Interview: All the pieces of Australia's economic puzzle

Published Dec 19, 2024, 4:30 PM

Australia is heading for a decade of budget deficits on the back of big spending by governments. But public spending is also the only thing keeping us out of recession right now... even though it's contributing to the inflation challenge for the Reserve Bank. It's quite the puzzle, and a challenge for the Government and the RBA.

Cherelle Murphy, EY Chief Economist, talks to Sean Aylmer about the various pieces of Australia's economic puzzle, and what 2025 might hold.

Welcome to Fear and Greed Business Interview. I'm Sean Aylmer. Australia is heading for a decade of budget deficits on the back of big spending by governments, but at the same time, public spending is the only thing keeping us out of a recession. Right now, it's all contributing to the inflation challenge for the Reserve Bank, which means interest rates are still sitting at twelve year highs, the benchmark at four point three five percent, even as other central banks around the world cut them. We're finishing twenty twenty four with quite the economic puzzle. Who better to put it all together than Chief economist at Ey Sharell Murphy Sharrell. Welcome back to Fear and Greed.

Thank you, Sean, Thank you for having me.

The puzzle king we're calling you from now. What do you make of the Australian economy with that my IFO coming through in the last couple of days as we kind of head into the Christmas period and then into next year. Where does the economy stand?

Well, it could be better than couldn't. Look, I'm going to start with the upside though, right so, we've got an unemployment rate of three point nine percent, which is pretty phenomenal. That's actually unchanged is December last year, if you were to kind of draw a line through the year, and that's you know, terrific news. Obviously, this is the kind of very human side of the economy. People have jobs and that means that they can do a lot more than they don't have jobs, including, of course, pay their mortgage, get by, pay for the grocery bills. Now, the not so good part, of course, is inflation is still elevated. With underlying inflation at three and a half percent, it means that the sort of purchasing power of household is not great. But you know that too has come down a lot over the last twelve months. When we look at the headline rate, for example, it was four point one percent last December and it's no two point eight percent, so a bit better there. And the government obviously been working quite hard to try and pull down that inflation number with rebates and state government's put in place all sorts of help for households, but we're still not seeing the hassholds that go respond to that very well. So basically hasshole consumption is flat over the year. There's really not much happening there at all. You know, we've got other things, you know, kind of a bit level. So business investment is okay, but not amazing. Something that has been a very big positive for the economy of late recently is the high commodity prices high export volumes. But these two are starting to come off on account of the fact that commodity prices are a bit lower. So it's it's look, we're slowing down, there's no doubt about it. And the labor market, if anything, is kind of a bit of an outlier indicator, but also very welcome.

What about government spending came out. We're obviously in for deficits for the next well for the next ten years, but in the forecast years for the next four years. You wrote, I can't quite remember the words, but along the lines of people know that there's a problem and there's trying to get frustrated with the government for not doing anything about it.

Just explain that, Yeah, so the spending that's in this budget is pretty extensive, and it's not being i guess recouped by the additional revenue that the government's being able to bring in. So, in other words, the budget position gets worse because expenditure is basically growing higher than revenue. That means that the sort of overall physical position is deteriorating. The problem with the sort of well we just kind of can't of catch up, which was sort of the line that the government gave us today, is that many of these spending pressures, while not exactly known, have definitely been known from a thematic point of view for some time. This is the whole reason we have an Intergenerational Report is to try and highlight some of these structural issues in the and the last Intergenerational Report back in twenty twenty three did highlights a lot of the things that we're having to fix up now. And that's not the first one either. You look back on those IGRs the same story. I guess the difficulty here is there's a lot more spending, but there's not a lot of offsetting cuts in the budget to make up for it, and not is there sort of higher revenue raising ambitions. Productivity. I think the government is trying on this one, like in terms of there's some new policy on the national productivity payments are just announced by the Treasurer recently. There's a big competition policy review going on. If it can genuinely use these types of policies to increase the growth rate of the economy so increase the size of the pie, it can get away with it. In other words, it can spend a bit more. But yeah, you put all that together and it's just not adding up right now?

Okay, wait, surell We're going to take a quick break and we'll come back and discuss government spending. I'm talking to Charrelle Murphy, chief economist at EY. How much should we worry about it? We talk about deficit budget deficits, and we had massive budget deficits during the COVID period. We came out growth was so strong we seem to be able to wind them back really quickly. We listened to Donald Trump about how much he's going to spend. Not for you, surely you're an economist, right, but for people like me. How much should I be worried about? Government's continually talking about deficits and we have to pay him back at some point?

I presume. Yeah, And Sean here is good economists as anyone I know, So don't underread.

That's like a Christmas present comment.

That is, they mattered because when we look to the future. We don't have a buffer again in the accounts, in the financial and the government's financial accounts, and we sort of need to have a buffer because we know things will go wrong in future. You know, we didn't predict the GFC, we didn't predict the pandemic, but when they came, the government had to spend a lot of money to keep the economy kind of float and get through that difficult period. So if we don't kind of rebuild our buffer, then that we could be in a bit of strife when the time comes to potentially save us again. The other thing, of course, is that we are there's nothing wrong with debt, and you know clearly, you know we need some debt, we need some investment in the economy. But it's just the rate of which is growing. At the moment, it's rising much faster than it has in the past. Two levels that we haven't seen before. I have both the commonwealth and the state levels allied. And you know, we don't have a plan to pay it back, which basically means that we're going to pass it on to our kids. And I thought there was a certain irony yesterday in the childcare announcements we're in the midyear update. You know, these are great policies, access to childcare for more kids, increase in the payments for childcare stuff, but ironically, these kids that are probably going to be paying for it when they go into the workforce. So you know, it's we need to kind of just have you know, more of a clamp down on spending or raise revenue or even better than both of those, increased productivity in the economy.

So the next twelve months, what would you like to see happen in the economy? Productivity improved. There's one that you've said that maybe I should broaden the quest and not what you'd just like to see, but what you think we'll see in terms of the unemployment rate, in terms of inflation, in terms of interest rates.

Well, I think the inflation rate will probably continue to ease, which is good news. I think the Reserve Bank will kind of make sure that happens by keeping rates of this kind of contractiony level. The unemployment rate probably will increase a little bit, and that be reflecting the sort of SLOWDAN and the GDP growth that we've already seen. There's a lot of unknowns though, of course, in large part because we have obviously new administration coming into the US. You know, Trump has a lot of policies which could really upset the global trading system, could potentially cause some excitement and the short term and extra activity, but then actually because of deterioration in growth later on, so you know, that throws up uncertainty. What would I like to see. I'd love to see some tax reform. This sort of number one thing on the list at the moment. And you know clearly this is not something you can design, implement and put in place in a twelve month period, but we should be talking about it. You know, we really have to get this back on the agenda, and ideally it's quite a big, extensive, root and branch review of the tax system, including how all the Commonwealth and the state taxes interact.

You didn't mention the interest rates, Thurrell. I'm going to ask you, what do you think will happen to interest rates in the next felve months?

Yeah, my bad.

Interesting, I thought you were avoiding it, well.

You know, trying to avoid that in this occupation. The interest rates, look, I think they will come down next year, probably not by very much, though I don't think that the result Bank is going to be in a position to lawer rates at its next meeting, which is in February, which means it's kind of a Q two proposition. Again, it depends, of course, on how the inflation numbers on board over the next few months and activity levels as well. But when you think about this from the Reserve Bank's point of view, the economy doesn't appear to need a whole lot of extra stimulus because the unemployment rate is really low, right, But it does have an inflation problem. So the policy of least regret is the whole interest rates where they are just be sure that that inflation story is vold being as their hope, and then you know they can they can act on lowering rates. But until they're sure of that, to me, it's like, well, why would they Why would they cut rates at this point in time?

Churell, thanks for joining Fear and Greed.

My pleasure.

That was ey, Chief Economist Cherrell Murphy. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed Daily business years for people who make their own decisions. I'm Sean Elmer. Enjoy your day.