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Sean Aylmer: Welcome to the Fear and Greed daily interview. I'm Sean Aylmer. Australia has avoided a double-dip recession for

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Sean Aylmer: now after GDP grew 0.7% during the June quarter. It's substantially better than

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Sean Aylmer: expected with most economists forecasting around 0.4% growth. And until

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Sean Aylmer: last week, many thought the economy may have actually contracted

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Sean Aylmer: during the quarter. If it had, it would have seen

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Sean Aylmer: us in recession again, as the current quarter, will almost

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Sean Aylmer: certainly go backwards due to lockdowns. But now that we've

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Sean Aylmer: avoided it, I want it to look at where the

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Sean Aylmer: economy goes from here. Dr Shane Oliver is the chief

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Sean Aylmer: economist at AMP Capital. Shane, welcome back to Fear and Greed.

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Dr Shane Oliver: Thank  you,  Sean.  Good  to be here.

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Sean Aylmer: Could we  just  run  through  the  numbers  yesterday?  The  overall  number 

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Sean Aylmer: was  better  than  most  people  tipped.

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Dr Shane Oliver: It certainly was. The rise in GDP was 0.7% for last quarter. That

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Dr Shane Oliver: was probably what people were expecting about two months ago, but

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Dr Shane Oliver: in the run- to the release, there's a whole bunch of economic

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Dr Shane Oliver: indicators that relate to bits of GDP. And so many

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Dr Shane Oliver: people have revised down well below that. In fact, a week or so ago we

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Dr Shane Oliver: forecasting a decline in GDP of minus 0. 1%. And that was particularly

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Dr Shane Oliver: after some weak construction numbers. And we thought that the trade numbers would also be a detractor along with inventories.

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Dr Shane Oliver: But as it turned out, as we came into the

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Dr Shane Oliver: release of those numbers, we did get some stronger data, but particularly the public

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Dr Shane Oliver: spending and the trade data looked a little bit better.

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Dr Shane Oliver: So we revised up to plus 0.3%. I think the

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Dr Shane Oliver: consensus was about 0. 4% or thereabouts, but nevertheless it

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Dr Shane Oliver: came in even stronger than that. And one of the

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Dr Shane Oliver: big drivers, there was a couple of big drivers, public

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Dr Shane Oliver: spending rose a lot more than I was expecting. It

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Dr Shane Oliver: contributed about 0.5 percentage points to 0.7% increase. So big contribution from public spending.

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Dr Shane Oliver: And of course the forward inventories was less than expected, probably

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Dr Shane Oliver: because of the farmers building up their inventories, and dwelling investments

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Dr Shane Oliver: actually rose whereas some data released last week suggested that it

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Dr Shane Oliver: would fall, but whatever it was driving it,  it was

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Dr Shane Oliver: a good outcome. And, but at the surface you can

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Dr Shane Oliver: see up until the lockdowns really intensified at the end

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Dr Shane Oliver: of the quarter, only at the very end of the quarter, the

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Dr Shane Oliver: Australian economy was growing at a reasonable pace with solid

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Dr Shane Oliver: growth in consumer spending a bit of strength in business investment,

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Dr Shane Oliver: but also a very strong contribution from public demand.

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Sean Aylmer: Okay. The thing about the GDP figures, it does give a good

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Sean Aylmer: snapshot in time at the whole economy. So just saying,

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Sean Aylmer: so consumer spending was reasonably okay. Business investment was okay,

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Sean Aylmer: bit less. When we talk about inventories, that's always an

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Sean Aylmer: interesting one and a bit technical for those who don't

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Sean Aylmer: follow economics too closely. Why is it when inventories rise that's a

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Sean Aylmer: detraction from growth?

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Dr Shane Oliver: Well, it depends on the size of the rise relative

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Dr Shane Oliver: to the previous quarter. So if inventories rose in the

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Dr Shane Oliver: previous quarter and then rise again this quarter, but rise

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Dr Shane Oliver: by less, that means production won't have gone up as much.

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Dr Shane Oliver: It's basically because if you've got demand in the economy,

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Dr Shane Oliver: so you can measure the economy in three different ways. There is

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Dr Shane Oliver: the income received, there's production and there's demand, you can

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Dr Shane Oliver: satisfy demand by either producing everything, but you can also run down some inventories. So it's

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Dr Shane Oliver: the change in inventories, which sort of impacts rather than the, or rather the change in

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Dr Shane Oliver: the changing factors, as opposed to the simple change. So

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Dr Shane Oliver: it's the second derivative, which drives it. So what happened in the last quarter

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Dr Shane Oliver: was that inventories rose, but they rose at a smaller rate, which meant production

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Dr Shane Oliver: wasn't quite as strong in terms of actually meeting demand

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Dr Shane Oliver: in the economy. So that turned out to be a detractor from both.

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Sean Aylmer: Okay. So we're at 0.7  during  the  June  quarter,  what  do  you  think  will 

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Sean Aylmer: happen  this  quarter?

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Dr Shane Oliver: Well, this quarter is always the big problem and as you've

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Dr Shane Oliver: alluded to in the introduction there, if we had a negative

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Dr Shane Oliver: June quarter, we're almost certain to see a negative September

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Dr Shane Oliver: quarter either way and that would have given us a

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Dr Shane Oliver: technical recession. So the fact that we got a positive June quarter,

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Dr Shane Oliver: it's caught on us because we missed that negative headline

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Dr Shane Oliver: of a double-dip in recession so to speak. But the

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Dr Shane Oliver: reality is, and as people in Sydney and Melbourne would

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Dr Shane Oliver: tell you things are pretty tough. It feels like a recession

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Dr Shane Oliver: to many anyway, but we going to see a pretty

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Dr Shane Oliver: hefty contraction in the economy in the current quarter. Now

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Dr Shane Oliver: we're looking for a decline in GDP in the current

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Dr Shane Oliver: quarter of around 4%, mind you in the June quarter last year,

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Dr Shane Oliver: the detraction was minus 7%, but that was because the whole of

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Dr Shane Oliver: the economy was locked up for I guess all of April and of

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Dr Shane Oliver: course much of May. This time around we're having about

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Dr Shane Oliver: half of the economy locked up, but probably right through

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Dr Shane Oliver: the whole quarter. And the bits that are being locked up are of course, Victoria and

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Dr Shane Oliver: New South Wales. And so hence you get a detraction

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Dr Shane Oliver: from GDP as economic activity doesn't occur but it's not as bad

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Dr Shane Oliver: as last year because we're still seeing some growth in WA, Queensland, South

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Dr Shane Oliver: Australia and Tasmania. Touch wood that they don't get affected either. 

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Sean Aylmer: And  then  beyond  this  quarter,  because  it  looks  like  Victoria and 

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Sean Aylmer: New  South  Wales  at  least,  won't  fully  reopen  till  well 

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Sean Aylmer: into  next  quarter,  October,  November,  depending  on  vaccination  rates,  are 

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Sean Aylmer: we  likely  to  see  some  sort  of  bounce  back,  perhaps 

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Sean Aylmer: not  a  strong  one?

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Dr Shane Oliver: I think we will see a bounce back. And this is

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Dr Shane Oliver: why we shouldn't get too gloomy here. I mean, it

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Dr Shane Oliver: does feel gloomy when you say that Victoria and-

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Sean Aylmer: Shane you are always  an  optimist,  you  know  that,  I  mean,  sorry,  you're 

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Sean Aylmer: a  realist.  You're  a  realist,  so  that's  not  an  optimistic 

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Sean Aylmer: economist,  but  you're  a  realist  in  that,  but  you  are 

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Sean Aylmer: an  optimist  at  heart.

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Dr Shane Oliver: I prefer to be an optimist. Yes. And I think optimist usually win in

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Dr Shane Oliver: the long run not necessarily the short run, but in the

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Dr Shane Oliver: short run, we also have to be a realist. And that's why when

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Dr Shane Oliver: I got the numbers a week or so ago, they were telling

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Dr Shane Oliver: me the June quarter was going to be negative and we were headed for recession.

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Dr Shane Oliver: So you've got to tell it why you see it,

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Dr Shane Oliver: then the facts changed, and of course, we've avoided that. But

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Dr Shane Oliver: by the same token, either way, I would still be looking forward to a

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Dr Shane Oliver: better next year. And I think there's good reason to

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Dr Shane Oliver: do that. I think from the end of this year,

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Dr Shane Oliver: we will start to see some sort of reopening. Put

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Dr Shane Oliver: simply the vaccination rates are rising rapidly across Australia with

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Dr Shane Oliver: New South Wales leading the charge. Partly because some of

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Dr Shane Oliver: the vaccines were allocated from other states. I don't want  to be harsh on the other States. And

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Dr Shane Oliver: that I think is getting us closer to that point

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Dr Shane Oliver: where we can stop to see some sort of reopening occur.

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Dr Shane Oliver: So if you think about it, technically, when the lockdown started

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Dr Shane Oliver: and there have been various grades of them, loose then tight then loose

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Dr Shane Oliver: and so on, but basically you saw this big hit

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Dr Shane Oliver: to economic activity back in July in New South Wales

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Dr Shane Oliver: and for much of the month, Victoria, but they're not going

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Dr Shane Oliver: to get any worse from here. It's very unlikely they'll

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Dr Shane Oliver: get any worse from here, I can't see the lockdowns being tightened further from here.

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Dr Shane Oliver: And then if you see a slight easing in the lockdowns,

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Dr Shane Oliver: perhaps enabling vaccinated people to have meals in cafes where all

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Dr Shane Oliver: the workers in the cafe are vaccinated and they're sitting outside.

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Dr Shane Oliver: If you start to see a little bit of incremental activity come back then that will

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Dr Shane Oliver: see GDP in those states lift through the course of the December quarter.

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Dr Shane Oliver: And so therefore you get some sort of recovery and

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Dr Shane Oliver: therefore again, avoid a technical recession as growth returns. So that's my

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Dr Shane Oliver: base case. I think we will see some sort of recovery. There is also a level of pent up demand as people are

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Dr Shane Oliver: stuck at home and can't do their normal spending, both businesses

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Dr Shane Oliver: and households are doing that. The savings rate will go

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Dr Shane Oliver: back up again, partly helped by government support measures and that will also help spending.

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Dr Shane Oliver: Only difference is compared to last year is that we'll be reopening

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Dr Shane Oliver: most likely where COVID numbers are relatively high in contrast

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Dr Shane Oliver: to last year when we reopened and COVID numbers were at or near zero. And so

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Dr Shane Oliver: therefore there'll be a degree of caution on the part

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Dr Shane Oliver: of Australians which you don't see in other countries, because they've

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Dr Shane Oliver: all gotten used to very high levels of coronavirus. If

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Dr Shane Oliver: you're in the UK, Europe, or the US, they're used

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Dr Shane Oliver: to it. But we have to get used to it. And until I

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Dr Shane Oliver: think we all get confident that we're not seeing our hospital's overwhelmed,

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Dr Shane Oliver: lots and lots of death and that vaccines are still working to protect people. Then

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Dr Shane Oliver: it'll take a little while to adjust to that. So

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Dr Shane Oliver: I think we will see a bounce back in the December quarter,

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Dr Shane Oliver: but it won't be as strong as the bounce back we saw

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Dr Shane Oliver: after the lockdown, the national lockdown last year.

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Sean Aylmer: Stay  with  me,  Shane,  we'll  be  back  in  a  minute. 

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Sean Aylmer: My guest this morning is Dr. Shane Oliver, chief economist

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Sean Aylmer: at AMP Capital. So for many of us, the way we

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Sean Aylmer: relate to it is via interest rates and particularly those homeowners.

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Sean Aylmer: What's the prospect for interest rates and then broader monetary

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Sean Aylmer: policy and also government spending?

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Dr Shane Oliver: Well, that's a good question. Government spending will remain at

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Dr Shane Oliver: very high levels as long as the lockdowns continue. There is

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Dr Shane Oliver: about a billion to $1.5 billion worth payments a week going to New South Wales,

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Dr Shane Oliver: something like that going into Victoria, as a result of federal and

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Dr Shane Oliver: state support measures. They're not the same as JobKeeper but in some areas

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Dr Shane Oliver: they're about the same size. That will start to wind down once

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Dr Shane Oliver: the lockdowns start to end and people see their income come back.

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Dr Shane Oliver: But by the same token, the level of economic activity as

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Dr Shane Oliver: we get through 2022. So the optimist in me tells me

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Dr Shane Oliver: it will pick up, we will see recovery, but we

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Dr Shane Oliver: are still probably looking at a lower level of economic activity

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Dr Shane Oliver: throughout the course of 2022
and a higher level of unemployment through

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Dr Shane Oliver: 2022 than the Reserve Bank was assuming just a few weeks back,

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Dr Shane Oliver: which I think ultimately means easier monetary policy for longer.

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Dr Shane Oliver: It's quite likely in the next week they will delay

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Dr Shane Oliver: their decision to slow down bond buying and keep it

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Dr Shane Oliver: at the rate of $5 billion a week. But it also, I guess,

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Dr Shane Oliver: reinforces what the Reserve Bank has been saying all along that first rate hike probably won't occur until 2024. Some of us have been thinking part

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Dr Shane Oliver: of the lockdowns that will occur the beginning of 2023, but the setback has put pay

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Dr Shane Oliver: to that. So it basically means lower for longer interest rates.

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Sean Aylmer: Do things like elections, and then we have to have one before May next year so it's within

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Sean Aylmer: nine months or so or less, what sort of role will they

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Sean Aylmer: play in the economy?

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Dr Shane Oliver: Well they have an impact. I mean, my God, it just seems like we

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Dr Shane Oliver: just got over the last election! We've spent all the time worried about coronavirus,

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Dr Shane Oliver: but anyway, they come around quickly. They have an impact

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Dr Shane Oliver: to the extent that in the run up to the elections, businesses in particular

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Dr Shane Oliver: and households to some degree often feel a bit nervous about things,

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Dr Shane Oliver: whether there'll be a change in government policy. This was most noticeable

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Dr Shane Oliver: prior to the last election because Labor's policy initiatives were

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Dr Shane Oliver: very different and some would say radically different almost like Whitlam's policies were

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Dr Shane Oliver: relative to the Liberals in 1972, or John Hewson's policies

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Dr Shane Oliver: were so different compared to Paul Keatings in 1993.
So it offered a real choice in

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Dr Shane Oliver: that sense, but there was a bit of uncertainty about what would be the impact

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Dr Shane Oliver: of changes to negative gearing, capital gains tax and various other things. And I think

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Dr Shane Oliver: that can lead to a period of uncertainty. If this

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Dr Shane Oliver: time around the policies of the two  major parties aren't that different, then that uncertainty may be

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Dr Shane Oliver: somewhat less, but nevertheless it does often cause a deal

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Dr Shane Oliver: of uncertainty in the run up to elections. And then of course, things settle back down afterwards.

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Sean Aylmer: And just while I've got you Shane, how's all this

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Sean Aylmer: play out for the share market?

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Dr Shane Oliver: You could be forgiven for thinking that the share market has gone bonkers

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Dr Shane Oliver: along with your property markets because they haven't batted an eyelid.

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Dr Shane Oliver: Occasionally some negative things in the market might take a bit of

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Dr Shane Oliver: a hit, but generally speaking, the Aussie share market has

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Dr Shane Oliver: been incredibly resilient the last couple of months, whereas last

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Dr Shane Oliver: year it fell 37% from late February to late March

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Dr Shane Oliver: as we went into the lockdowns. So a very different situation this time around and likewise,

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Dr Shane Oliver: the property market. Last year we saw the Sydney and Melbourne property market, Sydney fell about 3%

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Dr Shane Oliver: and the Melbourne property market fell about 6%. Other States a little bit less than that. And then of course they all recovered again.

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Dr Shane Oliver: This time around those markets have just sailed through. And I

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Dr Shane Oliver: think that's partly because the share markets we've just been

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Dr Shane Oliver: through the earnings reporting season. It's now finished as of yesterday.

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Dr Shane Oliver: I mean, there will be other company's reporting, but the ones

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Dr Shane Oliver: that you have to report in the month of August

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Dr Shane Oliver: have done so, and we saw a pretty good rebound.

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Dr Shane Oliver: 75% of companies saw their profits up, maybe no more than had

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Dr Shane Oliver: been expected on average by the market, but the big

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Dr Shane Oliver: surprise was that we saw record dividends and we saw something like $20 billion worth

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Dr Shane Oliver: of stock buybacks. So there's a lot of money coming

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Dr Shane Oliver: back to shareholders. So that's helped. We've still got lower

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Dr Shane Oliver: interests rates, lower for longer interest rates. That's helping. And of

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Dr Shane Oliver: course I think investors are thinking well after the lockdowns

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Dr Shane Oliver: last year, there was a recovery so selling going into a

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Dr Shane Oliver: lockdown was a big mistake. So we're not going to do that same

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Dr Shane Oliver: thing this time around. And also this time around there's

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Dr Shane Oliver: the vaccines, which offer the hope of a more sustained recovery.

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Dr Shane Oliver: And those vaccines were still on the horizon or over

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Dr Shane Oliver: the horizon in the national lockdown last year. So that's all

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Dr Shane Oliver: helped the share market. And a lot of that sentiment also helped the property market to keep going.

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Sean Aylmer: Shane,  thank  you  for  talking  to  Fear  and  Greed.

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Dr Shane Oliver: Thank  you  Sean,  all  the  best!

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Sean Aylmer: That was Dr Shane Oliver, Chief Economist at AMP Capital.

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Sean Aylmer: This is the Fear and Greed Daily Interview. Join me

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Sean Aylmer: every morning for the full Fear and Greed podcast with

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Sean Aylmer: all the business news you need to know. I'm Sean Aylmer.

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Sean Aylmer: Enjoy your day.