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Speaker 1: Welcome to Fear and Greed Q and A, where we

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

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

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Speaker 1: economists Stephen could Cooles to look at the week ahead.

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Speaker 1: You'll find him at the kook dot com. That's thg

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Speaker 1: kouk dot com and on X using the handle the

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Speaker 1: Kirk Stephen.

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Speaker 2: Good morning, Very good morning, Michael.

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Speaker 1: What a week last week and a big week coming

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Speaker 1: up this week as well. Obviously, last week we had

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Speaker 1: the Reserve Bank Board increasing the official cash rate by

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Speaker 1: twenty five basis points. I want to get to that

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Speaker 1: in a little bit of your thoughts on that, but

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Speaker 1: we'll start by looking to the week ahead, because I

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Speaker 1: dare say it's going to come up in this discussion anyway.

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Speaker 1: Household spending is something we're going to get a big

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Speaker 1: insight into that this week, which did play a part

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Speaker 1: in the RBA's decision last week.

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Speaker 2: And it's for the month of December. And yes, you're

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Speaker 2: quite right then, in her press statement after the rate

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Speaker 2: high announcement and in the statement on mountry policy, that

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Speaker 2: fifty five sixty page document that they put out mentioned

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Speaker 2: household spending being stronger than they assumed, and this goes

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Speaker 2: through to the month of November, so they were aware

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Speaker 2: also like we are, that there could have been a

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Speaker 2: little bit of a boost from Black Friday sales and

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Speaker 2: bring forward is spending ahead of Christmas, the usual seasonal

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Speaker 2: pattern for example. So these December numbers will be really

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Speaker 2: interesting because if they're even a little bit strong, and

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Speaker 2: by that, I'd say if we get a plus zero

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Speaker 2: point five percent growth rate, that would be classified as

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Speaker 2: strong because the prior two months were one point four

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Speaker 2: percent one percent, and that's really strong on a monthly basis.

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Speaker 2: The only way that you'd probably get them sort of

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Speaker 2: reflecting that maybe it was a one off boost because

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Speaker 2: of the Black Friday sales or similar sort of things,

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Speaker 2: was if we got a flat result or even a

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Speaker 2: small negative. So very very hard to forour this because

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Speaker 2: of this change in seasonal spending from US consumers US householders,

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Speaker 2: but it is absolutely important and it was one of

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Speaker 2: the reasons clearly cited by the RBA behind their rate

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Speaker 2: hike decision last week.

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Speaker 1: The other big one that's coming up this week that

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Speaker 1: will kind of helped her to paint a fuller picture

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Speaker 1: of what the Reserve banker is trying to deal with.

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Speaker 1: We're going to get lending data this week, and.

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Speaker 2: It's really important the lending data show, or the main

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Speaker 2: subcomponents of the lending data is how much money, again

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Speaker 2: we householders borrowed, mainly for mortgages. There's a little bit

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Speaker 2: of personal finance in there, but that's generally not a

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Speaker 2: big number. It's about housing, and this one for the

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Speaker 2: December quarter is actually very very interesting because it's the

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Speaker 2: first official capture of the effect of that first home

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Speaker 2: buyers five percent of deposit scheme that the federal government

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Speaker 2: introduced immediately after the election last year, and we'll see

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Speaker 2: just how many first home buyers have been taking advantage

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Speaker 2: of this lower deposit threshold to tap into the market.

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Speaker 2: We know some sort of decent and very good and

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Speaker 2: anecdotal elements from cotality that the price increases that we've

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Speaker 2: seen since this scheme was introduced with skewed to the

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Speaker 2: lower price houses which qualified for the scheme because there

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Speaker 2: is a price threshold on which city you're buying, and

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Speaker 2: so we'll see a bit of that. The other thing

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Speaker 2: that we'll also see is to what extent investors are

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Speaker 2: stepping back into the market and whether we've seen some

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Speaker 2: of this decisions about capital gains tax these other things.

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Speaker 2: Is that are we seeing investors step up? And if

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Speaker 2: that is the case, and if credit is strong, if

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Speaker 2: household lending and housing lending is strong, then of course

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Speaker 2: it'd validate if it needed any it'd validate the rate

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Speaker 2: hike that the RBA delivered.

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Speaker 1: Just before we move on from lending and in particular investors,

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Speaker 1: you mentioned capital gains tax, and we did hear last

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Speaker 1: week there was this suggestion that maybe this could be

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Speaker 1: something that the federal government will look at, that there

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Speaker 1: might be the potential to wind back those capital gains

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Speaker 1: tax concessions that I made for investors. What kind of

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Speaker 1: impact would that have because a couple of weeks ago,

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Speaker 1: you and I were talking about the fact that the

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Speaker 1: government is going to need to look for some big

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Speaker 1: ticket items, some things that are really going to help

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Speaker 1: just wind back spending, just put the brakes on a

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Speaker 1: little bit. Is this one of those things.

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Speaker 2: Fiscal policy tightening? I think we want it, and we

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Speaker 2: need it, and there are some good reasons for it.

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Speaker 2: And this is sort of in a way, even though

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Speaker 2: a lot of people may be impacted because it impacts

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Speaker 2: investor demand, particularly as it's been leaked at the moment,

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Speaker 2: and we don't know what form this change will be,

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Speaker 2: so we're flying a little bit blind. But if it's

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Speaker 2: one of these ones where the concessions for capital gains

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Speaker 2: on investments in property is the main focus of it,

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Speaker 2: then a couple of things. It won't have a huge

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Speaker 2: impact on house prices. I think there's been plenty of

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Speaker 2: research that shows it might just trim them by a

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Speaker 2: couple of percent, and well, every couple of percent helps,

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Speaker 2: as they say. But more importantly I think is that

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Speaker 2: it actually is a fiscal policy tightening. It will improve

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Speaker 2: the budget bottom line because these tax concessions will not

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Speaker 2: be claimed as frequently. The budget bottom line will improve,

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Speaker 2: and the government will then have the choice of do

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Speaker 2: they just bank that money a smaller budget deficit, good

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Speaker 2: if they can do that, or feeding to their other

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Speaker 2: policy objective of wanting to build more houses, do they

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Speaker 2: use the revenue that they say from this tax change

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Speaker 2: to put into the development of greenfield space to build

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Speaker 2: more dwellings? Do they do something to sort of build

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Speaker 2: more dwellings, which is of course is part of the

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Speaker 2: agenda of improving housing supply. So I would love to

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Speaker 2: see it, depending on the intricate details, But as it's

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Speaker 2: been floated last week, it sounds like there's some thing

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Speaker 2: brewing there, and I think it'd be great because it's

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Speaker 2: a fiscal policy tightening that actually hits the right part

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Speaker 2: of the economy, housing investors, who I don't think need

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Speaker 2: a leg up at the moment.

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Speaker 1: You've worked as an advisor to a prime minister before.

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Speaker 1: How hard is something like this to try and emphasize

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Speaker 1: the economic importance of it, knowing that the political reality

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Speaker 1: of it and trying to sell this into voters is

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Speaker 1: going to be a very difficult thing.

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Speaker 2: That you've uncovered. Oh, I don't know what percentage to

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Speaker 2: put on it, eighty ninety ninety five percent of the

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Speaker 2: difficulty of policy versus politics. Even the Productivity round table

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Speaker 2: from last year, there's some great policy ideas out there.

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Speaker 2: There are a list as long as your arm and

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Speaker 2: the Productivity Commission, Daniel Woods has got a myriad of

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Speaker 2: publications and analysis and research as well as a whole

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Speaker 2: lot of other people about how we can improve productivity.

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Speaker 2: How we've got the policy ideas out there to sort

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Speaker 2: of fix some of these problems in the Australian economy,

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Speaker 2: but the politics gets in the way. That Again, even

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Speaker 2: last week, even though it's only just a kiteness being

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Speaker 2: flown by the Treasurer, at the moment, we saw the

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Speaker 2: opposition starting to sort of demonize this change. And that's fine.

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Speaker 2: Politics is a tough game and all the rest of it.

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Speaker 2: But as someone who's sitting there thinking, this is a

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Speaker 2: really good idea, fixes the budget, addresses an imbalance or

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Speaker 2: a distortion in the economy. Therefore it's good obviously, but

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Speaker 2: if you do it, there's going to be a very

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Speaker 2: noisy cohort, even though that might be the minority, but

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Speaker 2: a noisy cohort who will rail against it and make

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Speaker 2: it harder to get through. You've seen a million examples

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Speaker 2: of it. The previous shortened Labor Party tried Franklin credit

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Speaker 2: reform and well capital gains tax concessions. We've seen it

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Speaker 2: with a whole lot of the GST things. When the

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Speaker 2: Howard government introduced it, they had to compromise because the

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Speaker 2: opposition of that day was sort of demonizing the the

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Speaker 2: breadth and the extent of the GST. It's hard to

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Speaker 2: get changes through which takes a little bit of money

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Speaker 2: out of the pockets of even a small part of

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Speaker 2: the electric Yeah.

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Speaker 1: Yeah, it is going to be a real challenge, and

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Speaker 1: we're going to see plenty of headlines. I suspect between

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Speaker 1: now and the budget on that I've led us on

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Speaker 1: quite a meandering path in order to get back to

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Speaker 1: the Reserve Bank. But this is where I want to

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Speaker 1: finish off, because I've got a couple of Reserve Bank

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Speaker 1: speakers this week. We've got Deputy Governor Andrew Howser chief

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Speaker 1: Economist Sarah Hunter are both speaking this week. What are

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Speaker 1: we expecting to hear from them? And I suppose the

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Speaker 1: question as well for you is when you look back

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Speaker 1: at last week's decision, and you saw it in the

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Speaker 1: press conference after the Reserve Bank Board meeting, when Governor

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Speaker 1: Michelle Bullock was talking about the decision and all of

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Speaker 1: these questions about we only just had an interest rate

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Speaker 1: cut in August of last year and now here we

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Speaker 1: in February of this year and we are increasing rates.

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Speaker 1: Did the RBA get it wrong back then? And if not,

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Speaker 1: kind of how did things change so much from the

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Speaker 1: forecasts that were being made last time to now?

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Speaker 2: Look, they didn't get it wrong and even with the

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Speaker 2: rate hike, and even though I was sort of cautiously

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Speaker 2: against it when we spoke about this time last week

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Speaker 2: and it was obviously delivered, they didn't get it wrong.

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Speaker 2: You can understand what they're doing. And the bottom line

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Speaker 2: was that rather making an error, the facts changed. Use

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Speaker 2: that sort of cliched phrase it's often thrown around from

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Speaker 2: August last year, just in a really quick summary. In

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Speaker 2: August last year, with the last rate cut, the third

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Speaker 2: rate cut of that cycle, the RBA was forecasting and

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Speaker 2: most people agreed. In fact, the vast majority of economists

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Speaker 2: agreed that inflation would be two and a half percent

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Speaker 2: over the forecast horizon, So big tick. That assumed another

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Speaker 2: couple of rate cuts, which were priced into the market,

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Speaker 2: and the RBA used as a technical assumption when they're

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Speaker 2: prepared their forecasts. They thought that way just growth to

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Speaker 2: be low, They thought the unemployment rate would be creeping up.

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Speaker 2: They thought there was enough uncertainty about the global what

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Speaker 2: do we call it, geopolitical economic environment to sort of

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Speaker 2: have a little bit of caution against some of the

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Speaker 2: downside risks. From there, fast forward six months, we've got

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Speaker 2: a shock on the inflation rate, we've got a shock

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Speaker 2: fall in the unemployment rates four point one percent. Global conditions,

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Speaker 2: as the governor said, have been what we're still nervous,

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Speaker 2: I must say, But it hasn't disrupted the global economy.

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Speaker 2: The global economy is muddling along. And while there's a

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Speaker 2: lot of volatility in financial markets, you know, most stock

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Speaker 2: markets are very close or at record highs. Again with

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Speaker 2: a lot of volatility and things going on there, and

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Speaker 2: so it seems that everything. Usually in economics, when you

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Speaker 2: get something wrong on the downside, there's something you get

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Speaker 2: wrong on the upside, and they sort of cancel each

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Speaker 2: other out. Broadly speaking, in the last six months, almost

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Speaker 2: all of the surprises on data on the economy have

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Speaker 2: been in the one direction strength, higher inflation, lower unemployment,

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Speaker 2: and greater global stability, which compounded and added to oh

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Speaker 2: my god, we've got we've actually got a bit of

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Speaker 2: an inflation issue that we've got to tackle. And so

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Speaker 2: the RBA responded to that new news as we've all

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Speaker 2: had to. It's new news, gotcha.

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Speaker 1: So instead of because looking at it from a distance,

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Speaker 1: you see it's going from one extreme to the other

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Speaker 1: in the space of just six months, to go from

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Speaker 1: cutting rates to hiking rates in just six months. And

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Speaker 1: you look at that six months in between ago. There

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Speaker 1: was no one big event for instance, that seems to

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Speaker 1: triggered it. But as you say, it's almost just an

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Speaker 1: accumulation of everything heading in the same direction that almost

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Speaker 1: make this a compulsory action by the RBA.

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Speaker 2: Spot on. There was not that one thing that all

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Speaker 2: of a sudden changed everything. Admittedly, though the September quarter

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Speaker 2: inflation number when it came out in late October, I

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Speaker 2: think was part of a catalyst for that reef them,

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Speaker 2: Oh gosh, that was a high result, and so that

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Speaker 2: started people on a path of well, what are we

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Speaker 2: seeing here? Then the next month or two, don't forget

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Speaker 2: the RBA held in December. You know, they saw that

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Speaker 2: inflation number, thought or is it a one off? Then

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Speaker 2: of course, as we said, we had that unemployment at

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Speaker 2: four point one, unemployment rate at four point one December

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Speaker 2: quarter CPI was high ish and as I said that,

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Speaker 2: they got pleasantly surprised. And this is the thing that

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Speaker 2: the government was trying to say too. Isn't it nice

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Speaker 2: that GDP's above growth is above two percent, that the

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Speaker 2: unemployment rate's near four percent? Okay, We've got a little

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Speaker 2: bit of a little bit of a stone in our

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Speaker 2: shoe with the inflation rate. It's a bit uncomfortable, but

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Speaker 2: we know we can we can address that. But isn't

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Speaker 2: it nice that the problem is that the bulk of

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Speaker 2: the economic news is good GDP growth, business investment picking up,

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Speaker 2: unemployment rate lower rather and we're tackling that with a

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Speaker 2: rate hike rather than a COVID or some other geopolitical

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Speaker 2: upheaval that causes us to panic. So look, the RBA.

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Speaker 2: I've been critical of them in the past, I certainly have,

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Speaker 2: but this time around I'm certainly not and they've responded

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Speaker 2: to the new news.

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Speaker 1: You know, every Monday morning I get an education from

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Speaker 1: you about economics, about the economy, and about the way

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Speaker 1: all of these things combine in order to kind of

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Speaker 1: steer us in a particular direction. Stephen, thank you for

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Speaker 1: taking me through it this morning.

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Speaker 2: Thanks Michael.

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Speaker 1: That was econdom of Stephen Coo Coolest, better known as

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Speaker 1: the Kok. You can find him at the kook dot

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Speaker 1: com and follow him on x using the handle of

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Speaker 1: the KUK. I'm Michael Thompson and this is Fear and

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Speaker 1: Greed Q and a