The Week Ahead | 12 June 2023

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Sean Aylmer: Welcome to Fear and Greed: the week ahead. I’m Sean Aylmer, and as

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Sean Aylmer: always, I’m joined by economist Stephen Koukoulas. You’ll find him

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Sean Aylmer: at thekouk. com, T- H- E K- O- U- k.

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Sean Aylmer: com. And on Twitter using the handle TheKouk. Stephen, you’d

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Sean Aylmer: be exhausted after last week.

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Stephen Koukoulas: Oh, Sean, what a week it was. I’m battered and

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Stephen Koukoulas: bruised. The RBA shocked me and a lot of other

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Stephen Koukoulas: people. We had pretty soggy GDP numbers. We had a

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Stephen Koukoulas: Bank of Canada rate hike and of course our RBA

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Stephen Koukoulas: a rate hike. So yeah, plenty of news last week

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Stephen Koukoulas: and hopefully this week’s a bit quieter, although there are

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Stephen Koukoulas: some important things still to come.

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Sean Aylmer: So I mean, it is kind of what … Last week

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Sean Aylmer: was like Christmas week for economists, so much to do.

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Sean Aylmer: However, where we stand today, it doesn’t look that good

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Sean Aylmer: for the local economy.

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Stephen Koukoulas: Things are slowing down. The interesting thing to me in

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Stephen Koukoulas: terms of the economic data, not so much the RBA

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Stephen Koukoulas: action, was in the national accounts are always very good.

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Stephen Koukoulas: The national accounts include the GDP numbers and we know that

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Stephen Koukoulas: growth slowed to just 0. 2% in the March quarter. In

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Stephen Koukoulas: per capita terms it was – 0. 2. So we’ve got that

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Stephen Koukoulas: slowdown occurring and the economy had to slow down. It’s

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Stephen Koukoulas: important to remember that we were overheating basically during 2022

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Stephen Koukoulas: which was one of the reasons, one of many, for

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Stephen Koukoulas: the inflation spike. So it had to slow down. That’s

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Stephen Koukoulas: one thing.
However, when we look at the subset, we

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Stephen Koukoulas: can see it’s the household sector that’s under a lot

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Stephen Koukoulas: of pressure and for obvious reasons, cost of living, real

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Stephen Koukoulas: wages going backwards, inflation rising more quickly than wages and

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Stephen Koukoulas: of course, of course, of course, interest rates going up.

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Stephen Koukoulas: So consumers actually had the lowest household saving rate in

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Stephen Koukoulas: 15 years. So we are now getting to the position

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Stephen Koukoulas: where consumers are not adding much to their savings because

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Stephen Koukoulas: they have to pay for cost of living issues and

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Stephen Koukoulas: for their mortgage.

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Sean Aylmer: Okay. So I mean that’s the National Accounts. What about

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Sean Aylmer: rates do you think we’re going to … I mean, the

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Sean Aylmer: household sector’s hurting, that’s clear. What does the reserve bank

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Sean Aylmer: do? It wants to lift rates further to cull inflation

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Sean Aylmer: because it’s still too high, but it’s got this household

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Sean Aylmer: sector that’s really hurting.

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Stephen Koukoulas: The household sector’s hurting. And the interesting thing too is that

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Stephen Koukoulas: the global economy’s weakening. It’s curious to see the German

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Stephen Koukoulas: economic data confirming a recession. They’ve had two consecutive quarters

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Stephen Koukoulas: of negative GDP, the whole eurozone’s in the same area.

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Stephen Koukoulas: So there’s a recession in Europe, which is a big part

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Stephen Koukoulas: of the global economy. China, after that initial euphoria from

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Stephen Koukoulas: the post- COVID reopening a few months ago, has now

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Stephen Koukoulas: sort of fallen over and they’re actually talking easier policy

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Stephen Koukoulas: there in China because the economy is so weak and

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Stephen Koukoulas: inflation in China, just by the way, is 0%. So

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Stephen Koukoulas: you’ve got these things and the RBA have got a bee

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Stephen Koukoulas: in their bonnet about wages and productivity. I think they

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Stephen Koukoulas: got, well, a bit of a nasty shock, if we

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Stephen Koukoulas: can call it that, from the Fair Work Commission ruling

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Stephen Koukoulas: a couple of weeks ago, the 5. 75% increase in the

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Stephen Koukoulas: minimum wage, which sort of parlayed through to a whole

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Stephen Koukoulas: lot of other awards. So there’s a bit more complexity

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Stephen Koukoulas: to it than that.
But really they’re just at a

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Stephen Koukoulas: time when they’re sort of hoping and they’re still expecting

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Stephen Koukoulas: inflation to fall. That’s still on the cards, there’s no

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Stephen Koukoulas: doubt about that. But the trajectory of that slowdown in

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Stephen Koukoulas: inflation is something that’s probably spooked them. Wages perhaps being

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Stephen Koukoulas: a problem. I’m not sure yet whether they’re calling that

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Stephen Koukoulas: correctly, but they’re the ones that pull the trigger on

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Stephen Koukoulas: interest rates and they’re very, very hawkish.

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Sean Aylmer: Okay, so what about this week, Steven? We’ve got the

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Sean Aylmer: labor force figures.

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Stephen Koukoulas: Labor force figures, and that’s one of the other things

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Stephen Koukoulas: that’s feeding into wages as we were just discussing, but

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Stephen Koukoulas: just the economy more broadly. And last month you might

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Stephen Koukoulas: recall that we had a bit of a statistical quirk,

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Stephen Koukoulas: maybe. Employment fell by 4, 000 and the unemployment rate

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Stephen Koukoulas: kicked up to 3. 7%. So one month’s numbers, of

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Stephen Koukoulas: course we never get too excited, but here we are,

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Stephen Koukoulas: we’re going to have a second month’s numbers. Look, the

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Stephen Koukoulas: market is forecasting a small increase in employment, for the

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Stephen Koukoulas: unemployment rate to remain about 3. 7%. Absolutely vital information

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Stephen Koukoulas: in terms of the skill shortages, labor shortages, wage pressures,

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Stephen Koukoulas: and these sorts of things in the economy.
If we

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Stephen Koukoulas: were to get a solid number, then that’s fine. It

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Stephen Koukoulas: validates what the RBA has done perhaps. But the thing

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Stephen Koukoulas: which would be, what do we call it? More of

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Stephen Koukoulas: a driver of extra volatility in the markets anyway, would

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Stephen Koukoulas: be if we get a soggy number, if we get

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Stephen Koukoulas: another really tepid increase or a small fall in employment

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Stephen Koukoulas: and the unemployment rate creeps up to 3. 8 or 3.

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Stephen Koukoulas: 9, then I think we have to have a really

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Stephen Koukoulas: serious consideration about just how the labor market’s performing and

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Stephen Koukoulas: how quickly it can turn.

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Sean Aylmer: Okay. The other thing that, well, another thing gets out

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Sean Aylmer: this week is the National Australia Bank business conditions and

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Sean Aylmer: confidence. One thing from last week’s national accounts, which were okay,

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Sean Aylmer: is actually business spending, business investment.

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Stephen Koukoulas: Indeed. And thank goodness for that. We’ve known for some

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Stephen Koukoulas: time that the NAB survey of business conditions has been

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Stephen Koukoulas: a lot more upbeat than consumers. Consumers are very gloomy.

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Stephen Koukoulas: But the NAB business confidence measure is sort of at

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Stephen Koukoulas: or even slightly above the long run averages that we’ve

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Stephen Koukoulas: been seeing over many decades. So the business sector’s actually

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Stephen Koukoulas: looking to ramp up their CapEx. And again, in the

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Stephen Koukoulas: GDP figures that came out last week, you quite rightly

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Stephen Koukoulas: point out that there was an increase in business investment

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Stephen Koukoulas: in the March quarter thankfully. And that contributed to the

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Stephen Koukoulas: positive GDP result that we saw. So the business confidence

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Stephen Koukoulas: conditions index that we’ll see later this week will be

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Stephen Koukoulas: really important to see whether that generally slightly positive tone,

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Stephen Koukoulas: slightly upbeat tone, to the business sector’s still there. If

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Stephen Koukoulas: there’s any deterioration in that outlook from the business sector,

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Stephen Koukoulas: then again, it feeds into this whole debate, how strong

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Stephen Koukoulas: is the economy? What sort of landing is the economy

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Stephen Koukoulas: going to have in the second half of 2023, a

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Stephen Koukoulas: soft landing, which we all hope for, or a hard

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Stephen Koukoulas: landing, which of course is a bit uncomfortable?

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Sean Aylmer: And of course, Westpac consumer sentiment this week too. Consumers

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Sean Aylmer: aren’t happy,

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Stephen Koukoulas: Consumers are glum. Yes, they are. It’s hard to imagine

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Stephen Koukoulas: that being strong because the survey’s been conducted after the

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Stephen Koukoulas: rate hike of last Tuesday. It’s going probably be a

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Stephen Koukoulas: very weak number. And why that matters is that when

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Stephen Koukoulas: consumers are gloomy, when they’re feeling pessimistic, they tend to

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Stephen Koukoulas: hunker down with their spending. So if we get a

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Stephen Koukoulas: poor level of consumer sentiment, you can be pretty sure

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Stephen Koukoulas: that that soggy retail sales performance that we’ve seen over

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Stephen Koukoulas: the last few months will continue into May and even June.

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Sean Aylmer: Stephen, have a great week.

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Stephen Koukoulas: Thank you, Sean. You too.

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Sean Aylmer: That was economist Stephen Koukoulas better known as the Kouk.

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Sean Aylmer: You can find him at thekouk. com and follow him

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Sean Aylmer: on Twitter using the handle TheKouk. I’m Sean Aylmer and

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Sean Aylmer: this is Fair and Greed: the week ahead.