and 46 00:02:25,080 --> 00:02:28,310 Jo Masters: the restrictions, ensuring that we do come out of that, 47 00:02:28,690 --> 00:02:31,280 Jo Masters: and as you said, this long- held belief that it 48 00:02:31,280 --> 00:02:33,980 Jo Masters: will take a long time for wage pressure to build 49 00:02:34,270 --> 00:02:35,700 Jo Masters: and for inflation to rise. 50 00:02:35,700 --> 00:02:40,050 Sean Aylmer: Do you think it's as transitory and nascent as the 51 00:02:40,050 --> 00:02:40,980 Sean Aylmer: Reserve Bank does? 52 00:02:41,210 --> 00:02:44,269 Jo Masters: I tend to err on the side that a good 53 00:02:44,270 --> 00:02:46,970 Jo Masters: portion of it is transitory. 54 00:02:47,250 --> 00:02:47,370 Sean Aylmer: Yep. 55 00:02:47,650 --> 00:02:51,730 Jo Masters: We've undeniably got supply chain disruption still in play. We've 56 00:02:51,730 --> 00:02:55,710 Jo Masters: got shipping routes that have been dislocated through COVID that 57 00:02:55,710 --> 00:02:59,470 Jo Masters: have yet to normalise. And at some point, that system 58 00:02:59,470 --> 00:03:03,440 Jo Masters: will find its new equilibrium. And when it does, that 59 00:03:03,440 --> 00:03:07,089 Jo Masters: will probably weigh on inflation, so bring inflation down in 60 00:03:07,090 --> 00:03:11,810 Jo Masters: the period ahead. Having said that though, I guess two 61 00:03:12,300 --> 00:03:15,059 Jo Masters: countering forces that we've got, the first one is there 62 00:03:15,060 --> 00:03:17,750 Jo Masters: is a lot of demand coming in and economies are seemingly 63 00:03:17,750 --> 00:03:22,380 Jo Masters: recovering quite quickly, and alongside that, labour markets are recovering 64 00:03:22,380 --> 00:03:26,950 Jo Masters: quite quickly. We're hearing about skill shortages in Australia even 65 00:03:26,950 --> 00:03:31,280 Jo Masters: though we've got this significant economic shock to activity. If 66 00:03:31,280 --> 00:03:34,750 Jo Masters: that flows through to broad-based wage pressure, that is the 67 00:03:34,750 --> 00:03:39,480 Jo Masters: number one influencer of generalised inflation pressures and would suggest 68 00:03:39,830 --> 00:03:42,370 Jo Masters: that you will get lift-off on inflation a bit earlier 69 00:03:42,370 --> 00:03:43,790 Jo Masters: than the RBA's forecasts. 70 00:03:44,320 --> 00:03:47,980 Sean Aylmer: Okay. What sort of role do state border closures play 71 00:03:47,980 --> 00:03:51,420 Sean Aylmer: on wage pressures? I suppose specifically I'm thinking about labour 72 00:03:51,420 --> 00:03:54,900 Sean Aylmer: mobility into Western Australia and the fact that those borders are 73 00:03:55,290 --> 00:03:58,020 Sean Aylmer: closed so hard. Tourism in Queensland would be the same 74 00:03:58,020 --> 00:04:01,100 Sean Aylmer: story as we come into the summer season. Does it 75 00:04:01,100 --> 00:04:03,150 Sean Aylmer: make much of a difference if... Well, I suppose if 76 00:04:03,150 --> 00:04:04,830 Sean Aylmer: they keep their borders closed, no one can go and visit 77 00:04:04,830 --> 00:04:07,940 Sean Aylmer: Queensland anyway. But still, I mean, they're crying out for 78 00:04:07,940 --> 00:04:09,369 Sean Aylmer: miners in Western Australia. 79 00:04:09,770 --> 00:04:14,710 Jo Masters: So traditionally, Australians are actually not very mobile across state borders when 80 00:04:14,710 --> 00:04:18,350 Jo Masters: you compare it to say the US for example, or even 81 00:04:18,350 --> 00:04:22,570 Jo Masters: the UK. I actually think one of the aspects to 82 00:04:22,570 --> 00:04:25,000 Jo Masters: the skill shortages that we're seeing is to think not 83 00:04:25,000 --> 00:04:28,910 Jo Masters: just about opening up international borders and skilled migration, which 84 00:04:28,910 --> 00:04:32,010 Jo Masters: is undeniably important, but what can we do to try 85 00:04:32,010 --> 00:04:36,970 Jo Masters: and encourage more interstate mobility by Australians, and also think 86 00:04:36,970 --> 00:04:40,630 Jo Masters: about the skills channel, making sure that we're training people 87 00:04:40,630 --> 00:04:43,700 Jo Masters: for the jobs that we're going to have in the future? Look, at 88 00:04:43,700 --> 00:04:46,620 Jo Masters: the end of the day, when domestic borders are closed, 89 00:04:46,800 --> 00:04:50,339 Jo Masters: that's a barrier to free- flowing economic activity. Therefore, it 90 00:04:50,339 --> 00:04:53,210 Jo Masters: has an economic cost. I think the sooner we can 91 00:04:53,210 --> 00:04:56,330 Jo Masters: get domestic borders not just open, but for people to 92 00:04:56,330 --> 00:04:59,109 Jo Masters: be confident that they will remain open, that I will 93 00:04:59,110 --> 00:05:02,080 Jo Masters: get to my holiday, that my business trip or, in 94 00:05:02,080 --> 00:05:06,270 Jo Masters: my case, my presentation in Melbourne will go ahead, that 95 00:05:06,270 --> 00:05:07,680 Jo Masters: I think will be really, really important. 96 00:05:08,270 --> 00:05:10,820 Sean Aylmer: Okay. Now you mentioned a moment ago the idea of 97 00:05:10,820 --> 00:05:13,430 Sean Aylmer: just how important the employment market is. We have an 98 00:05:13,430 --> 00:05:16,430 Sean Aylmer: unemployment rate of 4.5%, not that anyone thinks that actually 99 00:05:16,430 --> 00:05:21,510 Sean Aylmer: reflects the true depth of unemployment here. What do you think 100 00:05:21,510 --> 00:05:24,570 Sean Aylmer: will happen? What will be the trajectory of the employment 101 00:05:24,570 --> 00:05:25,740 Sean Aylmer: market over the next three to six months? 102 00:05:27,110 --> 00:05:29,570 Jo Masters: I think one of the most important things to remember 103 00:05:29,760 --> 00:05:33,310 Jo Masters: is that the impact of COVID is uneven. That has 104 00:05:33,310 --> 00:05:36,980 Jo Masters: been true right from the start. It's uneven across states, 105 00:05:37,010 --> 00:05:41,130 Jo Masters: it's uneven across sectors of the economy, and it's uneven 106 00:05:41,130 --> 00:05:45,520 Jo Masters: across people's lives. So look, all the signs are that 107 00:05:45,520 --> 00:05:50,900 Jo Masters: the labour market will recover reasonably quickly. Job ads are strong. 108 00:05:50,940 --> 00:05:54,650 Jo Masters: Job vacancies are strong. We've got this comment from the 109 00:05:54,670 --> 00:05:57,589 Jo Masters: RBA that their business liaison is saying that firms are 110 00:05:57,589 --> 00:06:02,290 Jo Masters: hiring ahead of restrictions easing. We've also got, and we've 111 00:06:02,290 --> 00:06:07,100 Jo Masters: not had this before, the expectation of ongoing workforce disruption 112 00:06:07,100 --> 00:06:11,700 Jo Masters: because of this ongoing need to trace, track, isolate, and quarantine. 113 00:06:12,110 --> 00:06:13,950 Jo Masters: And we've seen that in the UK where there are 114 00:06:13,950 --> 00:06:17,800 Jo Masters: firms reporting 20 to 30% of their workforce are quarantining at any 115 00:06:17,800 --> 00:06:22,670 Jo Masters: given moment. We're hearing already in Australia of some businesses 116 00:06:22,670 --> 00:06:25,480 Jo Masters: where work from home is not possible, so a combination 117 00:06:25,480 --> 00:06:30,270 Jo Masters: of food services, retail stores, for example, looking to increase 118 00:06:30,270 --> 00:06:33,050 Jo Masters: their workforce to try and manage that. So look, the signs 119 00:06:33,050 --> 00:06:36,700 Jo Masters: are good, but we've had a very significant economic shock 120 00:06:36,710 --> 00:06:39,680 Jo Masters: and so it will take time to recover even in a 121 00:06:39,680 --> 00:06:40,520 Jo Masters: good scenario. 122 00:06:40,900 --> 00:06:42,360 Sean Aylmer: Stay with me, Jo, we'll be back in a minute. 123 00:06:47,710 --> 00:06:51,669 Sean Aylmer: My guest this morning is EY Chief Economist, Jo Masters. Okay, 124 00:06:51,670 --> 00:06:54,240 Sean Aylmer: just shifting gear a little bit to consumers, the Commonwealth 125 00:06:54,240 --> 00:06:59,070 Sean Aylmer: Bank recently reported that its customers have around $10,000 extra in 126 00:06:59,070 --> 00:07:02,869 Sean Aylmer: their accounts compared to normal times. When we come out 127 00:07:02,920 --> 00:07:05,279 Sean Aylmer: of lockdowns, and New South Wales, that'll be in the next 128 00:07:05,279 --> 00:07:08,160 Sean Aylmer: few weeks, and Victoria, hopefully, we'll be in six to 129 00:07:08,160 --> 00:07:11,330 Sean Aylmer: eight weeks' time, and the ACT somewhere in between probably, 130 00:07:11,830 --> 00:07:15,370 Sean Aylmer: how big a boost to consumer spending do you think we'll see? 131 00:07:15,930 --> 00:07:20,520 Jo Masters: I think over the next zero to nine to 12 months, 132 00:07:20,520 --> 00:07:23,270 Jo Masters: we're going to have quite a significant boost. It may 133 00:07:23,270 --> 00:07:26,810 Jo Masters: not be immediate because there is the likelihood that at 134 00:07:26,810 --> 00:07:30,190 Jo Masters: least some people will remain cautious about being out and 135 00:07:30,260 --> 00:07:34,320 Jo Masters: about in the community, even if they're vaccinated. Classic example perhaps, say, 136 00:07:34,320 --> 00:07:38,800 Jo Masters: young children are not vaccinated. I feel like the surge 137 00:07:38,800 --> 00:07:42,210 Jo Masters: in buying goods for my home has largely run its course. 138 00:07:42,410 --> 00:07:45,430 Jo Masters: We've bought our sofas and our air fryers and our PlayStations 139 00:07:45,920 --> 00:07:49,561 Jo Masters: and the likes. So the spending is really around services, and it simply means- 140 00:07:49,561 --> 00:07:52,030 Sean Aylmer: Jo, Jo, did you really buy an air fryer? 141 00:07:53,470 --> 00:07:54,040 Jo Masters: I bought two. 142 00:07:55,060 --> 00:07:55,180 Sean Aylmer: Oh, Jo. 143 00:07:55,180 --> 00:07:58,920 Jo Masters: There is a story to that though. I bought a 144 00:07:58,920 --> 00:08:03,820 Jo Masters: smaller, cheaper one as a minimum value proposition. My daughters used 145 00:08:03,820 --> 00:08:05,570 Jo Masters: it, and they used it so much I then bought the big- 146 00:08:06,110 --> 00:08:10,900 Sean Aylmer: The better. Yeah, right. Okay. Sorry, keep going, you threw me there 147 00:08:10,900 --> 00:08:11,670 Sean Aylmer: on the air fryer. 148 00:08:12,180 --> 00:08:13,990 Jo Masters: I got to tell you, we use it every day- 149 00:08:14,050 --> 00:08:14,101 Sean Aylmer: Is that right? 150 00:08:14,101 --> 00:08:19,270 Jo Masters: ... moment. Anyway, listen, so our balance sheets are good. 151 00:08:19,360 --> 00:08:21,460 Jo Masters: Household balance sheets are strong. We saved a lot of 152 00:08:21,460 --> 00:08:24,790 Jo Masters: money. People will want to spend on services. It might 153 00:08:24,800 --> 00:08:26,700 Jo Masters: take a bit of time to get out there. Even 154 00:08:26,700 --> 00:08:30,640 Jo Masters: thinking about booking an international holiday sounds great. Everything I'm 155 00:08:30,640 --> 00:08:34,329 Jo Masters: reading says the paperwork's a nightmare. The admin's a nightmare. 156 00:08:34,330 --> 00:08:37,560 Jo Masters: You can still get caught somewhere. Don't go to too many countries. 157 00:08:37,970 --> 00:08:40,360 Jo Masters: Parents might be worried about their kids missing any more 158 00:08:40,360 --> 00:08:43,580 Jo Masters: schooling. So there's a lot of moving parts but, overall, 159 00:08:43,580 --> 00:08:46,870 Jo Masters: I do think that consumption will be a key driver 160 00:08:47,179 --> 00:08:49,080 Jo Masters: of the recovery process over the next year. 161 00:08:49,450 --> 00:08:51,540 Sean Aylmer: Okay. And just while you're here, Jo, a quick one on 162 00:08:51,540 --> 00:08:54,210 Sean Aylmer: house prices. The Reserve Bank did talk about the Council 163 00:08:54,210 --> 00:08:57,689 Sean Aylmer: of Financial Regulators yesterday, and it actually talked about ensuring 164 00:08:57,690 --> 00:09:01,280 Sean Aylmer: there's an adequate buffer for loan servicing, whether that's a 165 00:09:01,280 --> 00:09:03,960 Sean Aylmer: hint at something, I'm not sure. I mean, what do you think will 166 00:09:03,960 --> 00:09:07,960 Sean Aylmer: happen to house prices, and do you expect regulators will actually step 167 00:09:07,960 --> 00:09:09,750 Sean Aylmer: in and do something in the next three to six months? 168 00:09:10,230 --> 00:09:13,170 Jo Masters: So it seems pretty clear that we will be getting 169 00:09:13,170 --> 00:09:16,990 Jo Masters: some kind of macroprudential controls later this year or early 170 00:09:16,990 --> 00:09:20,470 Jo Masters: next year. We've had the Treasurer, the Council of Financial Regulators, 171 00:09:20,470 --> 00:09:24,550 Jo Masters: and now the Reserve Bank reasonably clear about that. Focus 172 00:09:24,550 --> 00:09:29,850 Jo Masters: on loan to income ratios, we're hearing that with new loans, 173 00:09:30,580 --> 00:09:33,140 Jo Masters: one in four or one in five has got debt-to-income 174 00:09:33,510 --> 00:09:36,969 Jo Masters: ratio of over six times. And obviously, perhaps, the focus 175 00:09:36,980 --> 00:09:40,890 Jo Masters: there on serviceability buffers as well. Look, that's appropriate when 176 00:09:40,890 --> 00:09:43,540 Jo Masters: you think that it's not just investors driving the market, 177 00:09:43,540 --> 00:09:47,939 Jo Masters: it's more broadly based. In that environment, look, house prices 178 00:09:47,940 --> 00:09:52,000 Jo Masters: are already beginning to slow on a month-on-month basis, and 179 00:09:52,000 --> 00:09:55,050 Jo Masters: these type of macroprudential controls when we've done them before, 180 00:09:55,350 --> 00:09:58,579 Jo Masters: they do slow the market. They are effective though, right? 181 00:09:58,580 --> 00:10:02,069 Jo Masters: They're quite nuanced. Banks can be quite targeted in them. 182 00:10:02,920 --> 00:10:05,170 Jo Masters: The two times we've used them before, we've slowed the 183 00:10:05,170 --> 00:10:08,250 Jo Masters: market not crashed the market. So I think that is 184 00:10:08,250 --> 00:10:10,670 Jo Masters: what we're looking at. Going forward, I think house prices 185 00:10:11,130 --> 00:10:14,190 Jo Masters: continue to rise but at a much more slower pace 186 00:10:15,130 --> 00:10:15,990 Jo Masters: than we've seen over the last year. 187 00:10:16,309 --> 00:10:18,640 Sean Aylmer: Now, Jo, the final question is the most important one, of 188 00:10:18,640 --> 00:10:21,840 Sean Aylmer: course. Prior to COVID, I know what your travel schedule 189 00:10:21,840 --> 00:10:25,780 Sean Aylmer: was like, and it was crazy. The last 18 months you 190 00:10:25,780 --> 00:10:28,040 Sean Aylmer: have continued working just as hard, but you're doing it 191 00:10:28,040 --> 00:10:31,740 Sean Aylmer: from home. Are you looking forward to lockdowns finishing and 192 00:10:31,740 --> 00:10:33,410 Sean Aylmer: resuming that sort of travel schedule? 193 00:10:33,690 --> 00:10:36,650 Jo Masters: I am really looking forward to getting back in the office. I 194 00:10:36,650 --> 00:10:40,070 Jo Masters: am actually looking forward to getting into offices around Australia. 195 00:10:40,280 --> 00:10:43,080 Jo Masters: I actually did a reasonable amount of travel just before 196 00:10:43,080 --> 00:10:45,719 Jo Masters: this lockdown. In fact, the week before the Sydney lockdown, 197 00:10:45,720 --> 00:10:49,209 Jo Masters: I did two domestic flights and two international flights to 198 00:10:49,210 --> 00:10:52,380 Jo Masters: New Zealand. Look, I hope I don't travel as much 199 00:10:52,380 --> 00:10:54,420 Jo Masters: as I did before COVID, but I am looking forward 200 00:10:54,420 --> 00:10:56,610 Jo Masters: to getting face to face with my colleagues and my 201 00:10:56,610 --> 00:10:57,840 Jo Masters: clients and my friends. 202 00:10:58,420 --> 00:11:00,330 Sean Aylmer: Good. Jo, thanks for talking to Fear and Greed. 203 00:11:00,770 --> 00:11:01,260 Jo Masters: My pleasure. 204 00:11:01,600 --> 00:11:04,750 Sean Aylmer: That was Jo Masters, Chief Economist at EY. This is 205 00:11:04,750 --> 00:11:06,969 Sean Aylmer: the Fear and Greed Daily Interview. Join me every morning 206 00:11:06,970 --> 00:11:09,330 Sean Aylmer: for the full Fear and Greed podcast, with all the 207 00:11:09,330 --> 00:11:12,240 Sean Aylmer: business news you need to know. I'm Sean Aylmer, enjoy 208 00:11:12,240 --> 00:11:12,570 Sean Aylmer: your day.