Interview: “If we have a recession next year, it’ll be the consumer that drags us there”

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Jennifer Duke: Welcome to the Fear and Greed Business interview. I’m Jennifer Duke.

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Jennifer Duke: The Australian economy expanded 0.4% over the June quarter, and

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Jennifer Duke: it’s up 2.1% on an annual basis, but on a

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Jennifer Duke: per capita basis, we’re in a recession, and the government’s

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Jennifer Duke: warning it’s going to get worse from here on out.

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Jennifer Duke: Here to discuss what this all means is Diana Mousina,

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Jennifer Duke: Deputy Chief Economist at AMP. Diana, welcome back to Fear

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Jennifer Duke: and Greed.

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Diana Mousina: Thank you, Jen. It’s a pleasure to be back.

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Jennifer Duke: So can you break that stat down for us a

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Jennifer Duke: little bit? What was behind the result, and how did

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Jennifer Duke: it compare to what you were expecting?

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Diana Mousina: We actually saw quite large divergences in the components of GDP.

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Diana Mousina: If you break it down, it will show you that

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Diana Mousina: consumer spending rose only 0.1%, which is extremely weak. And there

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Diana Mousina: was a huge contribution from net exports. Export growth was

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Diana Mousina: much stronger than import growth, and the government added a

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Diana Mousina: decent contribution as well to June quarter growth. And there

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Diana Mousina: was a large fall in inventories. So what do you

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Diana Mousina: make from all of this? I suppose the good news

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Diana Mousina: is that domestic demand is still holding up, thanks to

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Diana Mousina: government spending, the consumer contributing a little bit, and business investment,

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Diana Mousina: I’ve forgot to mention, was also pretty good. And the

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Diana Mousina: forward-looking indicators for business investment is still holding up, but

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Diana Mousina: the economy has clearly slowed from its highs last year,

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Diana Mousina: and we expect that there will be some further slowing

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Diana Mousina: from here from the impacts of tighter interest rates. That

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Diana Mousina: per capita recession may feel real to some people, but

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Diana Mousina: at the same time, we have had a very strong

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Diana Mousina: labour market in the past 12 months. So it’s difficult

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Diana Mousina: to say that conditions in the economy are weak. There

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Diana Mousina: are obviously pockets of weakness, but the unemployment rate is

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Diana Mousina: still around a 50-year low. So that per capita recession,

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Diana Mousina: I think will just generate more headlines than it’s actually worth.

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Jennifer Duke: That makes me feel a little bit more positive. So

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Jennifer Duke: that’s nice, to be honest. So Treasurer Jim Chalmers did

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Jennifer Duke: say at his press conference yesterday that we’re on that

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Jennifer Duke: pretty steady footing, and like you said, we’re sort of

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Jennifer Duke: expecting a bit of a slowing. How concerned do we

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Jennifer Duke: need to be, though, about China on the impact for outlook?

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Diana Mousina: Well, if you look at the export numbers, you wouldn’t

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Diana Mousina: even think that China was a problem to Australia because

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Diana Mousina: export growth was still extremely strong. I mean, China is

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Diana Mousina: obviously only part of the story, but they are our

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Diana Mousina: major trading partner. If you look at things like the

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Diana Mousina: iron ore price though, other commodity prices, you haven’t really

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Diana Mousina: seen much of a weakening in those prices, which to

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Diana Mousina: me suggests that for our key exports to China around

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Diana Mousina: commodities, there is still decent demand from China. Maybe not

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Diana Mousina: as strong as it was 10 years ago, but it’s

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Diana Mousina: still enough to support Australian growth. The part of GDP

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Diana Mousina: that I’m most worried about is around the consumer, and

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Diana Mousina: I think if we were to have a recession next year or a significant downturn,

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Diana Mousina: the consumer would be the one that drags us there.

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Jennifer Duke: And obviously, we’ve had a couple of months since June,

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Jennifer Duke: so we’re already a little bit further into that than

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Jennifer Duke: perhaps these figures are suggesting. Has there been more of

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Jennifer Duke: a slowing in that consumer element since then?

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Diana Mousina: Well, as of the June quarter, discretionary spending had fallen

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Diana Mousina: by three consecutive quarters, and that’s only up to June.

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Diana Mousina: The retail data over the past few months has been

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Diana Mousina: pretty bad. And that suggests to me that the GDP

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Diana Mousina: figures will continue to show weakness in the consumer. The

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Diana Mousina: savings rate is likely to keep coming down because consumers

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Diana Mousina: will continue to draw on those savings. So I think

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Diana Mousina: that we will see some further weakness in the consumer. And

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Diana Mousina: the sentiment numbers don’t really fill me with any joy

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Diana Mousina: either because consumers are still saying that they don’t feel

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Diana Mousina: very optimistic about the outlook.

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Jennifer Duke: Definitely. And I think the Reserve Bank was looking pretty

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Jennifer Duke: closely at those figures when they met on Tuesday and

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Jennifer Duke: kept rates on hold. Given the GDP data and that

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Jennifer Duke: thought that you have around the consumer spending, do you

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Jennifer Duke: have any views on where rates might be headed next?

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Diana Mousina: I think that the likelihood of a pause to interest

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Diana Mousina: rates from here is extremely high. You would really need

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Diana Mousina: to see a change in the inflation or wages environment

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Diana Mousina: to justify another rate rise from here. Given that the

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Diana Mousina: RBA has been on hold for three consecutive months, there

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Diana Mousina: is no real need for them to hike interest rates. Again,

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Diana Mousina: things are moving in line with their projections in terms

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Diana Mousina: of GDP growth. Inflation’s actually coming in better than their forecast.

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Diana Mousina: If we did see a renewed surge in wages or

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Diana Mousina: the labour market continuing to be extremely tight, then maybe

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Diana Mousina: that would justify another rate rise from here. So there is

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Diana Mousina: the possibility of another rate rise in the next few months,

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Diana Mousina: but it’s not our base case. And we think that

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Diana Mousina: the next move will be a cash rate cut sometime

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Diana Mousina: in the first six months of 2024.

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Jennifer Duke: Stay with me, Diana, we’ll be back in a minute.

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Jennifer Duke: I’m speaking to Diana Mousina, Deputy Chief Economist at AMP. The

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Jennifer Duke: home building industry is usually a pretty solid contributor to GDP,

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Jennifer Duke: but it kind of isn’t actually anymore based on the

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Jennifer Duke: looks of the data yesterday. So do you think it’s

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Jennifer Duke: going to pick up again, or are these sort of

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Jennifer Duke: long-haul issues in the industry that are playing out?

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Diana Mousina: We’re in a rising-rate environment. It is difficult for residential

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Diana Mousina: construction to be solid, and that will continue to be

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Diana Mousina: the case. If we look at the building approvals data,

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Diana Mousina: it’s not very strong either, which suggests that new housing

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Diana Mousina: construction will still probably remain weak, but the only, I guess,

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Diana Mousina: source of upside is potentially the government trying to focus

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Diana Mousina: on lifting housing supply, that could result in some more construction,

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Diana Mousina: which would add to GDP growth.

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Jennifer Duke: Definitely. And the other big change that Jim Chalmers has

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Jennifer Duke: announced yesterday was a new productivity commission chair, Danny Wood from

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Jennifer Duke: the Grattan Institute. What do you think is her big

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Jennifer Duke: challenge in terms of tackling the big productivity problem?

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Diana Mousina: Well, productivity is really the buzzword lately because it looks

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Diana Mousina: so dreadful when you look at the data. And it leads a lot

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Diana Mousina: of people to ask me, “Are we really more unproductive

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Diana Mousina: than we’ve ever been?” And I don’t really think that

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Diana Mousina: that’s the case because there is still some, I think

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Diana Mousina: postpandemic issues, that are filtering through the data in terms

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Diana Mousina: of measuring productivity. But also, the very big increase in

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Diana Mousina: hours worked is keeping a lid on productivity growth, helping

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Diana Mousina: it to look extremely low. There are many issues that

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Diana Mousina: need to be addressed in the economy around productivity. So

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Diana Mousina: things like taxation reform, incentives for business investment, trying to

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Diana Mousina: lift business investment, what’s the optimal rate of business tax rates,

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Diana Mousina: helping to increase education standards in the country, increasing housing supply,

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Diana Mousina: trying to get the right balance of population growth for

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Diana Mousina: the economy, given our infrastructure challenges, so there’s kind of

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Diana Mousina: productivity issues in every single sector of the economy. So

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Diana Mousina: I don’t envy her role at the moment because productivity

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Diana Mousina: is a long-term issue that needs to be addressed through

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Diana Mousina: reforms, but they take a long time. So we’re not just magically going

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Diana Mousina: to see a lift in productivity growth, it will take

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Diana Mousina: some time for it to rise.

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Jennifer Duke: And Danny’s been pretty vocal on that tax reform piece

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Jennifer Duke: and the need to get a bit of an overhaul

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Jennifer Duke: in the GST space and bring us to it, maybe

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Jennifer Duke: a bit of a new horizon. Do you think that

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Jennifer Duke: message is going to be listened to by the government?

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Jennifer Duke: Are you sort of on the tax reform side?

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Diana Mousina: Well, economists usually like tax reform, so I think I

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Diana Mousina: have to say yes because taxation reform tries to reduce

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Diana Mousina: some inefficiencies in the system and ultimately try and make

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Diana Mousina: the system fairer and get rid of taxes that aren’t

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Diana Mousina: benefiting the economy. And I suppose if they’ve appointed her

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Diana Mousina: as the new chair, then the government is serious about

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Diana Mousina: trying to tackle tax reform. So I really hope that

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Diana Mousina: it is something that they look into.

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Jennifer Duke: And I just want to go back to that per capita recession issue

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Jennifer Duke: as well, because clearly you said that it’s going to

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Jennifer Duke: generate a lot of headlines but perhaps not as many

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Jennifer Duke: practical effects. Are you concerned at all about those headlines

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Jennifer Duke: and the way that they might impact people’s perceptions on

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Jennifer Duke: population growth and migration settings?

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Diana Mousina: Bad news always sells, I think. And whenever you look

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Diana Mousina: up things around the economy, there’s always someone predicting a

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Diana Mousina: crash or recession because I think sometimes it’s often easier

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Diana Mousina: to be negative than it is just to say, “Well,

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Diana Mousina: things can just turn out okay and not be too

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Diana Mousina: strong or too weak, but just moderate.” So I don’t

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Diana Mousina: think it’s helpful to get people worried about recessions. It’s

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Diana Mousina: important to keep in mind that we could experience a

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Diana Mousina: downturn because we have had such a significant lift in

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Diana Mousina: interest rates that there will be some consequences of this

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Diana Mousina: and one of those consequences will be a slowing in

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Diana Mousina: GDP growth. Hopefully, we don’t need to go down the

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Diana Mousina: path where GDP growth crashes, but it is important to

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Diana Mousina: be cognisant that we will have a further slowing in

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Diana Mousina: activity from here, but not necessarily to get people worried

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Diana Mousina: about the outlook.

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Jennifer Duke: And one of those other effects of high interest rates

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Jennifer Duke: that everyone always assumes is going to happen is a

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Jennifer Duke: very rapid drop in property prices, but it doesn’t seem

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Jennifer Duke: like that’s actually happening anymore. Have you been surprised about

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Jennifer Duke: what’s going on in the property market?

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Diana Mousina: Extremely surprised, and a part of the reason is definitely

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Diana Mousina: around the tight rental market and the surge in population

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Diana Mousina: growth. I guess I didn’t expect that population growth would

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Diana Mousina: rise at such a quick pace in a very concentrated

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Diana Mousina: number of quarters, I guess, or even months. I thought that

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Diana Mousina: our population growth numbers would’ve started to increase last year,

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Diana Mousina: but there was definitely a delay post the pandemic, and it

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Diana Mousina: all seems to be coming right now, and we just

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Diana Mousina: don’t have the levels of supply to meet the demands

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Diana Mousina: of population growth. So that needs to be addressed. And

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Diana Mousina: I suppose the government is trying to address those housing

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Diana Mousina: supply issues, but the issue is that they just, if you want

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Diana Mousina: to build a house, it doesn’t just happen in a

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Diana Mousina: day. It can take months, if not numerous months, if

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Diana Mousina: not close to a year.
So that’s sort of the

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Diana Mousina: issue. I really hope that the lift in housing supply

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Diana Mousina: can ease some of the tightness in the rental market,

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Diana Mousina: but the strength in the housing market is definitely surprising. Although

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Diana Mousina: I don’t see the pace of growth that we’ve had

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Diana Mousina: over the past few months continuing, I think that we

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Diana Mousina: will see some softening in the pace of property price

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Diana Mousina: growth, especially coming into next year.

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Jennifer Duke: Definitely. Diana, thank you so much for talking to Fear

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Jennifer Duke: and Greed.

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Diana Mousina: Thank you.

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Jennifer Duke: And that was Diana Mousina, deputy chief economist at AMP Capital.

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Jennifer Duke: This is the Fear and Greed Business interview. Join us

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Jennifer Duke: every morning for the full episode of Fear and Greed,

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Jennifer Duke: Australia’s best business podcast. I’m Jennifer Duke, economics correspondent for

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Jennifer Duke: Capital Brief, and in the chair for Sean Aylmer. Have

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Jennifer Duke: a nice day.