Interview: “The June rate hike was the last one.”

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Jennifer Duke: Welcome to the Fear and Greed Daily Interview. I’m Jennifer

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Jennifer Duke: Duke. As Australia’s largest bank, Commonwealth Bank already has an

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Jennifer Duke: incredible insight into the real economy. That’s where and how

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Jennifer Duke: we earn, spend, and save our money. When it comes

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Jennifer Duke: to consumer activity, those insights just became even more accurate

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Jennifer Duke: with the launch of the improved CommBank Household Spending Intentions

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Jennifer Duke: Index. Stephen Halmarick is Chief Economist for the Commonwealth Bank.

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Jennifer Duke: He’s been leading the charge on this new dataset. Stephen,

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Jennifer Duke: welcome back to Fear and Greed.

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Stephen Halmarick: Thanks very much. Very good to be with you again.

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Jennifer Duke: Can you start with the basics for us? Why are

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Jennifer Duke: household spending intentions so important?

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Stephen Halmarick: Well, household spending is the largest part of the economy.

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Stephen Halmarick: Consumer spending is around 50% of the Australian economy, so

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Stephen Halmarick: really important to understand what consumers are doing, how much

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Stephen Halmarick: money they’re spending, what they’re spending their money on if

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Stephen Halmarick: we want to understand what’s happening in the broader Australian

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Stephen Halmarick: economy. Of course, that also helps us forecast things like

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Stephen Halmarick: what the Reserve Bank might be doing with monetary policy.

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Jennifer Duke: Where do you get all of this data from?

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Stephen Halmarick: The data is from approximately 7 million Commonwealth Bank customers.

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Stephen Halmarick: That’s roughly 30% of all consumer transactions in Australia. Really

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Stephen Halmarick: importantly, the data is de- identified. We meet all the

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Stephen Halmarick: privacy and regulatory requirements. But it’s all internally generated data

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Stephen Halmarick: from things like credit card spending, debit card spending, keypad

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Stephen Halmarick: transactions, BPAY, ATM, direct debit. It’s a very comprehensive data set.

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Jennifer Duke: You’ve obviously got a lot of data products already. How

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Jennifer Duke: does this new one fit into the mix of that

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Jennifer Duke: suite of products?

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Stephen Halmarick: We’re actually calling this one the CommBank Household Spending Insights

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Stephen Halmarick: Report. It replaces the previous Household Spending Intentions. The key

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Stephen Halmarick: change here is we have really upgraded the statistical robustness,

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Stephen Halmarick: if I can say that, of the series. All the

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Stephen Halmarick: data is census weighted to be nationally represented of Australia.

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Stephen Halmarick: We take out the skew of market share changes that

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Stephen Halmarick: we might have or parts of the population we may have

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Stephen Halmarick: a higher or lower… that bank with us. Also, the

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Stephen Halmarick: data is now all seasonally adjusted. People who are used

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Stephen Halmarick: to looking at Australian Bureau of Statistics data… We usually

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Stephen Halmarick: always look at the seasonally adjusted numbers. Now, we’re seasonally

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Stephen Halmarick: adjusting all the data. It’s representative of the Australian population.

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Stephen Halmarick: It’s seasonally adjusted, all de- identified. We’re looking at 12

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Stephen Halmarick: different spending categories, which align with the ABS definitions and

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Stephen Halmarick: categories as well. It’s very much aligned with the type

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Stephen Halmarick: of data that people would be used to seeing. But

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Stephen Halmarick: it’s a very large data set. It comes very quickly.

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Jennifer Duke: Sounds like you’ve been very, very busy. Looking at that

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Jennifer Duke: July report as well, what does that tell us about

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Jennifer Duke: the state of the economy right now?

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Stephen Halmarick: For the month of July, which is the first month

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Stephen Halmarick: we’ve released under this new Household Spending Insights, spending on

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Stephen Halmarick: the month was actually unchanged. 0% change on the month

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Stephen Halmarick: relative to June. We could see there was increases in

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Stephen Halmarick: spending on things like household goods and transport and hospitality,

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Stephen Halmarick: and education. They’re offset by reductions in spending on things

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Stephen Halmarick: like household services, recreation, and utilities. But I think that

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Stephen Halmarick: the number we’re really focused on is the annual percent

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Stephen Halmarick: change. July this year compared to July last year was up only 1.

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Stephen Halmarick: 3%. We have to remember that’s in nominal dollars. After

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Stephen Halmarick: inflation, it’s going backwards. That annual rate was running at 8.

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Stephen Halmarick: 3% in May last year when the Reserve Bank first

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Stephen Halmarick: started increasing interest rates and actually peaked at 18.7% in August-

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Jennifer Duke: Gosh.

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Stephen Halmarick: … before all the interest rates rises had started to

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Stephen Halmarick: have an impact. Since August last year to July this

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Stephen Halmarick: year, the annual rate’s gone from 18. 7% to 1. 3.

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Stephen Halmarick: That really shows the big impact of the 400 basis

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Stephen Halmarick: points of rate hikes from the RBA over the course

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Stephen Halmarick: of the last year or so.

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Jennifer Duke: Now, you mentioned the RBA. They only just released their

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Jennifer Duke: meeting minutes yesterday for the August meeting. What do you

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Jennifer Duke: think the RBA might make of your new data? What

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Jennifer Duke: does it mean for interest rates going forward?

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Stephen Halmarick: Well, our view is that the interest rate hiking cycle’s

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Stephen Halmarick: now done. In hindsight, the June rate hike was the

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Stephen Halmarick: last one, having kept rates on hold in July and

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Stephen Halmarick: August. The minutes, we think, reinforces that. There was actually

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Stephen Halmarick: a section in there where the Reserve Bank said that,

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Stephen Halmarick: at the current cash rate, there was a credible path

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Stephen Halmarick: for inflation to return to target over a reasonable timeframe.

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Stephen Halmarick: They still are hinting at potentially another rate rise. But

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Stephen Halmarick: our view is that we’ve seen the last rate increase.

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Stephen Halmarick: The hurdle to another rate rise is quite high. Our

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Stephen Halmarick: Household Spending Insights Report… That big reduction in the annual

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Stephen Halmarick: rate of spending growth reinforces in our mind that the

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Stephen Halmarick: RBA can now hold the cash rate steady for an

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Stephen Halmarick: extended period.

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Jennifer Duke: Stay with me, Stephen. We’ll be back in a minute.

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Jennifer Duke: I am speaking to Commonwealth Bank chief economist Stephen Halmarick.

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Jennifer Duke: Clearly, your insights report is very, very helpful for economists

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Jennifer Duke: who are looking to see where things are moving and

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Jennifer Duke: what’s happening. But how can businesses use the information? What

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Jennifer Duke: about policymakers as well?

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Stephen Halmarick: As I mentioned, we have 12 separate categories. It’s really,

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Stephen Halmarick: I think, interesting to see what people are spending more

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Stephen Halmarick: money on and what they’re spending less money on. If

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Stephen Halmarick: you look at, again, the change over the year to

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Stephen Halmarick: July, some of the big increases in spending were on

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Stephen Halmarick: things we probably don’t like spending a lot more money

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Stephen Halmarick: on. Number one was insurance: was up 13. 2%, education

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Stephen Halmarick: up 9%, health up 8%. But interestingly, recreation spending was

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Stephen Halmarick: still up 7.1%. It seems like Australians are still wanting to spend money

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Stephen Halmarick: on recreation but really going for the big- ticket items.

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Stephen Halmarick: We could see, in July, not surprisingly, a big increase

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Stephen Halmarick: in cinemas. That’s the-

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Jennifer Duke: Barbenheimer.

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Stephen Halmarick: Barbenheimer effect.

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Jennifer Duke: Yeah.

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Stephen Halmarick: Also, there’s some big events happening at the moment: as

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Stephen Halmarick: we all know, the FIFA World Cup. There was the

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Stephen Halmarick: Bledisloe Cup down in Melbourne. These bigger events… People still

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Stephen Halmarick: look like they’re setting some money aside. But if we

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Stephen Halmarick: look at what spending has declined over the last year,

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Stephen Halmarick: household services… down a long way, down nearly 8%, transport

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Stephen Halmarick: down 6%, household goods down 5. 4%. We’re spending less

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Stephen Halmarick: money on those things into the house, both services and

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Stephen Halmarick: goods, and having to spend more money on things like

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Stephen Halmarick: insurance, education, and health with a little bit for some

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Stephen Halmarick: big ticket items on recreation.

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Jennifer Duke: I do love that people somehow managed to find the

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Jennifer Duke: space in their budget to go to the Matildas and

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Jennifer Duke: go and watch Barbie. It’s brilliant. While I’ve got you,

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Jennifer Duke: can you take me through the wages data that came

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Jennifer Duke: out yesterday? Were there any surprises in those figures for you?

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Stephen Halmarick: Well, it was a touch lower than both our forecast and the

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Stephen Halmarick: consensus forecast. It came in at 0. 8% for the quarter

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Stephen Halmarick: against our forecast of 0. 9%. The annual rate really

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Stephen Halmarick: not accelerating. Actually, we’ve now had three quarters in a

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Stephen Halmarick: row of 0. 8%. There’s not a lot of sign

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Stephen Halmarick: of a big acceleration in wages growth on that measure.

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Stephen Halmarick: But I would caution that this is the June quarter

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Stephen Halmarick: numbers. In fact, the numbers are collected in May. They’re

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Stephen Halmarick: a little bit dated now. They don’t take into account

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Stephen Halmarick: the national wage increase or the larger public sector agreements

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Stephen Halmarick: that have happened recently, around 4%, particularly here in New

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Stephen Halmarick: South Wales. That September quarter wages number, which we don’t

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Stephen Halmarick: get until November, is more likely to be a higher

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Stephen Halmarick: number given that national wage case and some big increases

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Stephen Halmarick: in public sector pay rises. But the number we got

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Stephen Halmarick: yesterday just reinforces, in our mind, that the wages outlook

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Stephen Halmarick: is consistent with inflation returning to target range over a

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Stephen Halmarick: reasonable period and the RBA rate hike cycle now being done.

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Jennifer Duke: If you can look into your crystal ball for a

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Jennifer Duke: minute for me, what do you think we might see

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Jennifer Duke: in the spending insights next year at about this time?

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Stephen Halmarick: Well, over the next six months, we would expect it

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Stephen Halmarick: to continue to weaken. We have not yet seen the

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Stephen Halmarick: full impact of the RBA’s rate hikes. The May and

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Stephen Halmarick: June rate hikes are not yet being paid by people.

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Stephen Halmarick: That’s still to come through the variable interest rate mortgage

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Stephen Halmarick: system. In addition, we’re pretty much, right now, at the

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Stephen Halmarick: peak of the fixed- rate mortgage rollover that will extend

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Stephen Halmarick: into 2024. The next six months or so, we’d expect

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Stephen Halmarick: to see our Household Spending Insights number continue to soften.

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Stephen Halmarick: But we are expecting rate cuts to get underway, potentially,

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Stephen Halmarick: as early as the March RBA board meeting next year,

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Stephen Halmarick: which, under the new timing, will be the 19th of

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Stephen Halmarick: March rather than the first week of March. Rate cuts

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Stephen Halmarick: through 2024 should help household spending stabilize and begin to

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Stephen Halmarick: pick up a bit towards the end of next year.

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Jennifer Duke: That sounds quite positive, actually. I’m hoping that we get

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Jennifer Duke: a little bit of an uptick towards the beginning half

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Jennifer Duke: of next year. that’s very exciting. Look, Stephen, thank you

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Jennifer Duke: very much for talking to Fear and Greed. I really

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Jennifer Duke: appreciate it.

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Stephen Halmarick: My pleasure. Always good to be on Fear and Greed.

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Jennifer Duke: That was Stephen Halmarick, Commonwealth Bank chief economist. This is

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Jennifer Duke: the Fear and Greed Daily Interview. Join us every morning

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Jennifer Duke: for the full episode of Fear and Greed, Australia’s most

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Jennifer Duke: popular business podcast. I’m Jennifer Duke, economics correspondent at Capital

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Jennifer Duke: Brief, and filling in for Sean Elmer. Have a great day.