1 00:00:03,900 --> 00:00:06,750 Sean Aylmer: Welcome to the FEAR & GREED Business Interview. I'm Sean Aylmer. 2 00:00:07,140 --> 00:00:10,289 Sean Aylmer: The economy grew by just 0. 2% in the three 3 00:00:10,289 --> 00:00:12,599 Sean Aylmer: months to the end of December, with higher interest rates 4 00:00:12,599 --> 00:00:17,160 Sean Aylmer: affecting household spending. The annual rate of growth for 2023 was 1. 5 00:00:17,160 --> 00:00:22,290 Sean Aylmer: 5%, slowing from 2. 1% three months earlier. Carlos Cacho 6 00:00:22,290 --> 00:00:25,799 Sean Aylmer: is Jarden Australia's Chief Economist. Carlos, welcome back to Fear 7 00:00:25,800 --> 00:00:26,280 Sean Aylmer: and Greed. 8 00:00:26,730 --> 00:00:27,870 Carlos Cacho: Thanks for having me back, Sean 9 00:00:28,469 --> 00:00:31,080 Sean Aylmer: What did you make of the results yesterday? 0. 2%, 10 00:00:31,530 --> 00:00:33,000 Sean Aylmer: was it kind of what you were expecting? 11 00:00:33,570 --> 00:00:37,320 Carlos Cacho: Yeah. Look, it's a soft GDP figure, but it's broadly 12 00:00:37,320 --> 00:00:39,629 Carlos Cacho: in line with what the market and the RBA were 13 00:00:39,630 --> 00:00:43,769 Carlos Cacho: penciling in. Both consensus of economists and the RBA thought 14 00:00:43,769 --> 00:00:47,759 Carlos Cacho: we're going to have GDP around 1.5% to end 2023, so we 15 00:00:47,759 --> 00:00:51,690 Carlos Cacho: were bang on that, but it's certainly not a strong 16 00:00:51,690 --> 00:00:54,420 Carlos Cacho: reading, and we have seen it, it's steadily weakened through 17 00:00:54,420 --> 00:00:58,110 Carlos Cacho: the year. That's really what you'd expect. The RBA is 18 00:00:58,110 --> 00:01:01,020 Carlos Cacho: trying to, in their words, get a better balance between 19 00:01:01,020 --> 00:01:04,440 Carlos Cacho: demand and supply, and soft growth is the outcome of 20 00:01:04,440 --> 00:01:07,259 Carlos Cacho: those hikes and of the RBA trying to bring inflation down. 21 00:01:07,950 --> 00:01:11,369 Sean Aylmer: Was the story yesterday households, because there wasn't much growth 22 00:01:11,430 --> 00:01:13,078 Sean Aylmer: amongst consumption? 23 00:01:13,620 --> 00:01:16,678 Carlos Cacho: Yeah, consumption does remain very weak. It was just 0. 24 00:01:16,890 --> 00:01:20,280 Carlos Cacho: 1% on the quarter. That said, it did pick up 25 00:01:20,280 --> 00:01:23,789 Carlos Cacho: a little bit from September. September was negative. In terms 26 00:01:23,789 --> 00:01:26,009 Carlos Cacho: of what drove that, it was really a pullback in 27 00:01:26,009 --> 00:01:30,390 Carlos Cacho: discretionary spending, so households pulling back on things like spending 28 00:01:30,450 --> 00:01:34,890 Carlos Cacho: out at restaurants and hotels, spending on clothing, and also 29 00:01:35,220 --> 00:01:38,039 Carlos Cacho: tobacco, given you had a big increase in the excise 30 00:01:38,039 --> 00:01:41,730 Carlos Cacho: in September, and then purchasing of vehicles and spending more 31 00:01:41,730 --> 00:01:46,619 Carlos Cacho: on essentials like electricity and rent. Outside of the consumer, 32 00:01:46,830 --> 00:01:49,890 Carlos Cacho: business investment was actually okay and has actually been holding 33 00:01:49,890 --> 00:01:52,170 Carlos Cacho: up pretty well recently. So that's kind of like a 34 00:01:52,170 --> 00:01:54,690 Carlos Cacho: bit of a bright spot. And the public sector remains 35 00:01:54,690 --> 00:01:57,030 Carlos Cacho: a really key source of growth for the economy, and 36 00:01:57,660 --> 00:02:00,660 Carlos Cacho: it's become much more important over recent years, contributing almost 37 00:02:00,660 --> 00:02:03,270 Carlos Cacho: a third of overall domestic demand. 38 00:02:04,260 --> 00:02:06,090 Sean Aylmer: So let's talk about some of those things that we 39 00:02:06,090 --> 00:02:08,340 Sean Aylmer: hear the Reserve Bank talking about and the need to 40 00:02:08,340 --> 00:02:11,550 Sean Aylmer: change. Productivity, where does that sit? 41 00:02:12,389 --> 00:02:15,419 Carlos Cacho: Look, it picked up a bit in the quarter, albeit it 42 00:02:15,419 --> 00:02:18,478 Carlos Cacho: was mostly driven by lower hours worked. So effectively, essentially, 43 00:02:18,480 --> 00:02:21,929 Carlos Cacho: the way the ABS measures productivity in GDP growth is 44 00:02:21,929 --> 00:02:24,720 Carlos Cacho: how much have we produced divided by how many hours 45 00:02:24,720 --> 00:02:26,970 Carlos Cacho: we used to produce that. And so you can either 46 00:02:26,970 --> 00:02:30,480 Carlos Cacho: have productivity move because we've produced more stuff or because 47 00:02:30,480 --> 00:02:32,849 Carlos Cacho: we've worked more or less hours. And in this case, 48 00:02:32,849 --> 00:02:36,268 Carlos Cacho: it was mostly because we worked less hours as employers 49 00:02:36,270 --> 00:02:38,639 Carlos Cacho: cut back on their staff hours, and so we did see 50 00:02:38,639 --> 00:02:42,780 Carlos Cacho: an improvement in productivity. That said, it remains relatively low. 51 00:02:43,080 --> 00:02:45,720 Carlos Cacho: The other key thing related to that ( that the RBA 52 00:02:45,720 --> 00:02:47,790 Carlos Cacho: and the market has been focusing on) is something called 53 00:02:47,790 --> 00:02:51,000 Carlos Cacho: unit labor costs, which essentially measures: what's the cost of 54 00:02:51,000 --> 00:02:53,130 Carlos Cacho: labor required to produce a unit of output in the 55 00:02:53,130 --> 00:02:56,910 Carlos Cacho: economy? And unfortunately, there the news was less positive, with 56 00:02:56,910 --> 00:03:00,629 Carlos Cacho: unit labor costs continuing to grow at kind of mid 57 00:03:00,629 --> 00:03:03,660 Carlos Cacho: to high single digits, a bit over 6% year- on- year, 58 00:03:03,900 --> 00:03:06,540 Carlos Cacho: which suggests it's still going to be pretty challenging to 59 00:03:06,540 --> 00:03:10,918 Carlos Cacho: get services inflation to come back sustainably within the RBA's 60 00:03:10,919 --> 00:03:12,089 Carlos Cacho: 2 to 3% target. 61 00:03:12,480 --> 00:03:14,310 Sean Aylmer: Stay with me, Carlos. We'll be back in a minute. 62 00:03:20,730 --> 00:03:24,000 Sean Aylmer: I am speaking to Carlos Cacho, Chief Economist at Jarden 63 00:03:24,060 --> 00:03:28,559 Sean Aylmer: Australia. What about the whole idea of a per capita 64 00:03:28,559 --> 00:03:31,440 Sean Aylmer: recession? What did yesterday's numbers tell us about that? 65 00:03:31,950 --> 00:03:36,449 Carlos Cacho: Well, it's continuing. We've had population growth running at about 66 00:03:36,449 --> 00:03:39,750 Carlos Cacho: 2.5% and GDP is running at 1. 5%, so we've had 67 00:03:39,750 --> 00:03:43,560 Carlos Cacho: another quarter of per capita recession. I think that's not 68 00:03:43,560 --> 00:03:46,410 Carlos Cacho: a surprise to anyone based on this data. I think 69 00:03:47,550 --> 00:03:50,939 Carlos Cacho: the per capita recession, it's a good headline, but I 70 00:03:50,940 --> 00:03:54,570 Carlos Cacho: think it's not a big concern for the RBA. And 71 00:03:54,570 --> 00:03:57,420 Carlos Cacho: importantly, I think one thing that's worth pointing out with 72 00:03:57,420 --> 00:04:00,390 Carlos Cacho: that migration is it has been supporting spending quite a 73 00:04:00,390 --> 00:04:02,820 Carlos Cacho: bit. Yes, spending's weak, but without that immigration, it would 74 00:04:02,820 --> 00:04:05,400 Carlos Cacho: be even weaker. So it is a bit of a 75 00:04:05,400 --> 00:04:07,710 Carlos Cacho: drag, but I think the per capita recession, in my 76 00:04:07,710 --> 00:04:09,809 Carlos Cacho: view, is a bit more of a headline- grabber than 77 00:04:09,809 --> 00:04:11,250 Carlos Cacho: a real concern for the RBA. 78 00:04:11,760 --> 00:04:13,710 Sean Aylmer: You are talking to a media outlet here, you know 79 00:04:13,710 --> 00:04:17,100 Sean Aylmer: that? We like those headlines. What about the savings rate? 80 00:04:17,550 --> 00:04:19,950 Carlos Cacho: Look, the savings rate picked up a little bit. It's 81 00:04:19,950 --> 00:04:23,580 Carlos Cacho: still very, very low. X. The last couple of quarters, 82 00:04:23,580 --> 00:04:25,980 Carlos Cacho: it would be the lowest we'd seen since before the 83 00:04:25,980 --> 00:04:28,830 Carlos Cacho: GFC at about 3%. The reason it picked up in 84 00:04:28,830 --> 00:04:32,040 Carlos Cacho: December is we saw a slightly stronger disposable income growth 85 00:04:32,400 --> 00:04:35,130 Carlos Cacho: that was most driven by taxes. So we saw a 86 00:04:35,130 --> 00:04:37,620 Carlos Cacho: modest fall in income tax just because of the timing 87 00:04:37,620 --> 00:04:40,678 Carlos Cacho: of when people were filing their tax returns. But essentially, 88 00:04:40,678 --> 00:04:43,678 Carlos Cacho: the savings rate's still quite low. However, it's important to 89 00:04:43,678 --> 00:04:47,308 Carlos Cacho: remember that's the rate of savings today in this quarter. 90 00:04:47,609 --> 00:04:49,950 Carlos Cacho: It's not the stock of savings. And if we actually 91 00:04:49,950 --> 00:04:52,529 Carlos Cacho: look at the stock of excess savings households built up 92 00:04:52,529 --> 00:04:55,140 Carlos Cacho: through COVID, there's still a lot of them there. So 93 00:04:55,140 --> 00:04:58,049 Carlos Cacho: people are still slowly working through those savings. We estimate 94 00:04:58,080 --> 00:05:01,078 Carlos Cacho: there're still over $ 200 billion of them. Of course, those 95 00:05:01,080 --> 00:05:03,659 Carlos Cacho: are not evenly distributed across all households. Some have a 96 00:05:03,660 --> 00:05:07,170 Carlos Cacho: lot, some have largely run them down, but the excess 97 00:05:07,170 --> 00:05:09,390 Carlos Cacho: savings that have been built up are still quite solid, 98 00:05:09,630 --> 00:05:12,089 Carlos Cacho: and in our view, you should continue to provide a 99 00:05:12,089 --> 00:05:14,609 Carlos Cacho: bit of a backstop for consumption over the year ahead. 100 00:05:15,210 --> 00:05:17,909 Sean Aylmer: Okay. So they kind of act like a shock absorber. 101 00:05:18,330 --> 00:05:21,808 Carlos Cacho: Yeah. For those who have them, they're able to maintain 102 00:05:21,809 --> 00:05:24,900 Carlos Cacho: their consumption at a higher level or meet their mortgage 103 00:05:24,900 --> 00:05:27,990 Carlos Cacho: repayments out of those excess savings. Now again, of course, 104 00:05:27,990 --> 00:05:30,330 Carlos Cacho: not everyone has them, and in particular, we see that 105 00:05:30,420 --> 00:05:32,880 Carlos Cacho: across age groups is where we see the biggest divide 106 00:05:32,880 --> 00:05:36,779 Carlos Cacho: there, where your older Australians ( 50 plus some) have a 107 00:05:36,779 --> 00:05:40,710 Carlos Cacho: lot of excess savings and you're younger, and particularly those 108 00:05:41,190 --> 00:05:44,909 Carlos Cacho: core, young families just starting out and they're buying their 109 00:05:44,910 --> 00:05:48,000 Carlos Cacho: first home ( 30 to 40 year olds) don't have much 110 00:05:48,180 --> 00:05:49,440 Carlos Cacho: excess savings left at all. 111 00:05:50,250 --> 00:05:53,009 Sean Aylmer: Okay, so what's all this mean? I mean, the economy 112 00:05:53,010 --> 00:05:55,469 Sean Aylmer: obviously was slowing towards the end of next year, but 113 00:05:55,469 --> 00:05:57,990 Sean Aylmer: not going backwards. It was still growing, just not as 114 00:05:57,990 --> 00:06:00,750 Sean Aylmer: fast as it was earlier in the year. What happens 115 00:06:00,750 --> 00:06:02,700 Sean Aylmer: next? I mean, this current quarter that we're in, is 116 00:06:02,700 --> 00:06:05,250 Sean Aylmer: it likely that it's going to keep that trajectory, which 117 00:06:05,250 --> 00:06:07,050 Sean Aylmer: means we could end up going backwards? Or do you 118 00:06:07,050 --> 00:06:10,139 Sean Aylmer: think now that interest rates have more or less stabilized, 119 00:06:10,139 --> 00:06:12,030 Sean Aylmer: that'll change things? What's your forecast? 120 00:06:12,450 --> 00:06:15,719 Carlos Cacho: I think things are going to remain fairly soggy in 121 00:06:15,719 --> 00:06:17,939 Carlos Cacho: the near term, but I think there's a couple of 122 00:06:18,210 --> 00:06:21,180 Carlos Cacho: green shoots we're seeing on a consumer side that are worth 123 00:06:21,180 --> 00:06:24,000 Carlos Cacho: pointing out. It does look like we've probably seen the 124 00:06:24,000 --> 00:06:27,539 Carlos Cacho: worst of the falls or the weakness in disposable income 125 00:06:27,540 --> 00:06:31,289 Carlos Cacho: in both nominal and real terms. So importantly, in yesterday's 126 00:06:31,290 --> 00:06:35,400 Carlos Cacho: data, real disposable incomes, we're no longer going backwards, so 127 00:06:35,400 --> 00:06:38,790 Carlos Cacho: people aren't losing out to inflation in aggregate anymore. That's 128 00:06:38,790 --> 00:06:41,669 Carlos Cacho: a big positive. Looking forward, we do expect that's going 129 00:06:41,670 --> 00:06:44,370 Carlos Cacho: to pick up between no more rate hikes, potentially some 130 00:06:44,370 --> 00:06:48,120 Carlos Cacho: cuts later this year and 2025, and the stage three 131 00:06:48,120 --> 00:06:51,570 Carlos Cacho: tax cuts coming through. The housing market has continued to 132 00:06:51,570 --> 00:06:54,719 Carlos Cacho: do well. That's supporting household wealth, that's seeing housing turnover 133 00:06:54,720 --> 00:06:57,300 Carlos Cacho: pick up, and that usually drives a bit of an 134 00:06:57,300 --> 00:07:00,270 Carlos Cacho: increase in spending as people are feeling better off. And, 135 00:07:00,779 --> 00:07:03,660 Carlos Cacho: if anything, the housing market has actually accelerated in early 136 00:07:03,660 --> 00:07:05,849 Carlos Cacho: 2024, so I think that's going to be a bit 137 00:07:05,849 --> 00:07:08,639 Carlos Cacho: of a tailwind. If you look at things like consumer confidence, 138 00:07:08,940 --> 00:07:13,260 Carlos Cacho: those surveys also appear to have troughed and are improving. 139 00:07:13,260 --> 00:07:15,870 Carlos Cacho: They're still weak ( they're still at a very low level), but 140 00:07:16,590 --> 00:07:18,660 Carlos Cacho: if we look across a couple of these things, it 141 00:07:18,660 --> 00:07:22,080 Carlos Cacho: does look like the worst may be behind the consumer 142 00:07:22,320 --> 00:07:25,078 Carlos Cacho: and that the outlook might start improving from here. So 143 00:07:25,200 --> 00:07:28,559 Carlos Cacho: still challenging and still tough conditions, but I think it 144 00:07:28,559 --> 00:07:31,830 Carlos Cacho: does seem like things may get a little bit better 145 00:07:31,830 --> 00:07:34,140 Carlos Cacho: as we move through 2024, particularly as we get to 146 00:07:34,140 --> 00:07:36,000 Carlos Cacho: the second half of the year and we get that 147 00:07:36,000 --> 00:07:38,400 Carlos Cacho: support from the stage three tax cuts coming through, which 148 00:07:38,400 --> 00:07:42,119 Carlos Cacho: is going to be about 1% of disposable income to households. 149 00:07:42,660 --> 00:07:44,340 Sean Aylmer: Okay. So I wanted to get there. I mean, so 150 00:07:44,730 --> 00:07:46,979 Sean Aylmer: we may be coming in for a soft landing. The 151 00:07:46,980 --> 00:07:50,490 Sean Aylmer: Reserve Bank and government may land the economy and not 152 00:07:50,490 --> 00:07:52,890 Sean Aylmer: go into recession. That's kind of where we're thinking at 153 00:07:52,890 --> 00:07:55,530 Sean Aylmer: the moment. Correct me if I'm wrong there. What about 154 00:07:55,530 --> 00:07:57,960 Sean Aylmer: when those tax cuts come in, and what about rate cuts 155 00:07:57,960 --> 00:07:58,739 Sean Aylmer: later in the year? 156 00:07:59,280 --> 00:08:01,440 Carlos Cacho: Look, our view is rate cuts are probably going to 157 00:08:01,440 --> 00:08:04,079 Carlos Cacho: be a little bit slower to come through than most 158 00:08:04,080 --> 00:08:06,990 Carlos Cacho: other market participants. We don't have them penciled in until 159 00:08:07,020 --> 00:08:11,100 Carlos Cacho: February 2025. The main reason is we still just think 160 00:08:11,100 --> 00:08:14,250 Carlos Cacho: the services components of inflation that the RBA is really worried about are 161 00:08:14,250 --> 00:08:16,650 Carlos Cacho: going to be quite sticky. We've kind of seen that 162 00:08:16,650 --> 00:08:21,539 Carlos Cacho: through things like rents, insurance still remain relatively elevated. The 163 00:08:21,540 --> 00:08:24,299 Carlos Cacho: weakness in demand and the weakness in CPI we saw 164 00:08:24,600 --> 00:08:27,150 Carlos Cacho: last week in the monthly data is definitely a positive 165 00:08:27,150 --> 00:08:29,550 Carlos Cacho: in getting that better balance. And so maybe you could 166 00:08:29,550 --> 00:08:31,740 Carlos Cacho: see a cut as early as November, but we think, 167 00:08:32,040 --> 00:08:36,059 Carlos Cacho: barring a real rapid deterioration in the labor market, we'll 168 00:08:36,059 --> 00:08:38,218 Carlos Cacho: probably see the RBA remain on hold for a little 169 00:08:38,219 --> 00:08:39,690 Carlos Cacho: bit longer than people expect. 170 00:08:40,559 --> 00:08:42,960 Sean Aylmer: Carlos, you've been an economist for a while. You're also 171 00:08:42,960 --> 00:08:45,420 Sean Aylmer: a bank analyst; a very, very busy man. How do 172 00:08:45,420 --> 00:08:48,750 Sean Aylmer: you get your head across the national accounts? That is 173 00:08:48,750 --> 00:08:51,630 Sean Aylmer: a massive document, and I've just asked you a bunch 174 00:08:51,630 --> 00:08:54,059 Sean Aylmer: of questions, which I've gone off and researched. How do 175 00:08:54,059 --> 00:08:54,900 Sean Aylmer: you get your head around it? 176 00:08:56,490 --> 00:08:59,218 Carlos Cacho: You just got to be in the data, and I 177 00:08:59,219 --> 00:09:01,380 Carlos Cacho: think the best way to learn is just to actually 178 00:09:02,040 --> 00:09:04,110 Carlos Cacho: play around with the data and look at it. We've got 179 00:09:04,740 --> 00:09:07,170 Carlos Cacho: a massive spreadsheet set up with just about every line 180 00:09:07,170 --> 00:09:09,540 Carlos Cacho: item there, and you kind of go through it line 181 00:09:09,540 --> 00:09:12,150 Carlos Cacho: by line; have a look around it. After a couple 182 00:09:12,150 --> 00:09:14,670 Carlos Cacho: of years, you start to understand it. But there's some of 183 00:09:14,670 --> 00:09:17,039 Carlos Cacho: these economic releases, especially the ones that only come around 184 00:09:17,039 --> 00:09:19,470 Carlos Cacho: once a quarter or once a year, that take quite 185 00:09:19,470 --> 00:09:21,960 Carlos Cacho: a while to really understand. So it's just, I guess, 186 00:09:22,170 --> 00:09:26,010 Carlos Cacho: practice makes perfect, hopefully eventually, but you're always learning something 187 00:09:26,010 --> 00:09:29,490 Carlos Cacho: new. You always see someone post a good chart online 188 00:09:29,490 --> 00:09:32,370 Carlos Cacho: or get a good question from a client and dig 189 00:09:32,370 --> 00:09:34,529 Carlos Cacho: into a little section you might not have unearthed before. 190 00:09:35,639 --> 00:09:37,710 Sean Aylmer: Fair enough. Carlos, thank you for talking to FEAR & GREED. 191 00:09:38,220 --> 00:09:39,120 Carlos Cacho: Thanks for having me, Sean. 192 00:09:39,630 --> 00:09:42,809 Sean Aylmer: That was Carlos Cacho, Chief Economist at Jarden Australia. This 193 00:09:42,809 --> 00:09:45,389 Sean Aylmer: is the FEAR & GREED Business Interview. Join us every morning 194 00:09:45,389 --> 00:09:48,480 Sean Aylmer: for the full episode of FEAR & GREED, Australia's best business 195 00:09:48,480 --> 00:09:50,760 Sean Aylmer: podcast. I'm Sean Aylmer. Enjoy your day.