Business Council chief economist Stephen Walters interview with Andrew Geoghegan, ausbiz

06 September 2023

Event: Business Council chief economist Stephen Walters interview with Andrew Geoghegan, ausbiz
Speakers: Andrew Geoghegan, host, ausbiz; Stephen Walters, chief economist, Business Council of Australia
Topics: National accounts; RBA; China; economic outlook; housing; migration


Andrew Geoghegan, host, ausbiz: Let's get some analysis. Stephen Walters joining us from BCA. Stephen good to see you.

Stephen Walters, chief economist, Business Council of Australia: Hi Andrew, how are you?

Andrew: Good. Okay, so economic growth slightly higher for the quarter. What did you make of those numbers? And given what we saw with the RBA, yesterday, would there be sort of any second thoughts?

Stephen: Not from the RBA. I think they're closely watching inflation. I think pretty clearly now inflation peaked last December, and it's been pretty steeply down since then. We'll see, we've obviously got a change of governor coming up in the next couple of weeks. So, we'll see what the new governor says. But I think Governor Lowe speaking tomorrow - I think he'll give a more sort of expansive summary of what he said yesterday, which is they're watching and just waiting. On the GDP numbers, it was better than expected, but 0.4, frankly, is a pretty weak growth number. If you annualise that, it's sort of 1.5 per cent. When you look under the bonnet, it's some pretty weak numbers in there. You mentioned net exports, that's great. Investment was pretty strong, public spending was pretty strong. So there's some good bits of the economy. But when you look at things like per capita income, that actually went backwards now for the second straight quarter. So some economists, and I'm probably one of them, describing that as a per capita recession in the economy. So once you adjust for population growth, it's pretty soft out there. The other thing was consumer spending barely grew at all and that's the biggest part of the economy.

Andrew: Absolutely, consumption, very soft. Also, those savings rates coming off, as well. So, what does that point to in the quarters ahead then?

Stephen: I think consumers are pretty much drained of all that big build-up of savings they had during the pandemic. Remember, there was hundreds of billions of dollars that were accumulated there, the savings rate is the flow of that. So, it's actually still positive. So, it came down as you said, but consumers are saving more, what I'd call the normal amount of their income now, rather than abnormal numbers we saw during the pandemic. But effectively, what that means now is consumer spending will be driven by the labour market, and already we've seen signs that employment growth slowing down. The Reserve Bank and Treasury are both forecasting growth in our economy of only 1.5 per cent. And in fact, the Reserve Bank's numbers for the end of this year are below 1 per cent. So that means employment growth has got to slow. So therefore, I think there's a bit of a challenge for consumers that they've run down their savings, it's really only going to be the labour income that's driving them from here. I think there's going to be some compression of that in the months ahead.

Andrew: So, when we look at the risks ahead for the Australian economy, given, obviously, spending and consumption down. But interesting, also, taking a look at the accompanying statement yesterday, compared with the previous month was that mentioned of China? What do you see as the effect there of that weak growth we're seeing out of China and given obviously our dependence there?

Stephen: It was interesting to see the Governor and the Board mention China, that's not something they speak about every time. They talk about growth and housing and wages and the like, and inflation, of course. So to see China in there was quite interesting. And we have seen some of those numbers coming out of China that are a bit troubling. The context here is that China takes a third of our goods exports, they're by far our biggest export market, they are our biggest source of tourists, biggest source of students until recently. So, what China's doing really matters. And we've seen not only their industrial growth numbers slowing down, but some of those financial sector stresses around their property market looking pretty soft. The government's done the go to thing they normally do, which is spending more money on infrastructure, which in the long run probably makes things worse, because you get a bigger excess to unwind, and cutting interest rates that might help but no, it really matters. So, it's interesting to see the Reserve Bank actually talking about that. What happens in China really affects our exports. And as you said earlier, it was one of the big drivers of our growth number today. So, if China's really slowing down, and we know the rest of the world slowing as well, the US is going through a slowdown, one of your earlier speakers was talking about Europe being quite soft. So, our external environments deteriorating at the time that I think domestic growth is slowing down as well.

Andrew: A weaker Australian dollar, obviously beneficial as far as exports are concerned. But of course, it works in reverse too in that we tend to import inflation, what are the risks there do you think?

Stephen: I think that's one of the big risks as well. You mentioned the oil price going up. And if the currency is going down, that's the double whammy there because the oil price in Aussie dollars goes up even more. So, I think that's a real risk. I think over the medium term, the bigger risk is service price inflation. The biggest component of that is wages. We know wages growth with the new workplace reforms the government's putting in place, and mandated wage increases for low income earners. There's a lot of wage pressures starting to build up. We saw the number today that unit labour costs, which is adjusted for hours worked, went up by over 5 per cent in the last year. So that's pretty rapid. We saw in the numbers on Monday that wages across the economy went up 10 per cent. So, if that's passing through into service prices, it does mean inflation is a little bit more persistent. I think that's the big risk for the RBA outside China, is that service price inflation actually stays a bit higher, but for now I think they're on hold. There'll be the change of the governor in a couple of weeks, and a big speech by Governor Lowe tomorrow. But I think, a wait and see for the Reserve Bank. But there's big moving parts out there with domestic growth pretty soft, slowing global growth, but persistent service price inflation.

Andrew: It's been a feature across developed countries globally and that the jobs market remains high that really failed to crack, haven't they, despite, you know, this rapid rise in interest rates. But of course, you know, the RBA, here forecasting that unemployment will reach what, 4.5?

Stephen: 4.5 yes.

Andrew: What's it going to take then? And also, what effect are we seeing just in terms of that high migration rate? Given, you know, obviously, that tightness in the, in the jobs market?

Stephen: Population growth that was implied in today's numbers is the fastest ever, it's about 2.5 per cent, quite extraordinarily high numbers. So, migration is really helping keep the economy afloat, but it's probably contributing to that per capita recession we talked about earlier. Look, I think the labour market always lags. Economists always talk about the labour market’s usually the last thing to turn. So, I think just sort of wait and see on that one. We've already seen unemployment start to go up. So, we bottomed out at 3.4 per cent late last year, we're now at 3.7 per cent. As you said, both Treasury and the Reserve Bank are looking at 4.5. I think that's probably about right. The risk is if unemployment goes up more quickly, then consumer spending is even weaker in the economy is even weaker again. So, I noticed a survey this week by some businesses in New South Wales saying one in four plan to shed jobs. That's quite troubling. That's 25 per cent of businesses in this state plan to shed jobs, that's really quite troubling.

Andrew: What are you seeing in the property market amongst those prices? Once again have shown resilience there. Now we're in the spring, of course, selling season. It will be interesting to see where tracks from here on, but have you been surprised at all of those given where those prices have gone? Given what's going on with interest rates or are we yet to see the effect because it seems as though with all that talk of the interest rate cliff coming off from fixed or variable, it's been fairly muted?

Stephen: So far, but we know that July August, September is the big period for those mortgage rate resets. So, we're sort of at the tail end of that, but still coming. Call me an economist, but it's really demand supply. Supply of housing is very weak. We know that. The cost of finance has gone up a lot. As you said, I thought would drive house prices down a lot more. That went down about 10 per cent, it was a pretty serious decline. But since then, the big migration flows have delivered a massive demand boost to the housing market. That's what’s winning out about against these other forces. Low supply is being swamped by really strong demand, and hence house prices going up. I think they’ll continue to go up through spring.

Andrew: All right, overall, then, Stephen, some big calls, now I'm going to ask you just in terms of the chances of recession in Australia, you think, how significant are they?

Stephen: Still relatively low but rising. So, we don't often have recessions, right? We avoided one for nearly 30 years, we had one during the pandemic that was extraordinary. So still quite low but I distinguish a recession in saying negative quarters of GDP versus rising unemployment. I think we are going to get rising unemployment. So, for some people, it'll feel a bit recessionary. But unlikely that we'll get back to back quarterly declines in GDP.

Andrew: With that said, just in terms of what the RBA is, are you of the opinion then that they are done?

Stephen: I think so, next move will be down. It'll be the nice job for the new Governor, Michelle Bullock to have. I think her first job will be to cut rates sometime next year. Having said that, if service price inflation persists and the currency keeps going down, there's a risk they have to hike again. And markets have got a small probability of that priced in, but I think they're done.

Andrew: When with the cutting cycle likely begin?

Stephen: I think second half next year. I think they're on hold for quite some time.

Andrew: All right, and you're talking about new governor Michelle Bullock, are we likely to see any policy divergence? And I guess bear in mind what the recommendations made out of the review, and how the Reserve Bank Board is structured. Will we see any noticeable shift do you think?

Stephen: Not in the near term, so the new board doesn't start until July next year, so that's some way off. Michelle Bullock's been at the Reserve Bank almost as long as Governor Lowe, 30 odd years. So, I doubt you'll see a really profound change. So, once we get through the implementation of these review recommendations, you might see some more change. But I think in the near term, it's pretty steady as she goes.

Andrew: Stephen, great to get your analysis. Thanks for joining us from BCA.


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