Adam Boyton Business Council chief economist, interview with Adam Creighton

06 November 2018

Event: Interview with Adam Creighton, YourMoney
Date: 6 November 2018
Topics: Interest rates, global economic outlook 


Adam Creighton, HOST: Adam Boyton, who is the chief economist of the Business Council of Australia. I first need to ask you about the November [RBA] meeting and the relationship with the Melbourne Cup now, because some people say that the Reserve Bank is more likely to cut or to hike rates on this month, is that actually statistically true?

Adam Boyton: I think Adam, that came from the fact that the November meeting follows immediately CPI,  just as a number of other meetings through the year do. And you also have the statement of monetary policy put together for the November meeting. So, there's just a bit more information out there that makes a change more likely in February, May, August and November, rather than than some of the other months but I don't think there's a conspiracy there.

Adam C: That’s good, so they're not just jealous of all the attention the horses are getting. Now look, you mentioned CPI there, the Reserve Bank would probably be disappointed with the result last week, it was weaker than expected. It's back below 2% of the annual rate. Does that basically suck out any chance of a rate rise over the next year?

Adam B: I think the weakness in the CPI or the soft CPI, does mean that a rate rise anytime soon is unlikely. And I think that's what the Reserve Bank will tell us at 2:30 this afternoon. But I think it's also important to remember that a low CPI actually means Australians have a bit more money left in their pocket. That's probably better for a lot of people than a high CPI.

Adam C: Look, it's a really good point. I mean, we so often hear economists say that they'd like inflation to be higher, but don't you think that the man in the street might find this rather odd because, of course, we've had sluggish wage growth and so they'd quite like prices to be lower? Who's  correct here? What's better for the country? Higher inflation or weaker inflation?

Adam B: Well, I think the best thing is inflation at somewhere around the target. To be quite honest with you, I don't think in the big scheme of things it makes much difference if inflation is at one and three quarter or two and a quarter. I think the things that make a big difference in the long run, the scheme of things are, can we lift productivity and can we use that to drive higher wages growth? That, I think, is much more important than this question of one point eight, one point nine or two point two on CPI.

Adam C: Let's look at some prices that have been moving by far more than that, and that is house prices. So, there's been real deflation here recently, I suppose. We've seen a 9%, sorry, 7% fall in Sydney a year, year on year, I think about 5% in Melbourne. I mean these falls seem to be accelerating. Would this be concerning the RBA at all?

Adam B: I think the issue for the RBA is a question of does it start to flow back into the economy more broadly? So a rebalancing of house prices, if that's what we're seeing, I think that's probably not going to concern the bank too much but if, for example, you were to see consumers spending a little less because they were worried about their wealth and you had that classic wealth feedback into consumer spending, then I think that would be a bit of a concern for the RBA. But at the moment, I think you can generally tell if the RBA is concerned by if they’re giving speeches about it and if they're writing about it and there doesn't seem to be that much concern just yet.

Adam C: Now, the language of that statement from Philip Lowe, economists obviously pore over that every month. It's been fairly similar now for a long time. Are you expecting any changes in the paragraphs given all that’s happened overseas recently and here, I suppose, to some extent?

Adam B: Well, I think there'll probably be a few changes. But to be honest, it was a statement from a former governor of the Reserve Bank who said that those documents are some of the most scrutinised in Australia and he was constantly surprised at the hidden meanings found in them. So perhaps we give them a little bit too much scrutiny.

Adam C: Yes, that's right. I mean, things just don't change that much sometimes from month to month. We've seen a few out of cycle rate hikes by the major banks. I think yesterday National Australia Bank announced it was putting up it's of headline rate by almost 20 basis points. I think it's 3.87.  Now, of course, as we know, the Reserve Bank hasn't moved rates for 27 months. Are the banks putting up their rates because of what's happening in the US?

Adam B: I think what all this tells us is, we're a small local economy. We simply can't separate ourselves from the global economy, when things happen in the global economy that often has a feedback here. I think, it's just one of those things that reminds us that we aren't immune from what happens overseas and our economy needs to be resilient and strong to make sure we can deal with any global volatility.

Adam C: Just moving overseas now to the US midterm elections and what sort of impact will that have, if any, on Australia?

Adam B: I'll leave it, I guess for the political pundits, to speculate about the politics. I think the lesson I take out of this as an economist is, the volatility that you see from time to time in the global economy and global markets just underscores the need to have a strong and resilient Australian economy. That means we need to be an attractive place for investment. It means we need to get our budget solidly back into surplus and start making inroads into net debt at the federal level. I think that's the lesson I take out of volatility in markets and economies,

Adam C: I’d just like to ask you a bit about how businesses are tracking, of course you're new role there is as chief economist at the Business Council. In the US we've seen extraordinary profit growth, I think 24% for the S&P 500 companies in the third quarter. Now I understand that it's not so great in Australia, but is it fair to say that Australian businesses are still doing very well?

Adam B: Well, I think you'd say that Australian businesses are doing reasonably well. I think conditions are probably a bit more favourable in the US. You've certainly seen a response in the US economy to some of the tax changes there. So, I think if you were to compare the two, you'd say the policies probably become a bit more favourable in the United States and that's been reflected in some of the responses by businesses there.

Adam C: And just on that company tax cut, which is seemingly not going anywhere here. In the US of course they've cut their headline rate from 35 percent to 25 percent. What sort of impacts that we seen so far from that massive cut? I think, it's almost two years since it started. I mean for instance, are we seeing any movement of firms towards the US. Are they relocating activity? Are they taking it out of Australia?

Adam B: Well, I think one of the interesting things in the US economy over the past few years has actually been resurgence in manufacturing in many parts of the US. So I do think you can look at those changes in taxation and you can say “yes, making yourself a more attractive place for investment does actually bring investment to you”. And the important thing about that is of course, if we think about the Australian context, it's investment that typically drives productivity and it's productivity and wages that are linked in the long run in Australia.

So I think it also tells us it's really quite important to make sure we remain a competitive investment destination and we don't stop, particularly while others are still running on the field.

Adam C: Well, just on wages, which you mentioned. Now we've seen a pick up in wage growth in the US of course 3.1% over the year to October from about 2.5% earlier in the year, but that's where their unemployment rate has fallen to about 3.5%. Whereas ours is still at 5%. Does that mean we have quite some way to go before we get a pickup here?

Adam B: Well, I think there's two ways to look at this and I might look at it from the positive light if you don't mind, and that's to say we've got an unemployment rate of 5%, which is close to the Reserve Bank's estimate of full employment. Yet we're not getting any inflation breakout, so I think we do actually have the possibility of driving the unemployment rate lower without getting an inflation breakout that the Reserve Bank needs to stomp on. And if only we could lift productivity, we could get wages growth up as well, and then you’d have a wonderful trifecta if I can use that term today, of low unemployment, a stable economy, inflation not breaking out and some wages growth. I think that would be a wonderful outcome.

We just need the productivity reform agenda to tick the wages growth box and then I think we could actually achieve something really quite remarkable.

Adam C: Well, what sort of reforms there more specifically would you be looking for?

Adam B: Well, I think we need to make sure that on the deregulation front we're not continually adding regulation that makes it more costly to do business. We need to make it easier for Australia to attract investment. We need to make the movement of goods in and out of Australia a little bit easier. I think we do need to ask ourselves, if we can't do a company tax cut for all businesses, what else can we do on taxation side to make investment in Australia more attractive if other people are cutting their tax rates? So I think there's a wide range of things, but to me, I think the lesson is you can't stand still while other people are still running.

Adam C: Just on the company tax cut point,  of course the government has made some effort here. It has cut the company tax rate for small companies, but I mean is it really worth it when it distorts the company tax system? You know, you get this kind of threshold where people would try not to grow, I guess to some extent, so they can pay the lower rate of tax. Anyway, my point basically is isn't it better just to cut the rate rather than the system like that?

Adam B: Well I think if you had a choice between a tax cut for all companies and a tax cut for some companies, you would pick a tax cut for all. Having said that, I think people don't really worry too much about the big business, small business distinction when you get out of Australia's capital cities and certainly when the Business Council is in regional Australia, one of the things that's continually said is that getting a big business to invest is a wonderful thing because it drives activity. Big businesses and small businesses need each other.  So I think this two tiered tax rate is probably unhelpful if it makes us forget that we actually all live together in this one country

Adam C: Now, just finally. There was a leaked tape, I think reported in the Daily Telegraph, from Ken Henry who was saying that he expected that the US economy might tip into recession fairly soon. I guess of course in Australia we have had 27 years of growth, so no sign of that here yet. But what do you make of those comments? I mean, it is quite a long expansion isn't really?

Adam B: It is quite a long expansion. Without knowing what a Dr Henry said, what I would say is when we get to July next year, this will actually be the longest US expansion since the 1850s. So what that just tells me is we need to be cognisant that we can't rely on global growth forever. This is a very long US expansion and we need to make sure that we have our policy settings right so that if you were to get a downturn across the globe, Australia can be a bit more resilient.

Adam C: Adam, thanks so much. We have to leave it there, but fantastic stat there. Longest expansion since the 1850s. I'll be using that later in the show.


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