In our final Friday afternoon chat, for the year Journalist Tarric Brooker and I look back at 2023, with all its ups and downs, and consider the year ahead, which Schrödinger’s cat like could go down quite different paths.
And we look at the most burning question: When Could Australian Interest Rates Be Cut?
Tarric’s slides and articles is here: https://avidcom.substack.com/p/the-most-burning-question-answered.
Thanks to all those who follow and subscribe, and please like and share the show. We will be back in 2024 for more charts and chat.
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The ABS reported that Household wealth rose for the fourth straight quarter (+2.3 per cent or $339 billion) in the September quarter 2023. What you say, we are not feeling it!
The key of course is distribution across households, and the nexus is property values. The ABS says “Household wealth is supported by house prices which have continued to grow despite increases in interest rates” so that total household wealth was $15.3 trillion in the September quarter, which was 7.0 per cent ($998 billion) higher than a year ago. This was largely driven by residential land and dwellings, which contributed 1.7 percentage points to quarterly growth.
And the growth in household wealth was also supported by seasonal tax refunds coming in at the start of the financial year, with deposits increasing 3.4 per cent ($52.8 billion) over the September quarter.
Deposits into accessible transaction accounts (known as Transferrable Deposits) made up $24.4 billion of this increase, with most going into offset accounts. Another $26.1 billion was invested in high interest Non-Transferable Deposits, including term deposits.
So, if you are in the right cohorts, with savings, mortgage free houses, and other assets, you are doing well, whereas many others are simply not. If you are a renter, or mortgaged up to the gills your wealth could well be minimal, while debts are building. So actually, this a symptom of the building inequality in the system.
This puts the RBA in a tricky position. And in fact, while markets doubt the Reserve Bank of Australia will deliver any more rate rises, with current cash rate at 4.35%, the central bank warned on Tuesday it may need to deliver another cash rate increase if inflation remains too high.
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Prices rose by 3.9% in the year to November, down from 4.6% in October according to data from the ONS today, driven by positive base effects mainly across oil products. Remember that falling inflation also does not mean most goods and services are cheaper, but rather prices are rising less quickly.
That rise compares to a more-than four-decade high rate above 11% reached last year. The last time inflation in the UK was lower than 3.9% was in September 2021 when it was 3.1%. Most economists had expected UK inflation to fall to 4.3% last month. As a result, UK inflation has fallen to its lowest level for more than two years, driven largely by a drop in fuel prices. The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 4.2% in the 12 months to November 2023, down from 4.7% in October. On a monthly basis, CPIH fell by 0.1% in November 2023, compared with a rise of 0.4% in November 2022. Within that energy prices fell, but rent and council tax were higher.
Slowing price rises for food, including staples such as pasta, milk and butter, as well as for household goods were also behind the fall.
But while inflation, which is the rate prices rise at, is now well down from its peak in 2022, it is still almost double the Bank of England’s 2% target.
UK inflation remains higher than in other countries including the US and Germany but the gap is narrowing. The fall to 3.9% in November puts the UK on level footing with France, but ahead of the EU’s average rate of 3.1% and the US’s 2.1%.
The softer inflation data prompted Goldman Sachs to bring forward its expectation for the first BOE rate cut to May from June previously.
Ahead, of course the impact of potentially higher Oil prices thanks to the closure of the Suez Canal for some ships, which have driven oil prices higher, and the removal of Government support for higher power prices might turn the inflation gauge higher in the months ahead. So again, markets are ahead of themselves, it will be some time before inflation is approaching the 2% target.
This is an edit of a live discussion with Dr Cameron K. Murray, an independent economist who publishes at Fresh Economic Thinking https://www.fresheconomicthinking.com/. We discussed housing policy and economics in general.
Here is the link to Cameron’s new book, out February 27th 2024 https://www.amazon.com.au/Great-Housing-Hijack-keeping-Australia/dp/176147085X
He recently republished his book from 2017 Game of Mates: How favours bleed the nation as Rigged “How Networks Of Powerful Mates Rip Off Everyday Australians”.
This book will open your eyes to how Australia really works. It’s not good news, but you need to know it.’ – Ross Gittins
‘You’ll be shocked at how far the Mates have their hand in your pocket.’ – Nicholas Gruen
Australia has become one of the most unequal societies in the Western world, when just a generation ago it was one of the most equal. This is the story of how networks of Mates have come to dominate business and government, robbing ordinary Australians.
Every hour you work, thirty minutes of it goes to line the Mates’ pockets rather than your own. Mates in big corporations, industry groups, government departments, the halls of parliament and the media skew the system to suit each other. Corporations dodge taxes, so you pay more. You pay more for your house and higher interest rates on your mortgage, more for your medicines and transport, and more for your children’s education and insurance, because the Mates take a cut.
Rigged uncovers the pattern of political favours, grey gifts and information-sharing that has been allowed to build up over two decades. Drawing on extensive economic research, it exposes the Game of Mates as nothing less than cronyism on a grand scale across Australia and how we have fallen behind other countries in combating it.
A final 2023 chat with Robbie Barwick from the Australian Citizens Party. We look at the RBA’s latest outing on cash usage, the Senate review of the RBA’s independence bill, and the formation of a National Investment entity.
On 7 December 2023, the Senate referred the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 [Provisions] to the Senate Economics Legislation Committee for inquiry and report by 21 March 2024.
The critical issue is that the Treasurer is walking back Government’s power to intervene with RBA decisions if they do not agree. This power was put into the constitution years ago but has never been used.
Without it, the Technocrats will be able to take over, and follow the lead of the Bank For International settlements, to the potential disadvantage of ordinary Australians and businesses.
Make a submission to make the case for this power to be retained! The closing date for submissions to this inquiry is 2 February 2024.
On 7 December 2023, the Senate referred the Treasury Laws Amendment (Reserve Bank Reforms) Bill 2023 [Provisions] to the Senate Economics Legislation Committee for inquiry and report by 21 March 2024.
The critical issue is that the Treasurer is walking back Government’s power to intervene with RBA decisions if they do not agree. This power was put into the constitution years ago but has never been used.
Without it, the Technocrats will be able to take over, and follow the lead of the Bank For International settlements, to the potential disadvantage of ordinary Australians and businesses.
Make a submission to make the case for this power to be retained! The closing date for submissions to this inquiry is 2 February 2024.
The Mid-Year Economic and Fiscal Outlook (MYEFO) update released on Wednesday estimates the Australian economy is expected to expand by a low 1.75% in 2023–24 before regaining momentum in 2024-25, when improved real incomes are expected to support a recovery in household consumption. It also notes inflation – although moderating – is still too high.
The outlook attributes that mainly to global oil prices and Treasury has not changed its forecast timetable for inflation’s return to the 2-3% target band, with 2.5% hit in mid 2025, so the Government is more optimistic than the RBA when it comes to expected progress on inflation. The RBA expects inflation to be at 3.0% by mid-2025.
Treasury’s analysis of the structural budget position suggests that the budget in 2023-24 is neutral with respect to inflation – it is neither adding nor reducing inflationary pressures.
Treasury continues to expect the economy will slow over the next few years to grow below trend with the unemployment rate drifting higher to 4.5% in 2025-26.
The migration intake has been a hot topic recently. As expected, the MYEFO forecasts upgrade the outlook for net overseas migration (NOM) in 2023-24 by 60k to 375k. We suspect that this will likely undershoot the eventual outcome. In 2024-25, forecasts for NOM have been marked down slightly to 250k, likely reflecting the expected impact of the Government’s recently announced migration strategy.
Gross debt is expected to peak at 35.4% of GDP in 2027-28, this is 0.2 percentage points lower than projected in the May Budget. While debt is expected to be lower, the expected cost of capital has also increased since the May Budget, reflecting the rise in government bond yields. Overall, these counteracting forces net out to a slight increase in interest payments as a share of GDP over the medium term.
Sadly, in a blow for budget transparency, there is still a line for decisions taken but not yet announced. We don’t know what decisions these are, but they are significant – the estimates start at $270 million in 2023-24 and rise to $1.8 billion in 2026-27. It is impossible to tell what this spending is for. If the government were to reverse those decisions between now and the next budget update, we will never know.
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You will recall that Australia’s October monthly CPI indicator from the Australian Bureau of Statistics came in below market expectations at 4.9%/yr (versus the consensus of 5.2%/yr). There were a number of factors which messed with the data, as I discussed in a previous show.
According to CBA, other surveys also suggest that trimmed mean CPI in Q4 23 is unlikely to be stronger than the RBA’s ~1.0%/qtr forecast.
But these monthly numbers are flaky, because the critical services price movements are not captured until the quarterly series which is due out in January.
As I discussed in my earlier show, the problem is the last mile problem – in that the last part of getting inflation down towards the target is the hardest, especially when then RBA now has a 2.5% central target, and as in the US data out yesterday, its services inflation which is driving the numbers as goods inflation eases back.
On this theme, Statistics New Zealand on Wednesday released its new monthly inflation gauge, which captures around 45% of the CPI basket.
The conclusion of all this, is the partial monthly numbers may well deceive, and should be taken with a truck load of salt. When the quarterly numbers land later then check out the services components. Goods price inflation may be coming under control, but services is not. And within that, watch the rental and housing sector in particular.
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The last mile of the journey in getting inflation back into its box, is the hardest and most intractable. So while US inflation is much lower than it was the latest release yesterday, ahead of the FED rate decision today shows it’s not declining quickly and remains above the Federal Reserve’s targets.
In summary, core inflation matched market expectations in November, increasing at a marginally faster rate of 0.3%. In annualised trend terms, core inflation is running at 3¼%, with rapid core goods disinflation of 3¾% broadly offsetting faster core services inflation of 5½%. But core services excluding housing inflation has picked up to 6% in annualised trend terms, while the trimmed mean CPI – which gives a sense of the breadth of price rises – has picked back up to 3¾%.
The initial spike in 2021 was driven by goods prices, which had been stable for years. That was mainly thanks to the pandemic’s effect on supply chains. That shock is over. At this point, inflation is almost entirely about core services, which include shelter.
The FOMC won’t change rates this week, but it does get to revise the “dot plot” which shows its projected course of interest rates ahead. That would be a way to assure the market that rates are coming down swiftly, but for now the Fed could be reluctant to do anything that encourages more speculation.
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The Australian Bureau of Statistics (ABS) has released the June quarter National Accounts, which were an unmitigated disaster and confirmed that Australia is in a deep per capita recession.
The economy as measured by real GDP grew by only 0.2% in the September quarter, driven by increased government consumption and capital investment over the quarter and badly missing economists’ expectations of a 0.4% print: Growth over the year was 2.1%, less than population growth over the same period. While the population surge earlier in the year has supported demand overall, it is now rolling over and will not provide the same support in 2024. Or as Luci Ellis, at Westpac put it The Australian economy limped along in the September quarter.
Real per capita GDP has fallen for three of the past five quarters, with the March quarter revised up to flat. Accordingly, GDP per capita fell 0.3% over the year. Expenditure by households was dead flat over the September quarter and would have fallen by around 0.7% per capita. By contrast, growth in both household consumption and GDP over 2023 slowed due to sustained cost of living pressures and higher interest rates. Household consumption would have fallen even further had the savings rate not fallen to just 1.1%, which is the lowest level since December 2007.
The savings rate is now well below the ‘par’ of 6.5% and notionally implies a draw-down on the ‘additional savings’ accumulated during the pandemic – estimated at around $260bn – running at about $12bn a quarter. In total, about $43bn, or 16.5% of this reserve now looks to have been drawn down. Of course these are not equally spread across households, with many now having no buffers at all.
As Westpac put it. the policy drag on Australian households is clearly biting.
