1 00:00:03,930 --> 00:00:06,330 Sean Aylmer: Welcome to the Fear and Greed business interview. I'm Sean 2 00:00:06,330 --> 00:00:10,200 Sean Aylmer: Aylmer. Headline inflation came in lower than expected during the 3 00:00:10,200 --> 00:00:13,410 Sean Aylmer: month of January, continuing to trend down towards the Reserve 4 00:00:13,410 --> 00:00:17,009 Sean Aylmer: Bank's target range, but it isn't there yet. The monthly 5 00:00:17,010 --> 00:00:19,560 Sean Aylmer: indicator can be a little volatile, so it's worth looking 6 00:00:19,590 --> 00:00:21,030 Sean Aylmer: at the factors that go into it and what it 7 00:00:21,030 --> 00:00:24,030 Sean Aylmer: all means for interest rates of course. Diana Mousina is 8 00:00:24,030 --> 00:00:27,510 Sean Aylmer: AMP'S Deputy Chief Economist. Diana, welcome back to Fear and Greed. 9 00:00:27,809 --> 00:00:28,590 Diana Mousina: Thank you, Sean. 10 00:00:29,010 --> 00:00:31,679 Sean Aylmer: The numbers out yesterday, what did you think of them, 11 00:00:31,679 --> 00:00:33,089 Sean Aylmer: the monthly inflation for January? 12 00:00:33,750 --> 00:00:37,559 Diana Mousina: Well, it was good to see that further moderation in 13 00:00:37,560 --> 00:00:41,040 Diana Mousina: inflation continued into January. There was always this risk that 14 00:00:41,040 --> 00:00:43,380 Diana Mousina: we would get a spike up in inflation in January 15 00:00:43,380 --> 00:00:46,409 Diana Mousina: because a lot of other countries overseas, like the US, 16 00:00:46,409 --> 00:00:49,830 Diana Mousina: Japan, all had this bit of an increase in inflation over 17 00:00:49,830 --> 00:00:53,819 Diana Mousina: that month. Some global factors at play, more supply side 18 00:00:53,820 --> 00:00:57,330 Diana Mousina: issues coming through with transport costs around the world up a 19 00:00:57,330 --> 00:00:59,910 Diana Mousina: bit and commodity prices as well, given what's going on 20 00:00:59,910 --> 00:01:03,990 Diana Mousina: in the Red Sea. So while it's good to see 21 00:01:03,990 --> 00:01:07,950 Diana Mousina: that inflation is running at around 3. 4% in headline 22 00:01:07,950 --> 00:01:12,270 Diana Mousina: terms, I think the difficulty with interpreting the monthly data, 23 00:01:12,270 --> 00:01:14,850 Diana Mousina: because it is not a full set of inflation figures, it's 24 00:01:14,850 --> 00:01:18,720 Diana Mousina: not as broad based as the quarterly data, as survey 25 00:01:18,720 --> 00:01:21,569 Diana Mousina: services in the month of January, I think it's difficult 26 00:01:21,569 --> 00:01:24,509 Diana Mousina: to get too excited that inflation's going to continue to 27 00:01:24,509 --> 00:01:27,029 Diana Mousina: decline significantly. There is still the risk that you get 28 00:01:27,030 --> 00:01:28,980 Diana Mousina: a bit of a bounce back up in price growth. 29 00:01:28,980 --> 00:01:33,750 Sean Aylmer: Okay. Just explain what's happening with goods inflation and why 30 00:01:33,750 --> 00:01:37,200 Sean Aylmer: that's falling so fast, and services inflation, which isn't falling 31 00:01:37,200 --> 00:01:38,669 Sean Aylmer: as fast, and why is that? 32 00:01:39,059 --> 00:01:42,330 Diana Mousina: Well, goods inflation was really driven by what happened during 33 00:01:42,330 --> 00:01:45,420 Diana Mousina: the pandemic. A lot of the supply side disruptions and 34 00:01:45,420 --> 00:01:48,119 Diana Mousina: the increase in consumer spending that went alongside with it, 35 00:01:48,570 --> 00:01:51,930 Diana Mousina: increased the prices of goods. Now goods usually lead what 36 00:01:51,930 --> 00:01:55,710 Diana Mousina: happens in the services sector because services inflation is mostly 37 00:01:55,770 --> 00:01:59,550 Diana Mousina: actually driven by wages growth, and wages tends to lag 38 00:01:59,550 --> 00:02:02,729 Diana Mousina: whatever happens in goods prices and generally just headline consumer 39 00:02:02,730 --> 00:02:06,359 Diana Mousina: prices, because consumers normally like to be compensated for around 40 00:02:06,359 --> 00:02:11,100 Diana Mousina: whatever's happening to inflation. So that's why services inflation is 41 00:02:11,100 --> 00:02:14,040 Diana Mousina: still lagging. What's happening in the goods sector, goods price 42 00:02:14,040 --> 00:02:16,979 Diana Mousina: inflation has come right down around the world, including in 43 00:02:16,980 --> 00:02:20,400 Diana Mousina: Australia, but services inflation is still elevated. And it's really 44 00:02:20,460 --> 00:02:23,309 Diana Mousina: that component that the Reserve Bank is worried about. It's 45 00:02:23,309 --> 00:02:25,919 Diana Mousina: not just services that the Reserve Bank is worried about, it's 46 00:02:25,919 --> 00:02:30,000 Diana Mousina: really more about, I think, more around that essential category 47 00:02:30,000 --> 00:02:33,869 Diana Mousina: of spending. So things like utilities, housing, which is mostly 48 00:02:33,870 --> 00:02:39,120 Diana Mousina: rents and new dwelling construction costs, insurance and finance, healthcare 49 00:02:39,150 --> 00:02:42,990 Diana Mousina: costs, other personal services types of costs, and utilities of 50 00:02:42,990 --> 00:02:44,970 Diana Mousina: course as well. And the types of things that you can't 51 00:02:44,970 --> 00:02:47,460 Diana Mousina: really cut back on spending, those are the ones that 52 00:02:47,460 --> 00:02:50,099 Diana Mousina: have seen a lot of high inflation over the past 53 00:02:50,099 --> 00:02:52,169 Diana Mousina: 12 months. But I think that they will take the 54 00:02:52,169 --> 00:02:54,810 Diana Mousina: lead from the goods sector in that inflation will slow. 55 00:02:55,049 --> 00:02:56,969 Diana Mousina: It's just a matter of if it slows enough that 56 00:02:56,969 --> 00:03:00,839 Diana Mousina: the Reserve Bank is comfortable to start cutting interest rates 57 00:03:00,840 --> 00:03:03,239 Diana Mousina: or even to start considering cutting interest rates. 58 00:03:04,350 --> 00:03:06,270 Sean Aylmer: The next meeting, which is still a few weeks away, 59 00:03:06,330 --> 00:03:09,959 Sean Aylmer: you don't expect a rate cut, but it's about the language. 60 00:03:10,469 --> 00:03:13,169 Diana Mousina: That's right. I mean, the next step for the Reserve Bank would be 61 00:03:13,169 --> 00:03:16,079 Diana Mousina: to remove their hiking bias. I'd call it a soft 62 00:03:16,079 --> 00:03:19,559 Diana Mousina: hiking bias, and they're still considering the possibility of whether they need 63 00:03:19,740 --> 00:03:21,720 Diana Mousina: to raise rates. Again, they're still debating at the board 64 00:03:21,720 --> 00:03:24,929 Diana Mousina: meeting whether they should be holding or hiking rates. So 65 00:03:25,110 --> 00:03:27,419 Diana Mousina: the next step would logically be for the RBA to 66 00:03:27,419 --> 00:03:30,030 Diana Mousina: remove that hiking bias, like the Fed or the ECB 67 00:03:30,030 --> 00:03:32,160 Diana Mousina: have done. But I think it looks like a bit 68 00:03:32,160 --> 00:03:34,949 Diana Mousina: of a stretch for the March meeting. The RBA in 69 00:03:34,949 --> 00:03:37,440 Diana Mousina: their commentary, we had a lot of commentary from Michelle 70 00:03:37,440 --> 00:03:40,770 Diana Mousina: Bullock in the past month, they still sound like they 71 00:03:40,770 --> 00:03:43,470 Diana Mousina: don't want to lead inflation expectations to increase. They don't 72 00:03:43,470 --> 00:03:45,809 Diana Mousina: want inflation to start increasing again. I think they're going 73 00:03:45,809 --> 00:03:48,750 Diana Mousina: to tread carefully. And I just don't see them getting 74 00:03:48,750 --> 00:03:51,809 Diana Mousina: rid of that hiking bias, unless we get something going 75 00:03:51,809 --> 00:03:57,840 Diana Mousina: completely wrong, like a negative GDP print next week or some 76 00:03:57,840 --> 00:04:01,080 Diana Mousina: very poor retail data. I think something would really need 77 00:04:01,080 --> 00:04:03,690 Diana Mousina: to go astray to get that hiking bias out of 78 00:04:03,690 --> 00:04:04,139 Diana Mousina: the way. 79 00:04:05,460 --> 00:04:08,759 Sean Aylmer: Before we leave the detail on this, oil prices, why 80 00:04:08,759 --> 00:04:12,000 Sean Aylmer: do we care so much about oil prices, petrol prices 81 00:04:12,059 --> 00:04:12,839 Sean Aylmer: in this data? 82 00:04:13,470 --> 00:04:16,740 Diana Mousina: Well, petrol prices are actually a good gauge to consumer 83 00:04:16,740 --> 00:04:20,700 Diana Mousina: inflation expectations. Consumers actually have a really bad track record 84 00:04:20,730 --> 00:04:24,719 Diana Mousina: around predicting inflation. They normally just tend to use whatever 85 00:04:24,719 --> 00:04:27,689 Diana Mousina: is going on at the moment. They always overestimate inflation as 86 00:04:27,690 --> 00:04:31,800 Diana Mousina: well. And inflation expectations moves in line with petrol prices. 87 00:04:32,430 --> 00:04:35,400 Diana Mousina: It's very visual, consumers can see how the price of 88 00:04:35,400 --> 00:04:38,880 Diana Mousina: petrol changes every day or every week whenever they're filling 89 00:04:38,880 --> 00:04:41,040 Diana Mousina: up their car. And they do use it as a 90 00:04:41,040 --> 00:04:43,140 Diana Mousina: gauge, which is why people care so much about it. 91 00:04:43,469 --> 00:04:48,779 Diana Mousina: And it can lead to not significant but moderate contributions 92 00:04:49,020 --> 00:04:53,130 Diana Mousina: or detractions from the inflation data. So that's why people tend 93 00:04:53,130 --> 00:04:53,789 Diana Mousina: to look at it. 94 00:04:54,270 --> 00:04:55,830 Sean Aylmer: Stay with me, Diana, and we'll be back in a 95 00:04:55,830 --> 00:05:05,970 Sean Aylmer: minute. I'm speaking to AMP Deputy Chief Economist, Diana Mousina. 96 00:05:06,990 --> 00:05:10,980 Sean Aylmer: When is the next rate move then, Diana Mousina. When is 97 00:05:10,980 --> 00:05:12,240 Sean Aylmer: it and which way is it going to be? 98 00:05:12,750 --> 00:05:15,299 Diana Mousina: Well, our official view is that it will be in 99 00:05:15,300 --> 00:05:18,750 Diana Mousina: June, that we'll see a rate cut by June, which 100 00:05:18,750 --> 00:05:22,139 Diana Mousina: is not really too far away. It's another three meetings 101 00:05:22,260 --> 00:05:26,160 Diana Mousina: because there is no board meeting in April. I mean, I 102 00:05:26,460 --> 00:05:30,120 Diana Mousina: think that the risk here is that the RBA will 103 00:05:30,120 --> 00:05:32,250 Diana Mousina: need to cut interest rates in the second half of 104 00:05:32,250 --> 00:05:35,999 Diana Mousina: the year. I suppose I'm worried that the Reserve Bank 105 00:05:36,660 --> 00:05:41,669 Diana Mousina: will be too concerned that inflation's going to be sticky 106 00:05:41,670 --> 00:05:45,180 Diana Mousina: and above their target band for longer than they'd like, 107 00:05:45,240 --> 00:05:47,219 Diana Mousina: which is why they may not move to cut interest 108 00:05:47,220 --> 00:05:49,800 Diana Mousina: rates. I think as soon as the economy needs that 109 00:05:49,800 --> 00:05:52,890 Diana Mousina: support ... We've already seen the unemployment rate increase by 0. 110 00:05:53,130 --> 00:05:56,219 Diana Mousina: 7 percentage points to 4. 1%. I think we're going 111 00:05:56,219 --> 00:05:58,349 Diana Mousina: to get some more weakness in the labor market figures, 112 00:05:58,619 --> 00:06:01,318 Diana Mousina: and I think that the consumer really will need that 113 00:06:01,320 --> 00:06:05,909 Diana Mousina: support this year as the labor market deteriorates. Earnings season in 114 00:06:05,910 --> 00:06:09,779 Diana Mousina: Australia wasn't particularly strong and some of the discretionary retailers 115 00:06:10,380 --> 00:06:13,589 Diana Mousina: suggesting that there's some more downside to come. So I 116 00:06:13,589 --> 00:06:16,229 Diana Mousina: think that we'll see further weakness in the economy that 117 00:06:16,230 --> 00:06:18,868 Diana Mousina: will justify the need for rate cuts. But yes, it may 118 00:06:18,870 --> 00:06:20,430 Diana Mousina: not come in June. It may come in the second 119 00:06:20,430 --> 00:06:21,120 Diana Mousina: half of the year. 120 00:06:21,930 --> 00:06:26,339 Sean Aylmer: As a house, AMP has generally been slightly less optimistic 121 00:06:26,370 --> 00:06:29,700 Sean Aylmer: about the trajectory of the economy, let's say, over the 122 00:06:29,700 --> 00:06:32,759 Sean Aylmer: last six months. You've been calling for a rate cuts perhaps 123 00:06:32,759 --> 00:06:34,709 Sean Aylmer: before others. Is that about the consumer? 124 00:06:35,760 --> 00:06:40,110 Diana Mousina: Ultimately, yes. That's really what our view hinges on. We 125 00:06:40,260 --> 00:06:42,390 Diana Mousina: were of the view that the Reserve Bank wouldn't hike 126 00:06:42,390 --> 00:06:46,200 Diana Mousina: rates as much as they did, and that rested on 127 00:06:46,200 --> 00:06:49,590 Diana Mousina: the view that the consumer would have felt more pressure 128 00:06:49,950 --> 00:06:52,080 Diana Mousina: from interest rate hikes. So I have been very surprised 129 00:06:52,080 --> 00:06:54,450 Diana Mousina: by the resilience of consumers. I think it came down 130 00:06:54,510 --> 00:06:56,250 Diana Mousina: to the fact that the labor market held up so 131 00:06:56,250 --> 00:07:00,270 Diana Mousina: well. Even though consumers had these headwinds of higher interest 132 00:07:00,270 --> 00:07:05,368 Diana Mousina: rates, high inflation, an increasing fiscal burden from bracket creep 133 00:07:05,370 --> 00:07:07,799 Diana Mousina: and paying more tax, they were able to offset that 134 00:07:07,799 --> 00:07:11,789 Diana Mousina: by high savings and ultimately being employed. The key differences 135 00:07:11,789 --> 00:07:15,960 Diana Mousina: for 2024 though is that the labor market's weakened and further weakness 136 00:07:15,960 --> 00:07:18,990 Diana Mousina: is likely. And that the consumers, where you're worried about 137 00:07:18,990 --> 00:07:21,300 Diana Mousina: them having those savings to draw down on, have properly 138 00:07:21,300 --> 00:07:25,620 Diana Mousina: used up all those additional savings. In my eyes, 2024 139 00:07:25,620 --> 00:07:27,960 Diana Mousina: is going to be a tougher year for the consumer 140 00:07:28,170 --> 00:07:30,599 Diana Mousina: than last year, even though cost of living issues were 141 00:07:30,929 --> 00:07:33,690 Diana Mousina: everywhere. I mean, that could be offset by the tax 142 00:07:33,690 --> 00:07:36,120 Diana Mousina: cuts that are coming from the 1st of July, potentially more 143 00:07:36,120 --> 00:07:39,300 Diana Mousina: tax relief, or potentially more cost of living relief from 144 00:07:39,300 --> 00:07:41,190 Diana Mousina: the government in May. But I think it'll be a 145 00:07:41,190 --> 00:07:44,730 Diana Mousina: mistake by the government to start giving people more cash 146 00:07:44,940 --> 00:07:46,889 Diana Mousina: in the May federal budget if we are still in 147 00:07:46,889 --> 00:07:48,870 Diana Mousina: this environment of elevated inflation. 148 00:07:49,320 --> 00:07:51,840 Sean Aylmer: Is this a soft landing we're heading towards, Diana? 149 00:07:52,410 --> 00:07:54,270 Diana Mousina: Well, we could be in a soft landing right now. I 150 00:07:54,270 --> 00:07:57,629 Diana Mousina: mean, maybe the central banks have engineered everything perfectly that 151 00:07:57,630 --> 00:07:59,849 Diana Mousina: this is the worst that it's going to get. I 152 00:07:59,849 --> 00:08:02,880 Diana Mousina: mean, we think that next week's GDP figures will show 153 00:08:02,880 --> 00:08:05,910 Diana Mousina: that growth was at about 1. 5%, actually a bit lower 154 00:08:05,910 --> 00:08:08,100 Diana Mousina: than that in the December quarter of last year. That's 155 00:08:08,100 --> 00:08:12,990 Diana Mousina: pretty low for Australia. It's per capita recession, and it's 156 00:08:12,990 --> 00:08:15,450 Diana Mousina: not a particularly strong environment. But if it doesn't get 157 00:08:15,450 --> 00:08:18,030 Diana Mousina: any worse from here, and we actually get those rate 158 00:08:18,030 --> 00:08:20,609 Diana Mousina: cuts around the middle of the year and the economy 159 00:08:20,759 --> 00:08:23,340 Diana Mousina: starts to recover, maybe this is the worst of it. 160 00:08:23,670 --> 00:08:25,800 Diana Mousina: But as an economist, you have to think about the 161 00:08:25,800 --> 00:08:29,610 Diana Mousina: probabilities, and history tells you that the probability of a central 162 00:08:29,610 --> 00:08:32,700 Diana Mousina: bank mistake, a downturn or a recession is still high. 163 00:08:32,700 --> 00:08:34,469 Diana Mousina: So I'd say that the risk of a recession in 164 00:08:34,469 --> 00:08:36,960 Diana Mousina: Australia is still at about 40% this year. 165 00:08:37,889 --> 00:08:40,439 Sean Aylmer: I'm not allowed to talk to an economist without asking 166 00:08:40,440 --> 00:08:42,869 Sean Aylmer: about house prices, and I do apologize. I'm sure you're 167 00:08:42,869 --> 00:08:44,819 Sean Aylmer: sick of people asking about house prices, but what do 168 00:08:44,820 --> 00:08:46,470 Sean Aylmer: you reckon will happen in 2024? 169 00:08:46,470 --> 00:08:51,000 Diana Mousina: The housing market has surprised us considerably. I mean, I 170 00:08:51,000 --> 00:08:53,309 Diana Mousina: think it really did for everyone, but the rate of 171 00:08:53,309 --> 00:08:55,348 Diana Mousina: the population growth I think has just been the key 172 00:08:55,349 --> 00:08:57,929 Diana Mousina: driver of that and the fact that we're just not 173 00:08:57,929 --> 00:09:01,020 Diana Mousina: building enough homes. And the construction work done data yesterday 174 00:09:01,020 --> 00:09:04,950 Diana Mousina: showed that residential construction went backwards massively again in the 175 00:09:04,950 --> 00:09:09,270 Diana Mousina: December quarter. It looks like we're in for another year 176 00:09:09,270 --> 00:09:11,700 Diana Mousina: of a positive home price growth, but I don't think 177 00:09:11,700 --> 00:09:14,370 Diana Mousina: it will be as high as 2023. We think low- 178 00:09:14,370 --> 00:09:18,329 Diana Mousina: single digits, maybe between two to 5%, which is obviously 179 00:09:18,330 --> 00:09:21,660 Diana Mousina: still positive but not as high as we were used 180 00:09:21,660 --> 00:09:24,809 Diana Mousina: to last year. We've probably seen the levels of peak 181 00:09:24,900 --> 00:09:28,109 Diana Mousina: population growth, which should help some of those housing supply 182 00:09:28,110 --> 00:09:30,300 Diana Mousina: issues. At the same time, we're just not building enough 183 00:09:30,300 --> 00:09:33,899 Diana Mousina: homes, and there's still a lot of pent- up demand 184 00:09:33,929 --> 00:09:37,260 Diana Mousina: for new housing, which will keep prices elevated. But at the 185 00:09:37,260 --> 00:09:39,900 Diana Mousina: same time, people have taken a 30% hit to their 186 00:09:39,900 --> 00:09:42,120 Diana Mousina: capacity to borrow. If you go to the bank today, 187 00:09:42,720 --> 00:09:45,330 Diana Mousina: you can take out a loan that's about 30% less 188 00:09:45,330 --> 00:09:47,759 Diana Mousina: than you could have before the RBA started hiking rates. 189 00:09:47,759 --> 00:09:50,279 Diana Mousina: So that will have to hit people as well when 190 00:09:50,280 --> 00:09:51,750 Diana Mousina: they're going and getting that mortgage. 191 00:09:52,469 --> 00:09:54,511 Sean Aylmer: Diana, thank you for talking to Fear and Greed. 192 00:09:54,511 --> 00:09:55,439 Diana Mousina: Thank you. It's been a pleasure. 193 00:09:55,979 --> 00:09:59,580 Sean Aylmer: That was AMP Deputy Chief Economist Diana Mousina. This is the Fear and 194 00:09:59,580 --> 00:10:02,400 Sean Aylmer: Greed business interview. Remember, this is general information only and 195 00:10:02,400 --> 00:10:05,040 Sean Aylmer: you should always seek professional advice before making any investment 196 00:10:05,040 --> 00:10:07,889 Sean Aylmer: decisions. Join us every morning for the full episode of 197 00:10:07,889 --> 00:10:10,828 Sean Aylmer: Fear and Greed, Australia's best business podcast. I'm Sean Aylmer, 198 00:10:11,279 --> 00:10:11,699 Sean Aylmer: enjoy your day.