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Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the

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Speaker 1: global economy to you. If the heck just happened in Australia.

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Speaker 1: That was the headline from one online magazine this week,

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Speaker 1: struggling to get its head round the shocking re election

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Speaker 1: of the Conservatives in the recent Australian election. Everybody got

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Speaker 1: this election wrong, even Bert the psychic Crocodile, who previously

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Speaker 1: had an unblemished record of calling elections correctly. In fact,

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Speaker 1: the result was considered such a sure thing that some

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Speaker 1: bookmakers had already paid out to people betting on Labor

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Speaker 1: to win. In a few minutes, I'll be asking our

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Speaker 1: in house Australia experts whether there are any lessons here

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Speaker 1: for other embattled governments around the world. I'll also have

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Speaker 1: a word with FED reporter Chris Condon about the US

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Speaker 1: Central Banks search for a new policy framework. But first

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Speaker 1: we asked Australia Economy report to Chris Burke to explain

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Speaker 1: why the economic recovery down Under has also been defying

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Speaker 1: the odds. This has been an extraordinary day in the

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Speaker 1: Soviet Union, where Mikhail Gorbachob has been ousted from power

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Speaker 1: in what appears to have been a bloodless cool Terminator

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Speaker 1: to Judgment Day. It's one of the new summer movies

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Speaker 1: we'll be reviewing this week on Cisco and ebrit Home

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Speaker 1: videotape of Los Angeles police beating Rodney King on indications

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Speaker 1: here at the Pentagon that this war may maybe beginning

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Speaker 1: right now and that the president may be going on

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Speaker 1: the year the US goes to war with Iraq after

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Speaker 1: Saddam Hussein in dades Kuwait, Vanilla Ice tops the music

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Speaker 1: charts and the developed world's longest uninterrupted economic expansion begins

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Speaker 1: down Under. For almost twenty eight straight years, Australia has

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Speaker 1: enjoyed steady economic growth without a recession. Not in two

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Speaker 1: thousand and one, where the tech bubble disrupted the US economy,

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Speaker 1: not in two thousand and eight, when the global financial

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Speaker 1: crisis infected much of the world. Here in Australia, the

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Speaker 1: economy has just kept on growing. But that streak now

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Speaker 1: looks to be in real danger of coming to an end.

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Speaker 1: It's all because a tumbling housing market is having some

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Speaker 1: painful side effects. The slump is weighing heavily on household

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Speaker 1: spending and inflation in an economy that's already sharply slowed

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Speaker 1: and where consumption makes up almost six of GDP. Indeed,

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Speaker 1: Australians long held fear of a failing economy was on

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Speaker 1: stark display just last weekend in the country's shock election result.

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Speaker 1: While polls showed a change of government was all but certain,

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Speaker 1: in the end, Ozzies just couldn't bring themselves to do it.

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Speaker 1: Prime Minister Scott Morrison managed to convince voters that their

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Speaker 1: economic prosperity would suffer if the Labor opposition one office.

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Speaker 1: Australians are particularly nervous right now. The house prices have

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Speaker 1: lost eight since the peak after a five year property

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Speaker 1: boom ended with a thud. But the worst has been

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Speaker 1: seen in Sydney, the most populous city in the nation's

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Speaker 1: economic powerhouse, where prices have sunk more than fourteen percent

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Speaker 1: from their peaks come through. I recently visited Wentworth Point,

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Speaker 1: a suburb crammed with new apartment blocks about forty minutes

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Speaker 1: northwest of central Sydney by train. I wanted to see

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Speaker 1: just how gloomy things were in the housing market, so

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Speaker 1: I arranged to meet real estate agent Alex Chittiac at

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Speaker 1: an open house he was hosting for a three bedroom

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Speaker 1: apartment on the side of the city's Paramatta River. The

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Speaker 1: numbers of people attending our homes drop theramatically. This was

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Speaker 1: on the market, say two years ago, we were expected

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Speaker 1: at least you know, ten groups come through on on

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Speaker 1: a Saturday. UM. Now it's you know, we're averaging around

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Speaker 1: three to four UM. A lot of that. All the

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Speaker 1: reason for that excause the the fiance commissions. It's a

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Speaker 1: lot of coupler now and then to borrow money. So

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Speaker 1: some people have disappeared altogether. Seen the number of investors

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Speaker 1: drops on them. So this was this is currently owned

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Speaker 1: by an investor UM and they're they're looking to get out,

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Speaker 1: mainly because you know, they finding that finance Chinians are

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Speaker 1: hard on. Australia is having its own version of the

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Speaker 1: credit crunch. After bingeing on debt for five years to

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Speaker 1: buy houses that were becoming more and more unaffordable, Australians

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Speaker 1: were saddled with one of the highest household debt levels

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Speaker 1: in the O e c D and their banks became

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Speaker 1: the most exposed to housing in the world. But the

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Speaker 1: money has since dried up. In the last two years,

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Speaker 1: a combination of regulatory curbs and a widespread probe into

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Speaker 1: the financial industry that exposed lots of bad behavior has

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Speaker 1: seen banks turn off the taps. Investors are now getting

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Speaker 1: a frosty reception and owner occupiers are being more scrutinized

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Speaker 1: than ever. I met anchored Shama and Rony Samanathan, a

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Speaker 1: couple inspecting the open home, and Wentworth Point. The two

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Speaker 1: young doctors were recently married and are searching for their

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Speaker 1: first time together. I asked them about the process of

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Speaker 1: getting a home loan the upshot. If you like your Netflix,

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Speaker 1: you might be in for a hard time. And are

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Speaker 1: you finding that kind of a difficult process getting the homeland?

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Speaker 1: Is it maybe taking it longer than you expected? Relying

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Speaker 1: in January a long time, we just got a pre approved.

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Speaker 1: Was the kind of criteria much stronger than you expected? Yeah,

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Speaker 1: I think it's stronger and more more strict with you know,

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Speaker 1: what they consider is income and what they conder and

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Speaker 1: how much we's been on Netflix and printing counts. Did

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Speaker 1: actually ask your stuff like that? That forms with every

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Speaker 1: detail of us, bending from sending out to holidays to

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Speaker 1: any subscription subscriptions, insurance, any detail have got the credit

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Speaker 1: card you know some reason? And they analyzed the credit card,

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Speaker 1: so we'd get the vacine. What was this expension? Australia's

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Speaker 1: economy is presenting policy makers with something of a conundrum.

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Speaker 1: The worst housing slump in the generation has played out

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Speaker 1: amid a roaring hiring boom. Thousands of new jobs are

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Speaker 1: being added each month, so by and large, most people

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Speaker 1: are managing to meet their mortage repayments. And while annual

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Speaker 1: GDP growth has slowed to two point three, that's still

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Speaker 1: only slightly low it's decade average. This may all provide

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Speaker 1: some comfort for now, but the jobs boom is showing

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Speaker 1: signs of weakening, and the unemployment rate has been creeping

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Speaker 1: back up. The Reserve Bank is worried that's going to

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Speaker 1: see a further drag on household spending, and this week

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Speaker 1: said it was considering cutting interest rates for the first

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Speaker 1: time since you know, the thing that I think would

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Speaker 1: really shift the balance of risks, as if we were

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Speaker 1: staring down the barrel of a softer labor market over

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Speaker 1: the course of two thousand and nine and two thousand

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Speaker 1: and twenty, incomes growth will slow further, and it also brings,

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Speaker 1: I guess into play the prospect of or selling in

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Speaker 1: the housing market. Which is not something we've had as

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Speaker 1: I yet. Sally Old is JP Morgan's senior strategist for

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Speaker 1: interest rates in Australia, one of many economists who reckon

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Speaker 1: the Central Bank will be forced to cut rates twice

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Speaker 1: this year to shore up the economy. So you recently

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Speaker 1: changed your outlook for interest rates to what extent did

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Speaker 1: the housing slump play a part in that decision? So

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Speaker 1: housing played a role in the sense that it's clearly

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Speaker 1: having an impact on the consumer. We've been quite variosh

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Speaker 1: on household consumption for a while now, and part of

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Speaker 1: that was to do with the slowing in house prices,

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Speaker 1: but more of it was just around some of these

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Speaker 1: constraints on the balance sheet starting to to bind and

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Speaker 1: make life a little bit difficult for Australian consumers. However,

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Speaker 1: the property downturn plays out here, there seems to be

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Speaker 1: a wide ranging consensus that it's going to be long

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Speaker 1: and painful. While prices aren't falling at the speed they

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Speaker 1: were a few months ago, they're unlikely to return to

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Speaker 1: their twenties seventeen peaks for years. Not only that, many

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Speaker 1: of the investors who once fueled the apartment market have

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Speaker 1: left town. Some of those investors were likely scared off

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Speaker 1: by the long expected election of a labor government which

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Speaker 1: planned to strip investors of lucrative Tact benefits. But that's

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Speaker 1: not happening now and could offer buys some incentive to

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Speaker 1: return if they can get finance. That is, the Reserve

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Speaker 1: Bank recently warned that a glut of Sydney apartments were

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Speaker 1: a risk to the economy after eighty thou new units

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Speaker 1: flooded the city in the past few years. In Wentworth

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Speaker 1: Point alone, more than three thousand apartments are still waiting

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Speaker 1: to be started or completed. I joined Alex, the estate

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Speaker 1: agent on a quick tour of the area in a

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Speaker 1: golf buggy that he uses to get around the large

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Speaker 1: estates of apartments. I like to say, you sure were,

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Speaker 1: I'll take this golf buggy on the road we're registered.

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Speaker 1: Are We're going to be stopped by the clogs. So

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Speaker 1: just to give you an idea. So he on the right,

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Speaker 1: it's a few development site resigns. There's towers up to

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Speaker 1: twenty stories on that block. Who's going to buy them?

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Speaker 1: It's hard to say. They haven't started selling them here.

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Speaker 1: Who There's another development that was that we just passed

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Speaker 1: that was on the market. Um, they have sales happened

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Speaker 1: wine as well as they hoped. So we're finding now

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Speaker 1: that we've sort of pull things on the back burner

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Speaker 1: and the projects being delayed. Um, I think it's until

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Speaker 1: they start moving them again we will probably probably won't

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Speaker 1: get off the grounds. If everything else in the world

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Speaker 1: was a bit rosier, Australia's property slump might not be

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Speaker 1: such a threat to the economy on its own. Indeed,

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Speaker 1: the Reserve Bank still thinks the correction is an orderly one,

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Speaker 1: but the problem is that it's happening at a time

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Speaker 1: when wage growth is still sluggish and global uncertainty abounds.

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Speaker 1: Australia's economy is more exposed to China than any other

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Speaker 1: in the developed world, with about a third of its

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Speaker 1: exports going there, and the jury is still out on

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Speaker 1: whether China can rebound from a recent soft patch amid

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Speaker 1: its ongoing trade dispute with the US. Add to that

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Speaker 1: a big question mark hanging over global growth, and it's

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Speaker 1: understandable why watches of the record breaking economy are a

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Speaker 1: bit nervous. As a Kiwi who spent six years in

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Speaker 1: their country, I can tell you that Ozzies are a

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Speaker 1: pretty resilient lot. There is something to their age old

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Speaker 1: mantrap of She'll be right, which basically means that whatever

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Speaker 1: comes along won't be the end of the world. So

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Speaker 1: have a beer in a barbie and enjoy the sunshine.

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Speaker 1: But if their record stretch of economic growth should come

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Speaker 1: to an end, that complacency is going to be sorely tested.

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Speaker 1: We also understand that he has to take the good

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Speaker 1: with the band. You know that the good times weren't

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Speaker 1: gonna last forever um and it's I guess it's just

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Speaker 1: a you just got to deal with with what you had.

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Speaker 1: So eventually I think we will see a turn, and

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Speaker 1: when it does, you know will be here to make

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Speaker 1: the most of them. I'm Chris Burke for Bloomberg News.

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Speaker 1: So that was a little bit on the miracle of

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Speaker 1: the Australian economy and also the miracle of the election

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Speaker 1: last week. Surprisingly, the reelection of the Conservative governments in

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Speaker 1: Australia when nobody, literally no one expected them to win.

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Speaker 1: I'm sitting in a noisy newsroom now talking on the

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Speaker 1: phone down the line to Tamara Henderson, who's our economist

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Speaker 1: for Australia and indeed Southeast Asia and New Zealand UM

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Speaker 1: for Bloomberg Economics and also Malcolm Scott are Managing editor

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Speaker 1: for Asia on the news side, Malcolm, can I start

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Speaker 1: with you? I mean, person you're sitting in Sydney. Were

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Speaker 1: you shocked by the result on Sunday? I was surprised.

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Speaker 1: I said to all my friends about a month ago.

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Speaker 1: The only way they can win this is by a

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Speaker 1: relentless negative attack on what was a very big target.

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Speaker 1: In a departure from the norm in Australia, the opposition

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Speaker 1: Labor Party went to the electorate with a very detailed

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Speaker 1: policy proposal, a whole bunch of tax initiatives, climate initiatives,

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Speaker 1: a big redistribution plan moving income from older generation to

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Speaker 1: the younger generation. And it was a huge target and

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Speaker 1: a backfired. The Liberal Party and the National Party attacked

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Speaker 1: the policies. They attacked the climate policies in the seats

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Speaker 1: where jobs were at stake from them and it worked well.

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Speaker 1: It reminds me actually, it's funny because we've got rather

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Speaker 1: used to election upsets, you know, the surprise of Brexit vote,

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Speaker 1: the surprise of the Trump election. But the big one

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Speaker 1: that was in my sort of early in my life

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Speaker 1: was in the UK, and it's the way you're describing

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Speaker 1: it was kind of similar that after many years of

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Speaker 1: Conservative government, Labor was expected to win and they were

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Speaker 1: extremely confident, and on the back of that had a

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Speaker 1: very detailed plan which even included raising taxes on a

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Speaker 1: certain chunk of the electorate, the people on hire incomes,

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Speaker 1: and that was credited afterwards as the reason why they

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Speaker 1: had that. The Conservatives actually got reelected against everyone's expectation,

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Speaker 1: whether that will be the lesson for Labor. Is there

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Speaker 1: something also, though, in this idea that the economy people

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Speaker 1: this very long recovery, potentially against the odds. Malcolm again,

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Speaker 1: there was something to that. And they also restored the

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Speaker 1: budget to surplus. Now in Australia, that's a big deal.

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Speaker 1: People want the budget insurplus. The former Labor government had

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Speaker 1: taken it into deficit in the response to the financial crisis.

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Speaker 1: They promised to return it to surplus time and time

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Speaker 1: again and never got there. Now the Coalition came into

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Speaker 1: power a few years ago and they've restored some some

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Speaker 1: kurds on spending and bit by bit they've been able

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Speaker 1: to increase revenue. But Josh Feinberg, the Treasurer, just leading

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Speaker 1: a decade of deficits budget surfaces are back and that

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Speaker 1: really boosted the traditional view of the Liberal National Coalition

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Speaker 1: wanting to know how to have an endless recovery and

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Speaker 1: no recessions, is there anything to learn from Australia or

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Speaker 1: are they just in the right place at the right time,

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Speaker 1: you know, so dependent on the Chinese economy when China

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Speaker 1: was strong and the rest of the world was weak,

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Speaker 1: but then also with their own domestic growth as well well.

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Speaker 1: They have a couple of factors. They've got some shock absorbers,

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Speaker 1: and one is the currency. It tends to be very

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Speaker 1: responsive to global global demand conditions or commodity prices. And yes,

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Speaker 1: they've actually got become much more linked to Asia and

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Speaker 1: especially the Chinese Chinese economy and when China stimulating their economy,

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Speaker 1: there there are knock on factors for Australia. But also

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Speaker 1: this is a domestic demand economy, so that factors in greatly.

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Speaker 1: And and during some of the times when when the

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Speaker 1: rest of the world have been in a slump, Australia

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Speaker 1: has happened to have a situation where the household spending

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Speaker 1: has been in the right place, or even investment has

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Speaker 1: been in the right in the right spot. So remember

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Speaker 1: we had that mining investment boom going on as well

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Speaker 1: just after the global financial crisis more recently, And Malcolm,

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Speaker 1: what does it mean does the election have any big

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Speaker 1: impact on economic policy in the short term. I guess

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Speaker 1: there's you're not going to have all of those proposals

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Speaker 1: from the Labor Party being implemented. But that's exactly the

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Speaker 1: chief the chief difference. That's a removal of risk. You know,

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Speaker 1: some of the economists had been worried Laby was going

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Speaker 1: to revoke some of the concessions for tech for investment

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Speaker 1: in property, right at the time that property is struggling,

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Speaker 1: that we're going to add new taxes on the carbon emissions,

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Speaker 1: right at the time that there is struggles to get

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Speaker 1: sufficient baseline baseload power to Australia's cities, and the tax

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Speaker 1: and spend dynamic of labor was was a bit of

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Speaker 1: a threat to the continued growth. It was a threat

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Speaker 1: that they justified on the grounds of fairness. But the

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Speaker 1: removal of that means a status quo, and you know

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Speaker 1: economies and economists often like the status quot. H Well,

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Speaker 1: I think the lesson for other parts of the world is,

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Speaker 1: if you want to have a really long recovery, be

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Speaker 1: next to China, and if and if you're going to

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Speaker 1: have a debt fueled housing bubble, try not to have

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Speaker 1: it burst the same time as everybody else. Australia now

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Speaker 1: has its crisis. I suspect it will be much less

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Speaker 1: serious because it's not happening at the same time around

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Speaker 1: the world. I'm joined now by Federal Reserve reporter Chris

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Speaker 1: Condon to talk about something completely different but possibly more

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Speaker 1: portent to many of the people listening, which is the

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Speaker 1: US Central Bank, the Federal Reserves review of how it

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Speaker 1: goes about its work. Because there's a there's a big

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Speaker 1: conference coming up which if you just looked at the program,

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Speaker 1: it would be one for the nerds, but actually we

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Speaker 1: we we should really care about this? Is that right? Absolutely?

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Speaker 1: You know, it's a big academic style conference in Chicago.

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Speaker 1: It's really part of a year long process. The FED

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Speaker 1: in particular is examining its mandate from Congress to keep

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Speaker 1: prices low and stable, and they're thinking about how do

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Speaker 1: we interpret that and how do we go about trying

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Speaker 1: to fulfill that mandate At the moment, of course, you

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Speaker 1: know that since two thousand and twelve they've had an

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Speaker 1: explicit two percent inflation target, but you know, inflation has

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Speaker 1: been low. They've failed to meet that target. For ever

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Speaker 1: since they've had that target, that's been below two percent UM.

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Speaker 1: So they're trying to think of what should we do

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Speaker 1: to lift inflation um And there are a number of ideas,

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Speaker 1: and some of them are quite technical, but quite controversial,

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Speaker 1: i have to say. And already even before this big conference,

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Speaker 1: they're running into some serious pushback from the PhD community

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Speaker 1: about whether or not the biggest economy in the world

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Speaker 1: should be experimenting essentially with its inflation target. Well, it's

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Speaker 1: interesting you say that. Of course, we're all quake at

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Speaker 1: the thought of the PhD community being against us. I'm

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Speaker 1: roobly glad that they're not against me, but what kind

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Speaker 1: of thing are they looking at? I mean, why is it?

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Speaker 1: It does obviously seem odd to have we think of

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Speaker 1: central banks as being dedicated to fighting inflation, but as

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Speaker 1: you say, they've kind of got to get their head

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Speaker 1: around the fact that they haven't been producing enough of it.

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Speaker 1: And actually the US has been a bit more successful

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Speaker 1: at that than countries like the central banks, like the

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Speaker 1: European Central Bank in the last few years. But what

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Speaker 1: kind of options could they be looking at? And someone

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Speaker 1: was talking to me about maybe having a price level

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Speaker 1: target or having an average inflation target. I guess those

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Speaker 1: things are quite hard to explain to people, But why

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Speaker 1: would they work better? Well, mostly I think we can.

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Speaker 1: We can put them into a category that we can

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Speaker 1: call makeup strategies. So at the moment, when they say

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Speaker 1: they want to hit two percent inflation target, that means

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Speaker 1: if it's below two percent, they want to push it

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Speaker 1: back up um And no matter how long it's been

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Speaker 1: below two percent, if it that then subsequently goes above

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Speaker 1: two percent, they want to immediately push it back down

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Speaker 1: to two. So they're always aiming to bring it closer

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Speaker 1: to that target. Now they've been under it for so long.

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Speaker 1: They're worried that that becomes ingrained in the way households

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Speaker 1: and businesses react. In other words, that they think people

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Speaker 1: will expect it to continue to be below and that

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Speaker 1: that will worsen the problem. So one of the several

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Speaker 1: actually of these proposals, um would have the FED, after

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Speaker 1: a period of under shooting persistently for a while, what

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Speaker 1: would have them aim to deliberately overshoot so that kind

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Speaker 1: of over a longer period, inflation would average around two

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Speaker 1: and that would keep the expectations of people, whether it's

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Speaker 1: individuals or people running companies, keeping their expectations for inflation

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Speaker 1: in the future to still be around two percent, rather

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Speaker 1: than deteriorating over time, which they're very much worried about

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Speaker 1: right now. I guess the question is, if you've already

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Speaker 1: failed to achieve one target and you're gonna effectively trying

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Speaker 1: to raise it and then say no, really, this time

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Speaker 1: we're going to get We're gonna going to live even

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Speaker 1: more inflation than we did before. Is that going to

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Speaker 1: be credible to people? Is going to is an extremely

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Speaker 1: good question. Really, it comes up all the time. If

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Speaker 1: they can't hit two percent, how can they hit two

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Speaker 1: and a quarter or two and a half, you know.

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Speaker 1: I think it it comes down to their resolve inflation.

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Speaker 1: As economists like to say always in everywhere a monetary phenomenon,

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Speaker 1: the one thing that central banks ought to really be

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Speaker 1: able to do is push around inflation. I think it

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Speaker 1: takes a little bit more resolved in and and also

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Speaker 1: the freedom that a new strategy would give them. Um,

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Speaker 1: with the target set as it is now, I think

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Speaker 1: there's always worry that there would be some um political

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Speaker 1: reaction if they were seen to be letting it run,

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Speaker 1: you know, reacting when it's rising towards two percent in

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Speaker 1: a way that's allowing it to go beyond that. If

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Speaker 1: they sold the strategy beforehand and then followed through with that,

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Speaker 1: perhaps it would be a little braver about actually essentially

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Speaker 1: letting it rise. As unemployed, as you know, is quite low.

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Speaker 1: If they just don't react to any um initial rise

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Speaker 1: in inflation heading as it heads back to two percent,

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Speaker 1: and then let it go, perhaps they'll they'll be a

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Speaker 1: little bit more successful. But recently, of course, they've they've

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Speaker 1: they've they've stuck with their old instincts to keep ahead

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Speaker 1: of it and try to cap it at two percent,

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Speaker 1: and that's only resulted in them being below You'll be

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Speaker 1: going alone. You'll you'll keep us informed. I will be

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Speaker 1: several of us will be going off to Chicago. UM.

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Speaker 1: And you know, if I could just add, it does

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Speaker 1: reveal both in the political field and within economists. I

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Speaker 1: think it reveals an interesting generational split. UM. A lot

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Speaker 1: of folks who are old enough, who lived as adults

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Speaker 1: through the very high period, the great inflation of the

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Speaker 1: seventies and eighties, still think quite fearfully about what will

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Speaker 1: happen with inflation if the FED doesn't very aggressively fight

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Speaker 1: back against any incipient rise in inflation. You see that

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Speaker 1: when J. Powel goes to Capitol Hill and some of

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Speaker 1: the older lawmakers, UM kind of give a shot across

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Speaker 1: the bow when he starts talking about re examining the

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Speaker 1: inflation target. And you see it also among PhD s.

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Speaker 1: You know, the one guy at the FED who's most

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Speaker 1: pushing for a rethink about this is John Williams, one

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Speaker 1: of the younger members of the Federal Open Market Committee.

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Speaker 1: So I think that's also an interesting revealing aspect of

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Speaker 1: all of this debate. Well, we are we are all

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Speaker 1: creatures of the times in which we grew up, but

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Speaker 1: hopefully not in our clothing ring, return of Flair trousers

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Speaker 1: and god knows what count music. Chris, thank you very much.

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Speaker 1: I am sure we will return to this topic. I'm

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Speaker 1: sure my pleasure. Thanks for listening to Stephanomics. We'll be

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Speaker 1: back next week with more on the ground insights into

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Speaker 1: the global economy. In the meantime, you can find us

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Speaker 1: on the Bloomberg Terminal, website, app or wherever you get

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Speaker 1: to rate and review our show so can reach more listeners.

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Speaker 1: For more news and analysis from Bloomberg Economics, follow as Economics.

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Speaker 1: It's simple on Twitter, and you could also find me

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Speaker 1: on at my Stephanomics. The story in this episode was

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Speaker 1: reported and written by Chris Burke, was produced by Magnus

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Speaker 1: Hendrickson and edited by Malcolm Scott and Scott Lamman, who

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Speaker 1: is also the executive producer of Stephanomics Special. Thanks to

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Speaker 1: Tomorrow Henderson, Chris Condon, and Malcolm Scott. Francesca Levy is

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Speaker 1: the head of Bloomberg Podcast