Speaker 1: Hello, and welcome to Stephanomics, the podcast that brings the
Speaker 1: global economy to you. If the heck just happened in Australia.
Speaker 1: That was the headline from one online magazine this week,
Speaker 1: struggling to get its head round the shocking re election
Speaker 1: of the Conservatives in the recent Australian election. Everybody got
Speaker 1: this election wrong, even Bert the psychic Crocodile, who previously
Speaker 1: had an unblemished record of calling elections correctly. In fact,
Speaker 1: the result was considered such a sure thing that some
Speaker 1: bookmakers had already paid out to people betting on Labor
Speaker 1: to win. In a few minutes, I'll be asking our
Speaker 1: in house Australia experts whether there are any lessons here
Speaker 1: for other embattled governments around the world. I'll also have
Speaker 1: a word with FED reporter Chris Condon about the US
Speaker 1: Central Banks search for a new policy framework. But first
Speaker 1: we asked Australia Economy report to Chris Burke to explain
Speaker 1: why the economic recovery down Under has also been defying
Speaker 1: the odds. This has been an extraordinary day in the
Speaker 1: Soviet Union, where Mikhail Gorbachob has been ousted from power
Speaker 1: in what appears to have been a bloodless cool Terminator
Speaker 1: to Judgment Day. It's one of the new summer movies
Speaker 1: we'll be reviewing this week on Cisco and ebrit Home
Speaker 1: videotape of Los Angeles police beating Rodney King on indications
Speaker 1: here at the Pentagon that this war may maybe beginning
Speaker 1: right now and that the president may be going on
Speaker 1: the year the US goes to war with Iraq after
Speaker 1: Saddam Hussein in dades Kuwait, Vanilla Ice tops the music
Speaker 1: charts and the developed world's longest uninterrupted economic expansion begins
Speaker 1: down Under. For almost twenty eight straight years, Australia has
Speaker 1: enjoyed steady economic growth without a recession. Not in two
Speaker 1: thousand and one, where the tech bubble disrupted the US economy,
Speaker 1: not in two thousand and eight, when the global financial
Speaker 1: crisis infected much of the world. Here in Australia, the
Speaker 1: economy has just kept on growing. But that streak now
Speaker 1: looks to be in real danger of coming to an end.
Speaker 1: It's all because a tumbling housing market is having some
Speaker 1: painful side effects. The slump is weighing heavily on household
Speaker 1: spending and inflation in an economy that's already sharply slowed
Speaker 1: and where consumption makes up almost six of GDP. Indeed,
Speaker 1: Australians long held fear of a failing economy was on
Speaker 1: stark display just last weekend in the country's shock election result.
Speaker 1: While polls showed a change of government was all but certain,
Speaker 1: in the end, Ozzies just couldn't bring themselves to do it.
Speaker 1: Prime Minister Scott Morrison managed to convince voters that their
Speaker 1: economic prosperity would suffer if the Labor opposition one office.
Speaker 1: Australians are particularly nervous right now. The house prices have
Speaker 1: lost eight since the peak after a five year property
Speaker 1: boom ended with a thud. But the worst has been
Speaker 1: seen in Sydney, the most populous city in the nation's
Speaker 1: economic powerhouse, where prices have sunk more than fourteen percent
Speaker 1: from their peaks come through. I recently visited Wentworth Point,
Speaker 1: a suburb crammed with new apartment blocks about forty minutes
Speaker 1: northwest of central Sydney by train. I wanted to see
Speaker 1: just how gloomy things were in the housing market, so
Speaker 1: I arranged to meet real estate agent Alex Chittiac at
Speaker 1: an open house he was hosting for a three bedroom
Speaker 1: apartment on the side of the city's Paramatta River. The
Speaker 1: numbers of people attending our homes drop theramatically. This was
Speaker 1: on the market, say two years ago, we were expected
Speaker 1: at least you know, ten groups come through on on
Speaker 1: a Saturday. UM. Now it's you know, we're averaging around
Speaker 1: three to four UM. A lot of that. All the
Speaker 1: reason for that excause the the fiance commissions. It's a
Speaker 1: lot of coupler now and then to borrow money. So
Speaker 1: some people have disappeared altogether. Seen the number of investors
Speaker 1: drops on them. So this was this is currently owned
Speaker 1: by an investor UM and they're they're looking to get out,
Speaker 1: mainly because you know, they finding that finance Chinians are
Speaker 1: hard on. Australia is having its own version of the
Speaker 1: credit crunch. After bingeing on debt for five years to
Speaker 1: buy houses that were becoming more and more unaffordable, Australians
Speaker 1: were saddled with one of the highest household debt levels
Speaker 1: in the O e c D and their banks became
Speaker 1: the most exposed to housing in the world. But the
Speaker 1: money has since dried up. In the last two years,
Speaker 1: a combination of regulatory curbs and a widespread probe into
Speaker 1: the financial industry that exposed lots of bad behavior has
Speaker 1: seen banks turn off the taps. Investors are now getting
Speaker 1: a frosty reception and owner occupiers are being more scrutinized
Speaker 1: than ever. I met anchored Shama and Rony Samanathan, a
Speaker 1: couple inspecting the open home, and Wentworth Point. The two
Speaker 1: young doctors were recently married and are searching for their
Speaker 1: first time together. I asked them about the process of
Speaker 1: getting a home loan the upshot. If you like your Netflix,
Speaker 1: you might be in for a hard time. And are
Speaker 1: you finding that kind of a difficult process getting the homeland?
Speaker 1: Is it maybe taking it longer than you expected? Relying
Speaker 1: in January a long time, we just got a pre approved.
Speaker 1: Was the kind of criteria much stronger than you expected? Yeah,
Speaker 1: I think it's stronger and more more strict with you know,
Speaker 1: what they consider is income and what they conder and
Speaker 1: how much we's been on Netflix and printing counts. Did
Speaker 1: actually ask your stuff like that? That forms with every
Speaker 1: detail of us, bending from sending out to holidays to
Speaker 1: any subscription subscriptions, insurance, any detail have got the credit
Speaker 1: card you know some reason? And they analyzed the credit card,
Speaker 1: so we'd get the vacine. What was this expension? Australia's
Speaker 1: economy is presenting policy makers with something of a conundrum.
Speaker 1: The worst housing slump in the generation has played out
Speaker 1: amid a roaring hiring boom. Thousands of new jobs are
Speaker 1: being added each month, so by and large, most people
Speaker 1: are managing to meet their mortage repayments. And while annual
Speaker 1: GDP growth has slowed to two point three, that's still
Speaker 1: only slightly low it's decade average. This may all provide
Speaker 1: some comfort for now, but the jobs boom is showing
Speaker 1: signs of weakening, and the unemployment rate has been creeping
Speaker 1: back up. The Reserve Bank is worried that's going to
Speaker 1: see a further drag on household spending, and this week
Speaker 1: said it was considering cutting interest rates for the first
Speaker 1: time since you know, the thing that I think would
Speaker 1: really shift the balance of risks, as if we were
Speaker 1: staring down the barrel of a softer labor market over
Speaker 1: the course of two thousand and nine and two thousand
Speaker 1: and twenty, incomes growth will slow further, and it also brings,
Speaker 1: I guess into play the prospect of or selling in
Speaker 1: the housing market. Which is not something we've had as
Speaker 1: I yet. Sally Old is JP Morgan's senior strategist for
Speaker 1: interest rates in Australia, one of many economists who reckon
Speaker 1: the Central Bank will be forced to cut rates twice
Speaker 1: this year to shore up the economy. So you recently
Speaker 1: changed your outlook for interest rates to what extent did
Speaker 1: the housing slump play a part in that decision? So
Speaker 1: housing played a role in the sense that it's clearly
Speaker 1: having an impact on the consumer. We've been quite variosh
Speaker 1: on household consumption for a while now, and part of
Speaker 1: that was to do with the slowing in house prices,
Speaker 1: but more of it was just around some of these
Speaker 1: constraints on the balance sheet starting to to bind and
Speaker 1: make life a little bit difficult for Australian consumers. However,
Speaker 1: the property downturn plays out here, there seems to be
Speaker 1: a wide ranging consensus that it's going to be long
Speaker 1: and painful. While prices aren't falling at the speed they
Speaker 1: were a few months ago, they're unlikely to return to
Speaker 1: their twenties seventeen peaks for years. Not only that, many
Speaker 1: of the investors who once fueled the apartment market have
Speaker 1: left town. Some of those investors were likely scared off
Speaker 1: by the long expected election of a labor government which
Speaker 1: planned to strip investors of lucrative Tact benefits. But that's
Speaker 1: not happening now and could offer buys some incentive to
Speaker 1: return if they can get finance. That is, the Reserve
Speaker 1: Bank recently warned that a glut of Sydney apartments were
Speaker 1: a risk to the economy after eighty thou new units
Speaker 1: flooded the city in the past few years. In Wentworth
Speaker 1: Point alone, more than three thousand apartments are still waiting
Speaker 1: to be started or completed. I joined Alex, the estate
Speaker 1: agent on a quick tour of the area in a
Speaker 1: golf buggy that he uses to get around the large
Speaker 1: estates of apartments. I like to say, you sure were,
Speaker 1: I'll take this golf buggy on the road we're registered.
Speaker 1: Are We're going to be stopped by the clogs. So
Speaker 1: just to give you an idea. So he on the right,
Speaker 1: it's a few development site resigns. There's towers up to
Speaker 1: twenty stories on that block. Who's going to buy them?
Speaker 1: It's hard to say. They haven't started selling them here.
Speaker 1: Who There's another development that was that we just passed
Speaker 1: that was on the market. Um, they have sales happened
Speaker 1: wine as well as they hoped. So we're finding now
Speaker 1: that we've sort of pull things on the back burner
Speaker 1: and the projects being delayed. Um, I think it's until
Speaker 1: they start moving them again we will probably probably won't
Speaker 1: get off the grounds. If everything else in the world
Speaker 1: was a bit rosier, Australia's property slump might not be
Speaker 1: such a threat to the economy on its own. Indeed,
Speaker 1: the Reserve Bank still thinks the correction is an orderly one,
Speaker 1: but the problem is that it's happening at a time
Speaker 1: when wage growth is still sluggish and global uncertainty abounds.
Speaker 1: Australia's economy is more exposed to China than any other
Speaker 1: in the developed world, with about a third of its
Speaker 1: exports going there, and the jury is still out on
Speaker 1: whether China can rebound from a recent soft patch amid
Speaker 1: its ongoing trade dispute with the US. Add to that
Speaker 1: a big question mark hanging over global growth, and it's
Speaker 1: understandable why watches of the record breaking economy are a
Speaker 1: bit nervous. As a Kiwi who spent six years in
Speaker 1: their country, I can tell you that Ozzies are a
Speaker 1: pretty resilient lot. There is something to their age old
Speaker 1: mantrap of She'll be right, which basically means that whatever
Speaker 1: comes along won't be the end of the world. So
Speaker 1: have a beer in a barbie and enjoy the sunshine.
Speaker 1: But if their record stretch of economic growth should come
Speaker 1: to an end, that complacency is going to be sorely tested.
Speaker 1: We also understand that he has to take the good
Speaker 1: with the band. You know that the good times weren't
Speaker 1: gonna last forever um and it's I guess it's just
Speaker 1: a you just got to deal with with what you had.
Speaker 1: So eventually I think we will see a turn, and
Speaker 1: when it does, you know will be here to make
Speaker 1: the most of them. I'm Chris Burke for Bloomberg News.
Speaker 1: So that was a little bit on the miracle of
Speaker 1: the Australian economy and also the miracle of the election
Speaker 1: last week. Surprisingly, the reelection of the Conservative governments in
Speaker 1: Australia when nobody, literally no one expected them to win.
Speaker 1: I'm sitting in a noisy newsroom now talking on the
Speaker 1: phone down the line to Tamara Henderson, who's our economist
Speaker 1: for Australia and indeed Southeast Asia and New Zealand UM
Speaker 1: for Bloomberg Economics and also Malcolm Scott are Managing editor
Speaker 1: for Asia on the news side, Malcolm, can I start
Speaker 1: with you? I mean, person you're sitting in Sydney. Were
Speaker 1: you shocked by the result on Sunday? I was surprised.
Speaker 1: I said to all my friends about a month ago.
Speaker 1: The only way they can win this is by a
Speaker 1: relentless negative attack on what was a very big target.
Speaker 1: In a departure from the norm in Australia, the opposition
Speaker 1: Labor Party went to the electorate with a very detailed
Speaker 1: policy proposal, a whole bunch of tax initiatives, climate initiatives,
Speaker 1: a big redistribution plan moving income from older generation to
Speaker 1: the younger generation. And it was a huge target and
Speaker 1: a backfired. The Liberal Party and the National Party attacked
Speaker 1: the policies. They attacked the climate policies in the seats
Speaker 1: where jobs were at stake from them and it worked well.
Speaker 1: It reminds me actually, it's funny because we've got rather
Speaker 1: used to election upsets, you know, the surprise of Brexit vote,
Speaker 1: the surprise of the Trump election. But the big one
Speaker 1: that was in my sort of early in my life
Speaker 1: was in the UK, and it's the way you're describing
Speaker 1: it was kind of similar that after many years of
Speaker 1: Conservative government, Labor was expected to win and they were
Speaker 1: extremely confident, and on the back of that had a
Speaker 1: very detailed plan which even included raising taxes on a
Speaker 1: certain chunk of the electorate, the people on hire incomes,
Speaker 1: and that was credited afterwards as the reason why they
Speaker 1: had that. The Conservatives actually got reelected against everyone's expectation,
Speaker 1: and then nobody ever ran in Britain on a campaign
Speaker 1: promising to raise anybody's taxes ever again. So I wonder
Speaker 1: whether that will be the lesson for Labor. Is there
Speaker 1: something also, though, in this idea that the economy people
Speaker 1: gave the Conservatives, even though it may have been a
Speaker 1: bit of a mess under the Conservatives in terms of
Speaker 1: changes of leadership and everything else, that they had produced
Speaker 1: this very long recovery, potentially against the odds. Malcolm again,
Speaker 1: there was something to that. And they also restored the
Speaker 1: budget to surplus. Now in Australia, that's a big deal.
Speaker 1: People want the budget insurplus. The former Labor government had
Speaker 1: taken it into deficit in the response to the financial crisis.
Speaker 1: They promised to return it to surplus time and time
Speaker 1: again and never got there. Now the Coalition came into
Speaker 1: power a few years ago and they've restored some some
Speaker 1: kurds on spending and bit by bit they've been able
Speaker 1: to increase revenue. But Josh Feinberg, the Treasurer, just leading
Speaker 1: to the election, was able to declare that yes, after
Speaker 1: a decade of deficits budget surfaces are back and that
Speaker 1: really boosted the traditional view of the Liberal National Coalition
Speaker 1: as strong on the economy, Tamara, if you're an economy
Speaker 1: wanting to know how to have an endless recovery and
Speaker 1: no recessions, is there anything to learn from Australia or
Speaker 1: are they just in the right place at the right time,
Speaker 1: you know, so dependent on the Chinese economy when China
Speaker 1: was strong and the rest of the world was weak,
Speaker 1: but then also with their own domestic growth as well well.
Speaker 1: They have a couple of factors. They've got some shock absorbers,
Speaker 1: and one is the currency. It tends to be very
Speaker 1: responsive to global global demand conditions or commodity prices. And yes,
Speaker 1: they've actually got become much more linked to Asia and
Speaker 1: especially the Chinese Chinese economy and when China stimulating their economy,
Speaker 1: there there are knock on factors for Australia. But also
Speaker 1: this is a domestic demand economy, so that factors in greatly.
Speaker 1: And and during some of the times when when the
Speaker 1: rest of the world have been in a slump, Australia
Speaker 1: has happened to have a situation where the household spending
Speaker 1: has been in the right place, or even investment has
Speaker 1: been in the right in the right spot. So remember
Speaker 1: we had that mining investment boom going on as well
Speaker 1: just after the global financial crisis more recently, And Malcolm,
Speaker 1: what does it mean does the election have any big
Speaker 1: impact on economic policy in the short term. I guess
Speaker 1: there's you're not going to have all of those proposals
Speaker 1: from the Labor Party being implemented. But that's exactly the
Speaker 1: chief the chief difference. That's a removal of risk. You know,
Speaker 1: some of the economists had been worried Laby was going
Speaker 1: to revoke some of the concessions for tech for investment
Speaker 1: in property, right at the time that property is struggling,
Speaker 1: that we're going to add new taxes on the carbon emissions,
Speaker 1: right at the time that there is struggles to get
Speaker 1: sufficient baseline baseload power to Australia's cities, and the tax
Speaker 1: and spend dynamic of labor was was a bit of
Speaker 1: a threat to the continued growth. It was a threat
Speaker 1: that they justified on the grounds of fairness. But the
Speaker 1: removal of that means a status quo, and you know
Speaker 1: economies and economists often like the status quot. H Well,
Speaker 1: I think the lesson for other parts of the world is,
Speaker 1: if you want to have a really long recovery, be
Speaker 1: next to China, and if and if you're going to
Speaker 1: have a debt fueled housing bubble, try not to have
Speaker 1: it burst the same time as everybody else. Australia now
Speaker 1: has its crisis. I suspect it will be much less
Speaker 1: serious because it's not happening at the same time around
Speaker 1: the world. I'm joined now by Federal Reserve reporter Chris
Speaker 1: Condon to talk about something completely different but possibly more
Speaker 1: portent to many of the people listening, which is the
Speaker 1: US Central Bank, the Federal Reserves review of how it
Speaker 1: goes about its work. Because there's a there's a big
Speaker 1: conference coming up which if you just looked at the program,
Speaker 1: it would be one for the nerds, but actually we
Speaker 1: we we should really care about this? Is that right? Absolutely?
Speaker 1: You know, it's a big academic style conference in Chicago.
Speaker 1: It's really part of a year long process. The FED
Speaker 1: in particular is examining its mandate from Congress to keep
Speaker 1: prices low and stable, and they're thinking about how do
Speaker 1: we interpret that and how do we go about trying
Speaker 1: to fulfill that mandate At the moment, of course, you
Speaker 1: know that since two thousand and twelve they've had an
Speaker 1: explicit two percent inflation target, but you know, inflation has
Speaker 1: been low. They've failed to meet that target. For ever
Speaker 1: since they've had that target, that's been below two percent UM.
Speaker 1: So they're trying to think of what should we do
Speaker 1: to lift inflation um And there are a number of ideas,
Speaker 1: and some of them are quite technical, but quite controversial,
Speaker 1: i have to say. And already even before this big conference,
Speaker 1: they're running into some serious pushback from the PhD community
Speaker 1: about whether or not the biggest economy in the world
Speaker 1: should be experimenting essentially with its inflation target. Well, it's
Speaker 1: interesting you say that. Of course, we're all quake at
Speaker 1: the thought of the PhD community being against us. I'm
Speaker 1: roobly glad that they're not against me, but what kind
Speaker 1: of thing are they looking at? I mean, why is it?
Speaker 1: It does obviously seem odd to have we think of
Speaker 1: central banks as being dedicated to fighting inflation, but as
Speaker 1: you say, they've kind of got to get their head
Speaker 1: around the fact that they haven't been producing enough of it.
Speaker 1: And actually the US has been a bit more successful
Speaker 1: at that than countries like the central banks, like the
Speaker 1: European Central Bank in the last few years. But what
Speaker 1: kind of options could they be looking at? And someone
Speaker 1: was talking to me about maybe having a price level
Speaker 1: target or having an average inflation target. I guess those
Speaker 1: things are quite hard to explain to people, But why
Speaker 1: would they work better? Well, mostly I think we can.
Speaker 1: We can put them into a category that we can
Speaker 1: call makeup strategies. So at the moment, when they say
Speaker 1: they want to hit two percent inflation target, that means
Speaker 1: if it's below two percent, they want to push it
Speaker 1: back up um And no matter how long it's been
Speaker 1: below two percent, if it that then subsequently goes above
Speaker 1: two percent, they want to immediately push it back down
Speaker 1: to two. So they're always aiming to bring it closer
Speaker 1: to that target. Now they've been under it for so long.
Speaker 1: They're worried that that becomes ingrained in the way households
Speaker 1: and businesses react. In other words, that they think people
Speaker 1: will expect it to continue to be below and that
Speaker 1: that will worsen the problem. So one of the several
Speaker 1: actually of these proposals, um would have the FED, after
Speaker 1: a period of under shooting persistently for a while, what
Speaker 1: would have them aim to deliberately overshoot so that kind
Speaker 1: of over a longer period, inflation would average around two
Speaker 1: and that would keep the expectations of people, whether it's
Speaker 1: individuals or people running companies, keeping their expectations for inflation
Speaker 1: in the future to still be around two percent, rather
Speaker 1: than deteriorating over time, which they're very much worried about
Speaker 1: right now. I guess the question is, if you've already
Speaker 1: failed to achieve one target and you're gonna effectively trying
Speaker 1: to raise it and then say no, really, this time
Speaker 1: we're going to get We're gonna going to live even
Speaker 1: more inflation than we did before. Is that going to
Speaker 1: be credible to people? Is going to is an extremely
Speaker 1: good question. Really, it comes up all the time. If
Speaker 1: they can't hit two percent, how can they hit two
Speaker 1: and a quarter or two and a half, you know.
Speaker 1: I think it it comes down to their resolve inflation.
Speaker 1: As economists like to say always in everywhere a monetary phenomenon,
Speaker 1: the one thing that central banks ought to really be
Speaker 1: able to do is push around inflation. I think it
Speaker 1: takes a little bit more resolved in and and also
Speaker 1: the freedom that a new strategy would give them. Um,
Speaker 1: with the target set as it is now, I think
Speaker 1: there's always worry that there would be some um political
Speaker 1: reaction if they were seen to be letting it run,
Speaker 1: you know, reacting when it's rising towards two percent in
Speaker 1: a way that's allowing it to go beyond that. If
Speaker 1: they sold the strategy beforehand and then followed through with that,
Speaker 1: perhaps it would be a little braver about actually essentially
Speaker 1: letting it rise. As unemployed, as you know, is quite low.
Speaker 1: If they just don't react to any um initial rise
Speaker 1: in inflation heading as it heads back to two percent,
Speaker 1: and then let it go, perhaps they'll they'll be a
Speaker 1: little bit more successful. But recently, of course, they've they've
Speaker 1: they've they've stuck with their old instincts to keep ahead
Speaker 1: of it and try to cap it at two percent,
Speaker 1: and that's only resulted in them being below You'll be
Speaker 1: going alone. You'll you'll keep us informed. I will be
Speaker 1: several of us will be going off to Chicago. UM.
Speaker 1: And you know, if I could just add, it does
Speaker 1: reveal both in the political field and within economists. I
Speaker 1: think it reveals an interesting generational split. UM. A lot
Speaker 1: of folks who are old enough, who lived as adults
Speaker 1: through the very high period, the great inflation of the
Speaker 1: seventies and eighties, still think quite fearfully about what will
Speaker 1: happen with inflation if the FED doesn't very aggressively fight
Speaker 1: back against any incipient rise in inflation. You see that
Speaker 1: when J. Powel goes to Capitol Hill and some of
Speaker 1: the older lawmakers, UM kind of give a shot across
Speaker 1: the bow when he starts talking about re examining the
Speaker 1: inflation target. And you see it also among PhD s.
Speaker 1: You know, the one guy at the FED who's most
Speaker 1: pushing for a rethink about this is John Williams, one
Speaker 1: of the younger members of the Federal Open Market Committee.
Speaker 1: So I think that's also an interesting revealing aspect of
Speaker 1: all of this debate. Well, we are we are all
Speaker 1: creatures of the times in which we grew up, but
Speaker 1: hopefully not in our clothing ring, return of Flair trousers
Speaker 1: and god knows what count music. Chris, thank you very much.
Speaker 1: I am sure we will return to this topic. I'm
Speaker 1: sure my pleasure. Thanks for listening to Stephanomics. We'll be
Speaker 1: back next week with more on the ground insights into
Speaker 1: the global economy. In the meantime, you can find us
Speaker 1: on the Bloomberg Terminal, website, app or wherever you get
Speaker 1: your podcast. We'd love it if you took the time
Speaker 1: to rate and review our show so can reach more listeners.
Speaker 1: For more news and analysis from Bloomberg Economics, follow as Economics.
Speaker 1: It's simple on Twitter, and you could also find me
Speaker 1: on at my Stephanomics. The story in this episode was
Speaker 1: reported and written by Chris Burke, was produced by Magnus
Speaker 1: Hendrickson and edited by Malcolm Scott and Scott Lamman, who
Speaker 1: is also the executive producer of Stephanomics Special. Thanks to
Speaker 1: Tomorrow Henderson, Chris Condon, and Malcolm Scott. Francesca Levy is
Speaker 1: the head of Bloomberg Podcast