The Week Ahead | 4 September 2023

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Jennifer Duke: Welcome to Fear and Greed – The Week Ahead. I’m Jennifer

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Jennifer Duke: Duke and I’m joined by economist Stephen Koukoulas. You’ll find

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Jennifer Duke: him at thekouk. com, that’s T- H- E- K- O- U- K.

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Jennifer Duke: com, and on X using the handle TheKouk. Stephen, good morning.

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Stephen Koukoulas: Good morning, Jen.

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Jennifer Duke: First of all, last week there was a little bit

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Jennifer Duke: of data out, quite a lot of talk. Can you

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Jennifer Duke: talk us through it?

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Stephen Koukoulas: Yeah, look, the highlight, I think, was the monthly inflation

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Stephen Koukoulas: number for the month of July. Came in lower than

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Stephen Koukoulas: market expectations, confirming that we’re getting this deceleration in inflation.

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Stephen Koukoulas: So from the peak that we saw in December 2022,

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Stephen Koukoulas: which hit 8. 4% in monthly terms… Gosh, that was

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Stephen Koukoulas: a real problem on inflation. But now here we are

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Stephen Koukoulas: in July with the July data showing that the annual

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Stephen Koukoulas: inflation rate’s eased to 4. 9%. So we’ve lost 3.

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Stephen Koukoulas: 5 percentage points off the annual inflation rate. And again,

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Stephen Koukoulas: I don’t mean to torture the data or manipulate it

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Stephen Koukoulas: too badly, but if you look at what has happened

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Stephen Koukoulas: to the monthly run rate since January, so the seven

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Stephen Koukoulas: months since January, and you annualize that, so divide it

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Stephen Koukoulas: by seven, multiply it by 12, you’re getting an inflation

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Stephen Koukoulas: rate that’s around about 3%.
And so it’s sort of

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Stephen Koukoulas: suggesting to me that the inflation momentum has certainly come

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Stephen Koukoulas: off the ball, that we’re heading towards the target. Yeah,

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Stephen Koukoulas: the economy’s weakening. Last week we saw building approvals down

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Stephen Koukoulas: again. So I think we’re not going to be seeing

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Stephen Koukoulas: a lot of new construction activity in the near term,

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Stephen Koukoulas: is one of the other concerns on the economy. Retail

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Stephen Koukoulas: sales, they were moderate after a couple of falls. So

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Stephen Koukoulas: the economy’s sort of muddling along, which says to me

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Stephen Koukoulas: that the inflation rate’s going to be falling, continue to

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Stephen Koukoulas: fall through the remainder of this year and into 2024,

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Stephen Koukoulas: even though things like petrol prices have jumped a bit

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Stephen Koukoulas: in the last few weeks.

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Jennifer Duke: That sounds like really, really good news. And it seems

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Jennifer Duke: like there’s quite a bit happening in housing as well.

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Jennifer Duke: Can you talk us through that?

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Stephen Koukoulas: Yes. Well, the CoreLogic numbers came out on Friday for

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Stephen Koukoulas: the month of August, they have that comprehensive set of

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Stephen Koukoulas: numbers. And as we were able to deduce from their

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Stephen Koukoulas: high frequency daily data, house prices rose 0. 8% — this

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Stephen Koukoulas: is a nationwide figure — 0. 8% in the month. And

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Stephen Koukoulas: that’s six consecutive months of increases. From the low point

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Stephen Koukoulas: that was recorded in February, they’ve increased by around about

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Stephen Koukoulas: 5%. So roughly half of that 9% drop that we

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Stephen Koukoulas: saw in 2022 and very early 2023 has been reversed

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Stephen Koukoulas: and the momentum still seems to be pretty solid.
Those supply

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Stephen Koukoulas: and demand dynamics are still in place. We’ve got still

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Stephen Koukoulas: strong population growth, and as we alluded to with the

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Stephen Koukoulas: building approval numbers, we’re not building many houses. So good old-

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Stephen Koukoulas: fashioned supply and demand are just continuing to dominate the

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Stephen Koukoulas: interest rate hikes that we’ve been seeing. So prices still

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Stephen Koukoulas: going up and not really showing a lot of signs

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Stephen Koukoulas: that they’re losing momentum.

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Jennifer Duke: I’m really amazed at how resilient the housing market’s been,

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Jennifer Duke: actually, through this cycle. I don’t know if you feel

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Jennifer Duke: the same way.

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Stephen Koukoulas: Yes. Look, I’m surprised at how strong it’s been. I

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Stephen Koukoulas: was never in the camp that prices would dropped 20 or 30%.

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Stephen Koukoulas: I didn’t think that was realistic, it’s never happened. And

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Stephen Koukoulas: again, somewhat apparent that post- COVID we would be reopening

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Stephen Koukoulas: the borders and the like. So it was always going

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Stephen Koukoulas: to be a weak period, but this rebound is something

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Stephen Koukoulas: that I think’s been much stronger than anyone, even the

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Stephen Koukoulas: most optimistic house price bull would’ve been thinking. And again,

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Stephen Koukoulas: it’s one of these ones, obviously there’s an intergenerational issue

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Stephen Koukoulas: or people who really are being squeezed out of buying

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Stephen Koukoulas: the property market, and of course it’s tightest in the

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Stephen Koukoulas: housing market. It’s showing up in rents, which are still increasing

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Stephen Koukoulas: at a rapid pace.
That was one thing in the

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Stephen Koukoulas: inflation numbers last week that was still accelerating, dwelling rents.

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Stephen Koukoulas: So we’ve got this issue that’s coming through. However, as

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Stephen Koukoulas: the Reserve Bank have noted many times in the past,

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Stephen Koukoulas: there is a wealth effect from housing. So if house

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Stephen Koukoulas: prices go up, on average — this is not everybody — but

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Stephen Koukoulas: on average Australians are wealthier, and when they’re feeling wealthier

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Stephen Koukoulas: they tend to spend more. So again, as we’ve discussed

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Stephen Koukoulas: many times, the interlinkages on housing, the economy, interest rates, population

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Stephen Koukoulas: growth are many and varied.

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Jennifer Duke: I think that’s a great point. And we’ve obviously got

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Jennifer Duke: the Reserve Bank meeting this week. Can you give us

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Jennifer Duke: a bit of a sense of what you’re thinking they

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Jennifer Duke: might do?

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Stephen Koukoulas: Yes. I think this is a relatively straightforward one, or

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Stephen Koukoulas: I hope it is. No change tomorrow when the Reserve

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Stephen Koukoulas: Bank board meet. It’s the last meeting for Dr. Lowe

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Stephen Koukoulas: as governor before Michele Bullock takes over in the middle

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Stephen Koukoulas: of September, so roughly two weeks away. No change, and

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Stephen Koukoulas: for the reasons that we’ve just discussed, I suspect. And

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Stephen Koukoulas: that’s because inflation is tracking lower and we are yet

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Stephen Koukoulas: to feel the full impact of the 400 points of

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Stephen Koukoulas: rate hikes.
That’s the other thing, again, that the Reserve

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Stephen Koukoulas: Bank’s been talking about. They’ve delivered a lot of rate

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Stephen Koukoulas: hikes. And while there’s a sort of a knee- jerk reaction, ”

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Stephen Koukoulas: Oh, they hiked yesterday,” and there’s an impact on consumer

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Stephen Koukoulas: sentiment, the actual effect on the economy, as we know,

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Stephen Koukoulas: takes… Well, they call it a long and variable lag.

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Stephen Koukoulas: And I think that’s sort of code for somewhere between

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Stephen Koukoulas: six and 12 and 18 months before it really hits the economy.

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Stephen Koukoulas: And so we had four rate hikes in the first half

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Stephen Koukoulas: of 2023. Here we are in September. The effect is

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Stephen Koukoulas: still to come through.
So for the RBA tomorrow, no

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Stephen Koukoulas: change. They’ll still probably sound a little bit hawkish. They’ll

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Stephen Koukoulas: be expressing a few concerns. The inflation at 4. 9,

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Stephen Koukoulas: yes, in headline terms it’s too high. So they’ll kill

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Stephen Koukoulas: any discussion of rate cuts, and I agree, there’s no

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Stephen Koukoulas: chance of rate cuts anytime soon. But they’ll probably say

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Stephen Koukoulas: that, yeah, we need to keep a steady hand at

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Stephen Koukoulas: that narrow path to lower inflation while maintaining a good

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Stephen Koukoulas: labor market. We’re on that path still, but we just

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Stephen Koukoulas: need to be careful not to over- tighten anymore. So

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Stephen Koukoulas: no change from our friends at the RBA.

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Jennifer Duke: And Dr. Lowe’s also due to give a speech, I

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Jennifer Duke: believe it’s called his final remarks, at the Anika Foundation.

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Jennifer Duke: What do you think he might remark on in his

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Jennifer Duke: final speech?

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Stephen Koukoulas: Look, if I was Dr Lowe, I would be acknowledging

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Stephen Koukoulas: some of the errors that have been made, of course.

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Stephen Koukoulas: You can’t not do that if you’ve been presiding over

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Stephen Koukoulas: very low inflation, very high inflation and giving… What do

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Stephen Koukoulas: we call it? Misleading guidance on where rates are going.

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Stephen Koukoulas: But having said that, I would also point to the

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Stephen Koukoulas: fact that here we are, we’ve got through a pandemic

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Stephen Koukoulas: with reasonably good economic outcomes. Here we are discussing the

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Stephen Koukoulas: unemployment rate at a three point something level. And that’s

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Stephen Koukoulas: a wonderful legacy. Full employment, we’ve sort of got it,

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Stephen Koukoulas: and it occurred without wages breaking out. Wages have lifted too,

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Stephen Koukoulas: that’s another good thing that he could emphasize, but that

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Stephen Koukoulas: they’re not too hot, if you know what I mean.

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Stephen Koukoulas: The scorecard, if you like, on the economy, while there

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Stephen Koukoulas: are a few question marks and a few little hiccups

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Stephen Koukoulas: and things and a few unpleasantries in the scorecard on

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Stephen Koukoulas: the economy, full employment’s a mighty good thing. Moderate wage growth

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Stephen Koukoulas: that’s sustainable in that 3. 5 to 4% level, which

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Stephen Koukoulas: appears to be where wages growth is being maintained at

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Stephen Koukoulas: the moment, is a good thing as well. So I’d

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Stephen Koukoulas: expect him to be reasonably positive whilst acknowledging a couple

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Stephen Koukoulas: of missteps in recent years.

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Jennifer Duke: And what else do we have to look forward to

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Jennifer Duke: for the rest of the week?

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Stephen Koukoulas: The other big one is on Wednesday we get the

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Stephen Koukoulas: June quarter GDP results, and everybody loves the GDP results. It’s going

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Stephen Koukoulas: to be a soft number. I guess that feeds back

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Stephen Koukoulas: into the RBA decision. They obviously meet before the GDP

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Stephen Koukoulas: number comes out and, as I understand it, they don’t

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Stephen Koukoulas: actually have it before them when they discuss interest rate

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Stephen Koukoulas: settings, as I understand it.

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Jennifer Duke: Oh, that’s awkward.

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Stephen Koukoulas: Yes. It’s a bit of a funny one. But it’s probably going to be

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Stephen Koukoulas: a pretty soft number. We know a lot of the

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Stephen Koukoulas: partial indicators. Retail sales went backwards. We had good CapEx

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Stephen Koukoulas: numbers last week too. Business investment, which was going to

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Stephen Koukoulas: be adding a bit of a floor to bottom line

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Stephen Koukoulas: GDP. Net exports are probably neither here nor there. So

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Stephen Koukoulas: GDP probably around about 0.4, 0. 5, quarter on quarter. In per

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Stephen Koukoulas: capita terms, probably close to zero. In angle terms, probably

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Stephen Koukoulas: dipping below 2%. So a soft result, but we are not in

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Stephen Koukoulas: free fall in terms of how the economy is going.

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Stephen Koukoulas: So a lot to digest later this week. RBA, GDP numbers,

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Stephen Koukoulas: Governor Lowe’s speech. I love it. I love it.

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Jennifer Duke: I think it’s going to be a really, really busy one. Is there anything

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Jennifer Duke: else that we should be expecting coming up?

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Stephen Koukoulas: Look, there’s a couple of bits and bobs too. We

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Stephen Koukoulas: do get the Melbourne Institute Monthly Inflation Gauge. Not a

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Stephen Koukoulas: bad leading indicator on the official inflation numbers. The A

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Stephen Koukoulas: and Z Indeed job ad series comes out. With the

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Stephen Koukoulas: slowing economy, of course there’s been a dip in demand for

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Stephen Koukoulas: labor, so probably another moderate fall in the number of

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Stephen Koukoulas: job advertisements coming through.
And then we’ve got things like

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Stephen Koukoulas: new motor vehicle sales and the international trade data. We’re going

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Stephen Koukoulas: to be recording another big international trade surplus. Even though

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Stephen Koukoulas: some of the commodity prices have come down, export volumes

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Stephen Koukoulas: are still pretty resilient and imports are probably pretty weak

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Stephen Koukoulas: as domestic demand in Australia’s slowing. So another 10 odd

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Stephen Koukoulas: billion monthly trade surplus.

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Jennifer Duke: Good grief. It’s going to be a very busy week.

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Jennifer Duke: Stephen, I hope you have a really good one for

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Jennifer Duke: the rest of the week.

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Stephen Koukoulas: I will, Jen. You, too. Thanks very much.

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Jennifer Duke: And that was economist Stephen Koukoulas, better known as The

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Jennifer Duke: Kouk. You can find him at thekouk. com and follow

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Jennifer Duke: him on X using the handle TheKouk. I’m Jennifer Duke, economics

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Jennifer Duke: correspondent at Capital Brief. I’m filling in for Sean Aylmer,

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Jennifer Duke: and this is Fear and Greed – The Week Ahead.