1 00:00:03,430 --> 00:00:06,909 Sean Aylmer: Welcome to the Fear and Greed Daily Interview. I'm Sean Aylmer. The 2 00:00:06,909 --> 00:00:10,299 Sean Aylmer: past week has been a monster for economics. Last week, 3 00:00:10,299 --> 00:00:13,530 Sean Aylmer: it was the GDP data with Australia staying out of 4 00:00:13,530 --> 00:00:16,239 Sean Aylmer: a recession, for now at least. Then yesterday, the Board 5 00:00:16,239 --> 00:00:18,890 Sean Aylmer: of the Reserve Bank held its monthly meeting. To help 6 00:00:18,890 --> 00:00:21,800 Sean Aylmer: work through all that, I welcome back Carlos Cacho, chief 7 00:00:21,800 --> 00:00:25,020 Sean Aylmer: economist at Jarden Group. Carlos, welcome back to Fear and Greed. 8 00:00:25,730 --> 00:00:27,440 Carlos Cacho: Thanks for having me, Sean. Happy to be here. 9 00:00:27,840 --> 00:00:30,670 Sean Aylmer: Delay but not derail. Is that the message from the 10 00:00:30,670 --> 00:00:31,350 Sean Aylmer: Reserve Bank? 11 00:00:31,900 --> 00:00:35,699 Carlos Cacho: That seems to be what they're telling us in the meeting statements certainly 12 00:00:35,699 --> 00:00:39,390 Carlos Cacho: versus their SOMP (Statement on Monetary Policy) forecast from August or Statement on Monetary Policy 13 00:00:39,390 --> 00:00:43,760 Carlos Cacho: forecast from August. There's a pretty significant near term downside 14 00:00:43,760 --> 00:00:47,669 Carlos Cacho: miss to GDP (Gross Domestic Product), but they've really danced around that issue 15 00:00:47,669 --> 00:00:50,999 Carlos Cacho: and really pinned their hopes on a very strong recovery 16 00:00:51,000 --> 00:00:53,710 Carlos Cacho: when restrictions are eased at the other side of lockdowns. 17 00:00:54,110 --> 00:00:56,490 Sean Aylmer: Okay. So what were the key messages out of yesterday's 18 00:00:56,490 --> 00:00:56,929 Sean Aylmer: statement? 19 00:00:57,510 --> 00:01:00,650 Carlos Cacho: Look, really it's that they still expect a strong recovery to 20 00:01:00,650 --> 00:01:04,249 Carlos Cacho: come through, that near term, yes, there are downside risks 21 00:01:04,250 --> 00:01:06,250 Carlos Cacho: to the outlook and, yes, the economy is going to 22 00:01:06,250 --> 00:01:10,120 Carlos Cacho: be materially worse than they expected, but that they expect 23 00:01:10,450 --> 00:01:14,020 Carlos Cacho: that once restrictions are eased, we're going to see a solid 24 00:01:14,020 --> 00:01:17,820 Carlos Cacho: recovery as pent up demand is unleashed. They do concede 25 00:01:17,880 --> 00:01:20,170 Carlos Cacho: that the pickup is probably going to be a bit 26 00:01:20,170 --> 00:01:24,220 Carlos Cacho: softer than last year's recovery. In our own view, we 27 00:01:24,220 --> 00:01:26,919 Carlos Cacho: think there's probably some risk to that. We think that 28 00:01:26,920 --> 00:01:30,419 Carlos Cacho: this transition to living with COVID is probably going to be a 29 00:01:30,670 --> 00:01:34,119 Carlos Cacho: bit more challenging than many expect, and that means that 30 00:01:34,119 --> 00:01:36,770 Carlos Cacho: even when lockdowns are lifted, the economy might still be 31 00:01:36,770 --> 00:01:38,209 Carlos Cacho: a bit softer than what we hope. 32 00:01:38,830 --> 00:01:41,580 Sean Aylmer: Yeah. It was interesting reading the statement yesterday because it 33 00:01:41,580 --> 00:01:43,740 Sean Aylmer: looked as if the board of the bank was kind 34 00:01:43,740 --> 00:01:46,459 Sean Aylmer: of upbeat, but exactly what you just said then, it's 35 00:01:46,459 --> 00:01:49,470 Sean Aylmer: a different way out of lockdown this time around compared 36 00:01:49,470 --> 00:01:50,109 Sean Aylmer: to last year. 37 00:01:50,400 --> 00:01:54,450 Carlos Cacho: Yeah. I think that's a really important point. Last year and even the lockdowns 38 00:01:54,450 --> 00:01:57,139 Carlos Cacho: we saw earlier this year with Melbourne's fourth and fifth 39 00:01:57,140 --> 00:02:00,859 Carlos Cacho: lockdowns were all ended when cases got to zero. So 40 00:02:00,860 --> 00:02:04,930 Carlos Cacho: when restrictions are eased, the public could largely return to 41 00:02:04,930 --> 00:02:08,619 Carlos Cacho: normal life without any concerns of community transmission. This time, 42 00:02:08,620 --> 00:02:12,090 Carlos Cacho: what we're going to see is we're seeing vaccination really being the driving force 43 00:02:12,090 --> 00:02:15,040 Carlos Cacho: of easing of lockdowns, particularly in New South Wales and Victoria. 44 00:02:15,519 --> 00:02:18,450 Carlos Cacho: What that's going to mean is hopefully the vaccinations mean that 45 00:02:18,669 --> 00:02:22,950 Carlos Cacho: prevalence of severe cases and hospitalisations remain fairly low, but 46 00:02:22,950 --> 00:02:26,519 Carlos Cacho: it's likely that community transmission of COVID is going to pick up 47 00:02:26,519 --> 00:02:29,859 Carlos Cacho: or remain relatively high, which is a big difference. If 48 00:02:30,220 --> 00:02:32,900 Carlos Cacho: you think about your decision to go out and partake 49 00:02:32,900 --> 00:02:36,710 Carlos Cacho: in economic activity, you're potentially exposing yourself to a virus, 50 00:02:36,919 --> 00:02:39,309 Carlos Cacho: which we haven't really had much exposure to in Australia. 51 00:02:39,380 --> 00:02:41,870 Carlos Cacho: In the UK or the US where they've gotten used 52 00:02:41,870 --> 00:02:45,450 Carlos Cacho: to very high levels of cases. Having that ongoing level 53 00:02:45,450 --> 00:02:47,469 Carlos Cacho: of cases is less of a concern here. I think 54 00:02:47,470 --> 00:02:49,480 Carlos Cacho: it will be a bit of a challenge psychologically and 55 00:02:49,480 --> 00:02:50,880 Carlos Cacho: behaviourally for people. 56 00:02:51,350 --> 00:02:53,459 Sean Aylmer: And just before we go any further on that and 57 00:02:53,459 --> 00:02:55,799 Sean Aylmer: staying with the bank statement yesterday, what are they doing 58 00:02:55,799 --> 00:02:57,769 Sean Aylmer: on the tapering of bond purchases? 59 00:02:58,120 --> 00:03:01,869 Carlos Cacho: So the RBA decided to proceed with the planned taper in 60 00:03:01,870 --> 00:03:06,100 Carlos Cacho: bond purchases. So prior to September, they had been purchasing 61 00:03:06,100 --> 00:03:08,959 Carlos Cacho: bonds at a rate of $ 5 billion a week. They're going 62 00:03:08,959 --> 00:03:11,330 Carlos Cacho: to now taper that down to $ 4 billion a week. 63 00:03:11,660 --> 00:03:15,459 Carlos Cacho: They did concede though that they were going to maintain that rate until 64 00:03:15,459 --> 00:03:19,609 Carlos Cacho: at least February next year. Whereas, previously, they had suggested 65 00:03:19,609 --> 00:03:22,059 Carlos Cacho: they would review it again in November. So they've given us a 66 00:03:22,060 --> 00:03:25,909 Carlos Cacho: slight concession to the deteriorating outlook by keeping that purchase 67 00:03:25,910 --> 00:03:28,370 Carlos Cacho: rate a little bit higher for a little bit longer. 68 00:03:28,780 --> 00:03:31,360 Carlos Cacho: To us, I think one key thing out of this 69 00:03:31,419 --> 00:03:35,420 Carlos Cacho: is the decision to continue tapering despite the significant miss to 70 00:03:35,420 --> 00:03:40,400 Carlos Cacho: their outlook, suggests potentially that there's some unspoken concerns the RBA 71 00:03:40,400 --> 00:03:44,890 Carlos Cacho: has about the QE (Quantitative Easing) program that also are in their thoughts. 72 00:03:44,890 --> 00:03:46,630 Carlos Cacho: And I think the two key ones would be the 73 00:03:46,630 --> 00:03:49,410 Carlos Cacho: fact that the ownership of the bond market is getting to 74 00:03:49,410 --> 00:03:51,960 Carlos Cacho: a very high level and so they probably don't want 75 00:03:51,960 --> 00:03:54,560 Carlos Cacho: to push it too much more or they may risk the 76 00:03:54,560 --> 00:03:57,430 Carlos Cacho: strong functioning and liquidity of the market. And the second 77 00:03:57,430 --> 00:04:01,040 Carlos Cacho: one is that they do remain quite concerned about the strong rise 78 00:04:01,040 --> 00:04:03,940 Carlos Cacho: in house prices and their run- up in lending. And I 79 00:04:03,940 --> 00:04:05,869 Carlos Cacho: think they don't want to risk putting any more fuel 80 00:04:05,869 --> 00:04:08,350 Carlos Cacho: on the fire with putting downward pressure on rates from here. 81 00:04:08,760 --> 00:04:11,060 Sean Aylmer: But they're not talking about inflation at this point, are they? 82 00:04:11,730 --> 00:04:14,600 Carlos Cacho: No, they're definitely not concerned about inflation right now. The 83 00:04:14,600 --> 00:04:19,409 Carlos Cacho: latest wage figures out for Q2 remained fairly soft. CPI (Consumer Price Index), 84 00:04:19,409 --> 00:04:22,400 Carlos Cacho: while it had a significant rise in June, that's largely 85 00:04:22,400 --> 00:04:25,869 Carlos Cacho: temporary and it's due to really the very weak results from last 86 00:04:25,870 --> 00:04:28,669 Carlos Cacho: year falling out. So they're not at all concerned about inflation at the moment. 87 00:04:29,390 --> 00:04:32,109 Sean Aylmer: Okay. So when do you think interest rates will eventually 88 00:04:32,180 --> 00:04:34,600 Sean Aylmer: rise? It's clearly not anytime soon. 89 00:04:34,960 --> 00:04:37,770 Carlos Cacho: No, look. It's still definitely some way off. We're hopeful 90 00:04:37,770 --> 00:04:41,820 Carlos Cacho: that by mid 2023, the right building blocks will be 91 00:04:41,820 --> 00:04:44,580 Carlos Cacho: in place for the RBA to begin hiking rates. But 92 00:04:44,580 --> 00:04:46,930 Carlos Cacho: even then, it's going to be a very gradual process. 93 00:04:47,130 --> 00:04:50,029 Carlos Cacho: We're not going to be seeing anything like the rate hikes we've 94 00:04:50,029 --> 00:04:53,770 Carlos Cacho: seen historically. It's probably going to be looking at most 95 00:04:54,099 --> 00:04:58,240 Carlos Cacho: one hike a quarter, if even that. So you'd look 96 00:04:58,240 --> 00:05:02,320 Carlos Cacho: at rates going up probably less than 1% a year, 97 00:05:02,930 --> 00:05:05,869 Carlos Cacho: so it is going to be a very, very gradual pace 98 00:05:05,870 --> 00:05:06,680 Carlos Cacho: of rate hikes. 99 00:05:06,779 --> 00:05:09,159 Sean Aylmer: So that's a couple of years away. In the meantime, 100 00:05:09,159 --> 00:05:11,760 Sean Aylmer: and the difference between now and the end of the 101 00:05:11,760 --> 00:05:14,320 Sean Aylmer: global financial crisis, back then, we have or the world 102 00:05:14,320 --> 00:05:17,130 Sean Aylmer: had quantitative easing and low interest rates but it didn't 103 00:05:17,130 --> 00:05:20,070 Sean Aylmer: quite have the fiscal spending that we've got this time 104 00:05:20,070 --> 00:05:22,929 Sean Aylmer: around. Do you expect governments to start pulling back on 105 00:05:22,930 --> 00:05:24,270 Sean Aylmer: spending in the next couple of years? 106 00:05:24,770 --> 00:05:26,560 Carlos Cacho: Look, I think we're going to have to have that 107 00:05:26,560 --> 00:05:30,370 Carlos Cacho: discussion around fiscal stimulus and some budget consolidation at some 108 00:05:30,370 --> 00:05:33,370 Carlos Cacho: point. For the moment, obviously, in the midst of another 109 00:05:33,680 --> 00:05:37,279 Carlos Cacho: economic downturn, that's not really on the radar, but I 110 00:05:37,279 --> 00:05:40,260 Carlos Cacho: do suspect after the next election, which is due by 111 00:05:40,260 --> 00:05:43,510 Carlos Cacho: May next year, we'll probably start seeing the governments have 112 00:05:43,510 --> 00:05:45,760 Carlos Cacho: to make some hard choices when it comes to that. 113 00:05:46,140 --> 00:05:48,219 Carlos Cacho: What we've learned through this crisis is I think that 114 00:05:48,520 --> 00:05:51,659 Carlos Cacho: fiscal spending really can avoid the worst impacts of the 115 00:05:51,659 --> 00:05:55,809 Carlos Cacho: recession, and I think that is going to change probably fiscal behavior in 116 00:05:55,810 --> 00:05:58,050 Carlos Cacho: recessions or negative shocks going forward. 117 00:05:58,060 --> 00:06:01,469 Sean Aylmer: Yeah, it is very interesting how fiscal policy really has 118 00:06:01,469 --> 00:06:04,089 Sean Aylmer: come to the fore over the last 12 months or so. 119 00:06:04,849 --> 00:06:07,320 Carlos Cacho: It has. One of the things the RBA had been 120 00:06:07,320 --> 00:06:10,909 Carlos Cacho: calling for, for quite a while pre- COVID was for 121 00:06:10,909 --> 00:06:13,479 Carlos Cacho: some help from fiscal. We had a situation where monetary 122 00:06:13,479 --> 00:06:16,200 Carlos Cacho: policy was being eased to try and support the economy 123 00:06:16,200 --> 00:06:18,869 Carlos Cacho: to drive growth and to pick up inflation. But on the 124 00:06:18,870 --> 00:06:22,599 Carlos Cacho: other side, you had fiscal policy continually tightened and the 125 00:06:22,599 --> 00:06:25,950 Carlos Cacho: move to ever closer towards a surplus, which we get 126 00:06:25,950 --> 00:06:28,719 Carlos Cacho: so close to. I think what we're seeing this time 127 00:06:28,719 --> 00:06:31,609 Carlos Cacho: is we've actually seen those two levers of policy working 128 00:06:31,609 --> 00:06:33,729 Carlos Cacho: in tandem and it really shows you how effective they 129 00:06:33,729 --> 00:06:37,969 Carlos Cacho: are, but going forward with the RBA already at zero and 130 00:06:37,969 --> 00:06:41,640 Carlos Cacho: with QE already being used and the RBA owning quite a 131 00:06:41,640 --> 00:06:44,560 Carlos Cacho: good chunk of the bonds that they're purchasing, that ownership 132 00:06:44,560 --> 00:06:46,839 Carlos Cacho: is probably going to get close to 40% or 50% of some 133 00:06:46,839 --> 00:06:47,750 Carlos Cacho: of those bond lines. 134 00:06:47,880 --> 00:06:48,029 Sean Aylmer: Wow. 135 00:06:48,159 --> 00:06:51,619 Carlos Cacho: Really it's going to be fiscal policy that drives stimulus 136 00:06:51,830 --> 00:06:54,479 Carlos Cacho: in any future shocks. Monetary policy doesn't have a whole 137 00:06:54,479 --> 00:06:55,210 Carlos Cacho: lot of fuel left. 138 00:06:55,839 --> 00:06:58,279 Sean Aylmer: Yeah. Stay with me, Carlos. We'll be back in a 139 00:06:58,279 --> 00:06:58,489 Sean Aylmer: minute. 140 00:07:03,690 --> 00:07:06,710 Sean Aylmer: My guest this morning is Jarden Chief Economist, Carlos Cacho. 141 00:07:07,229 --> 00:07:09,140 Sean Aylmer: So just to bring it a little bit closer to 142 00:07:09,140 --> 00:07:12,030 Sean Aylmer: home, what's your prediction for GDP in the December quarter? 143 00:07:12,570 --> 00:07:14,840 Carlos Cacho: In the December quarter, hard to say at this stage. It's really going 144 00:07:15,260 --> 00:07:17,790 Carlos Cacho: to come down to the health outcomes and when lockdowns 145 00:07:17,790 --> 00:07:20,890 Carlos Cacho: end. But look, we'd be hopeful that we'd see something 146 00:07:20,890 --> 00:07:25,309 Carlos Cacho: around a 2% pick up in growth, but very, very 147 00:07:25,310 --> 00:07:26,520 Carlos Cacho: highly uncertain right now. 148 00:07:26,850 --> 00:07:28,360 Sean Aylmer: And a negative quarter this quarter? 149 00:07:29,040 --> 00:07:31,410 Carlos Cacho: Yeah. This quarter, it's looking like it could be anything 150 00:07:31,410 --> 00:07:35,880 Carlos Cacho: from minus two and a half to minus four, very, again, 151 00:07:35,920 --> 00:07:39,119 Carlos Cacho: hard to pin down. The fall in consumption we're expecting 152 00:07:39,120 --> 00:07:41,800 Carlos Cacho: in New South Wales and Victoria alone is enough to 153 00:07:41,800 --> 00:07:44,600 Carlos Cacho: probably see minus two and a half to three. So 154 00:07:44,600 --> 00:07:46,020 Carlos Cacho: you add to that a bit of weakness in the 155 00:07:46,020 --> 00:07:50,610 Carlos Cacho: construction sector, less interstate travel, a few other areas that 156 00:07:50,610 --> 00:07:52,980 Carlos Cacho: are softening, and it is going to be a very, very 157 00:07:52,980 --> 00:07:57,270 Carlos Cacho: soft quarter. Probably the outside of 2020s recession, probably one of the 158 00:07:57,270 --> 00:07:59,080 Carlos Cacho: worst quarterly results for GDP on record. 159 00:07:59,370 --> 00:08:02,710 Sean Aylmer: Wow. So the $ 64 question for most of us who 160 00:08:02,710 --> 00:08:05,840 Sean Aylmer: don't live in your world, house prices. Carlos, tell me, 161 00:08:05,840 --> 00:08:06,660 Sean Aylmer: what's going to happen? 162 00:08:07,310 --> 00:08:10,650 Carlos Cacho: Well, all the leading indicators still suggest the housing market 163 00:08:10,660 --> 00:08:14,249 Carlos Cacho: has not been dented by Delta. We've got auction clearance 164 00:08:14,250 --> 00:08:17,960 Carlos Cacho: rates moderating but still remaining consistent with pretty solid house 165 00:08:17,960 --> 00:08:21,630 Carlos Cacho: price growth. The latest data from CoreLogic continues to show 166 00:08:21,630 --> 00:08:25,450 Carlos Cacho: price growth above 1% month on month. So our expectation is 167 00:08:25,450 --> 00:08:28,880 Carlos Cacho: still that we'll probably see another 10% to 15% price increases 168 00:08:28,880 --> 00:08:32,900 Carlos Cacho: from here, largely based on low interest rates, feeding into 169 00:08:32,900 --> 00:08:35,729 Carlos Cacho: higher borrowing capacity. That means that at this cycle, we'd 170 00:08:35,850 --> 00:08:40,069 Carlos Cacho: probably see house prices appreciate around about 25% to 30%. 171 00:08:40,449 --> 00:08:43,380 Sean Aylmer: That's pretty good. All in all, do you think regulators will be 172 00:08:43,380 --> 00:08:44,110 Sean Aylmer: worried about that? 173 00:08:44,520 --> 00:08:49,040 Carlos Cacho: Look, I definitely think it's something they're focusing on. Actually, yesterday, 174 00:08:49,040 --> 00:08:52,240 Carlos Cacho: as well as the RBA, we also had APRA release the latest data 175 00:08:52,240 --> 00:08:56,449 Carlos Cacho: on lending characteristics, which shows this high-risk lending and detail 176 00:08:56,449 --> 00:08:59,190 Carlos Cacho: of lending standards that the RBA and APRA are watching very closely. 177 00:08:59,760 --> 00:09:02,610 Carlos Cacho: And what it showed was a really mixed and interesting picture. 178 00:09:03,090 --> 00:09:06,870 Carlos Cacho: On the one hand, you've got a situation where higher LVR (Loan to Value Ratio) lending, 179 00:09:06,870 --> 00:09:08,959 Carlos Cacho: so that's people who are borrowing more relative to the 180 00:09:08,959 --> 00:09:12,410 Carlos Cacho: value of their house, has actually gone down. Interest- only 181 00:09:12,410 --> 00:09:15,420 Carlos Cacho: lending was also lower, but then you saw a higher 182 00:09:15,420 --> 00:09:18,220 Carlos Cacho: debt to income lending, which is people who were borrowing a 183 00:09:18,240 --> 00:09:21,250 Carlos Cacho: relatively large amount of debt relative to their income or 184 00:09:21,290 --> 00:09:24,619 Carlos Cacho: greater than six times their income went up quite materially. 185 00:09:24,939 --> 00:09:27,119 Carlos Cacho: And of course, we know that investors are really coming 186 00:09:27,120 --> 00:09:29,739 Carlos Cacho: into the market in quite a number again. So you've 187 00:09:29,740 --> 00:09:32,760 Carlos Cacho: got some areas where things are looking pretty good and 188 00:09:32,760 --> 00:09:36,220 Carlos Cacho: others where there's maybe some concerns. I definitely think the 189 00:09:36,220 --> 00:09:38,890 Carlos Cacho: regulators are watching it closely, but in the midst of 190 00:09:38,890 --> 00:09:42,379 Carlos Cacho: an economic downturn, they're not about to tighten macroprudential policy. 191 00:09:42,380 --> 00:09:44,280 Carlos Cacho: And I still think it's much more of a story 192 00:09:44,280 --> 00:09:45,959 Carlos Cacho: for 2022 than 2021. 193 00:09:46,459 --> 00:09:48,240 Sean Aylmer: Carlos, as always, thanks for talking to us. 194 00:09:48,429 --> 00:09:49,150 Carlos Cacho: Thanks for having me, Sean. 195 00:09:49,709 --> 00:09:52,920 Sean Aylmer: That was Carlos Cacho, chief economist at Jarden Group. This 196 00:09:52,920 --> 00:09:54,900 Sean Aylmer: is the Fear and Greed Daily Interview. Join me every 197 00:09:54,910 --> 00:09:57,179 Sean Aylmer: morning for the full Fear and Greed podcast with all 198 00:09:57,179 --> 00:09:59,790 Sean Aylmer: the business news you need to know. I'm Sean Aylmer. 199 00:09:59,970 --> 00:10:00,589 Sean Aylmer: Enjoy your day.