Welcome to the Fear and Greed business interview. I'm sure nail them. The Australian economy grew by just zero point two percent in the March quarter. The result was weaker than economist had expected, and it resulted in the rate for the twelve months at the end of March at one point three percent. That was steady from three months earlier. Sally Old is the chief economist at National Australia Bank. Sally, welcome back to Fear and Greed.

Welcome to the Fear and Greed business interview. I'm sure nail them. The Australian economy grew by just zero point two percent in the March quarter. The result was weaker than economist had expected, and it resulted in the rate for the twelve months at the end of March at one point three percent. That was steady from three months earlier. Sally Old is the chief economist at National Australia Bank. Sally, welcome back to Fear and Greed.

Thanks very much, Sean.

Thanks very much, Sean.

What did we learn out of yesterday's national accounts?

What did we learn out of yesterday's national accounts?

So? I think we learned that, you know, we are going to have to lower our sights on I guess the potential trajectory for the Australian economy through twenty twenty five. We had started to sense that that was a likely outcome maybe a month ago when we got the read on where first quarter consumption partial data was headed and it felt to us like it was tracking weaker than we and the Reserve Bank had expected. And so I guess today's number, which is disappointed in terms of where we had our forecast earlier in the week, does suggest that the economy is struggling to get up some genuine momentum as we start twenty twenty five. But I would caveat by that by saying that there were I guess some unusual things going on in the quarter. A lot of that was weather related, but also some funny things in the way that the statistician compiles the national accounts around how we account for electricity subsidies. So a lot of one off's going on, and maybe these will wash out as we move into the second quarter, but certainly I think it tells us that we are in for another year of sub trend growth here in Australia, albeit growth that's a bit stronger than it was last year.

So? I think we learned that, you know, we are going to have to lower our sights on I guess the potential trajectory for the Australian economy through twenty twenty five. We had started to sense that that was a likely outcome maybe a month ago when we got the read on where first quarter consumption partial data was headed and it felt to us like it was tracking weaker than we and the Reserve Bank had expected. And so I guess today's number, which is disappointed in terms of where we had our forecast earlier in the week, does suggest that the economy is struggling to get up some genuine momentum as we start twenty twenty five. But I would caveat by that by saying that there were I guess some unusual things going on in the quarter. A lot of that was weather related, but also some funny things in the way that the statistician compiles the national accounts around how we account for electricity subsidies. So a lot of one off's going on, and maybe these will wash out as we move into the second quarter, but certainly I think it tells us that we are in for another year of sub trend growth here in Australia, albeit growth that's a bit stronger than it was last year.

Just digging into some of the details, households, what sort of state are they?

Just digging into some of the details, households, what sort of state are they?

So household consumption went up by four tenths of a percent, and on its own you would argue that that's a relatively respectable outcome. But what actually happened in that quarter was that electricity bills subsidies that were given by the Queensland government basically ran out. And so the way that's accounted for in the GDP figures as it means less government consumption and a bit more household consumption and So if you abstract for that effect and say, let's not worry about consumption of energy, what did household spending do? It was only up two tenths of a percent, so actually quite a soft outcome in the quarter. And it's interesting, it's a bit of a puzzle because if we look at the fourth quarter of last year, the consumer did quite well and it felt like, you know, whether it was a tight labor market, or energy bill rebates or Stage three tax cuts accumulating, and even just a narrative that the Reserve Bank was finished hiking interest rates, all those things seemed to give the consumer, I guess, some confidence to go out there and spend. And we had thought that, you know, most of those factors have sustained into twenty twenty five, and we had a great cut in the first quarter. But it does feel like consumers have gone a little bit back into their shells, maybe a little bit more cautious, and what we're really seeing is a desired to maybe pay down debt, repair the balance sheet, and save a little bit more.

So household consumption went up by four tenths of a percent, and on its own you would argue that that's a relatively respectable outcome. But what actually happened in that quarter was that electricity bills subsidies that were given by the Queensland government basically ran out. And so the way that's accounted for in the GDP figures as it means less government consumption and a bit more household consumption and So if you abstract for that effect and say, let's not worry about consumption of energy, what did household spending do? It was only up two tenths of a percent, so actually quite a soft outcome in the quarter. And it's interesting, it's a bit of a puzzle because if we look at the fourth quarter of last year, the consumer did quite well and it felt like, you know, whether it was a tight labor market, or energy bill rebates or Stage three tax cuts accumulating, and even just a narrative that the Reserve Bank was finished hiking interest rates, all those things seemed to give the consumer, I guess, some confidence to go out there and spend. And we had thought that, you know, most of those factors have sustained into twenty twenty five, and we had a great cut in the first quarter. But it does feel like consumers have gone a little bit back into their shells, maybe a little bit more cautious, and what we're really seeing is a desired to maybe pay down debt, repair the balance sheet, and save a little bit more.

Is there any sense of why that's the case. I mean, it was pre Liberation Day tariffs the March quarter. Is there a Trump effect you think.

Is there any sense of why that's the case. I mean, it was pre Liberation Day tariffs the March quarter. Is there a Trump effect you think.

I'm not sure that it's a Trump effect, but we do wonder whether, you know, we did go through a period for a couple of years where real income's growth in the household sector, you know, was really quite negative, and that was because inflation rose by a lot and people's incomes didn't rise anywhere near as much, and so that was quite a difficult period for many households. And I guess one explanation might be that the scarring from that period, I guess has lasted a lot longer than many of us anticipated, and that's what's encouraging or forcing consumers to want to pay down a bit more debt to get the balance sheet looking a little bit healthier. And the way they're doing that is, you know, saving those extra dollars as opposed to spending them.

I'm not sure that it's a Trump effect, but we do wonder whether, you know, we did go through a period for a couple of years where real income's growth in the household sector, you know, was really quite negative, and that was because inflation rose by a lot and people's incomes didn't rise anywhere near as much, and so that was quite a difficult period for many households. And I guess one explanation might be that the scarring from that period, I guess has lasted a lot longer than many of us anticipated, and that's what's encouraging or forcing consumers to want to pay down a bit more debt to get the balance sheet looking a little bit healthier. And the way they're doing that is, you know, saving those extra dollars as opposed to spending them.

What about business investment, that's sluggish, It seems.

What about business investment, that's sluggish, It seems.

It is a bit sluggish, and that's been I guess, in a way one of the missing links in terms of the overall growth trajectory here in Australia. And so we have had this narrative, particularly for the last couple of years, that a lot of the growth we've seen has been driven by the public sector, so government investment, government spending, and what we actually saw in the first three months of this year is that narrative reversed a little bit. So actually, government spending was a bit softer in the quarter, and private spending, including consumption and also investment, was a little bit stronger. Now I'm not sure how sustainable that that turn is, because we did note that the statistician said government spending was a bit weaker just because some of these big public infrastructure projects or either getting closer to completion or they experienced delays. And while we're all sort of desperate to have a little bit of reorientation in the economy away from public sector driven growth towards private sector driven growth, I'm not sure even though that's what we saw in the first three months of twenty twenty five, that we're yet honest trajectory for that story.

It is a bit sluggish, and that's been I guess, in a way one of the missing links in terms of the overall growth trajectory here in Australia. And so we have had this narrative, particularly for the last couple of years, that a lot of the growth we've seen has been driven by the public sector, so government investment, government spending, and what we actually saw in the first three months of this year is that narrative reversed a little bit. So actually, government spending was a bit softer in the quarter, and private spending, including consumption and also investment, was a little bit stronger. Now I'm not sure how sustainable that that turn is, because we did note that the statistician said government spending was a bit weaker just because some of these big public infrastructure projects or either getting closer to completion or they experienced delays. And while we're all sort of desperate to have a little bit of reorientation in the economy away from public sector driven growth towards private sector driven growth, I'm not sure even though that's what we saw in the first three months of twenty twenty five, that we're yet honest trajectory for that story.

How worried should we be about per capita growth going backwards?

How worried should we be about per capita growth going backwards?

Yeah, so per capita growth did go backwards again in the quarter, and so what we're really saying is that the growth in the economy in terms of the value of goods and services that we produced was actually outpaced by growth in population. And that's been I guess, a reasonably familiar dynamic in the national accounts for a couple of years now, and it's not really one that I guess is overly favorable. But as population growth slows over the next year and or two, which is effectively what the government has in its numbers and it's what the Reserve Bank is forecasting now, my sense is is that that sort of less favorable aspect of the GDP numbers should start to correct itself, and so it is quite possible, I think that we might be near the end of that narrative of negative per capita GDP growth.

Yeah, so per capita growth did go backwards again in the quarter, and so what we're really saying is that the growth in the economy in terms of the value of goods and services that we produced was actually outpaced by growth in population. And that's been I guess, a reasonably familiar dynamic in the national accounts for a couple of years now, and it's not really one that I guess is overly favorable. But as population growth slows over the next year and or two, which is effectively what the government has in its numbers and it's what the Reserve Bank is forecasting now, my sense is is that that sort of less favorable aspect of the GDP numbers should start to correct itself, and so it is quite possible, I think that we might be near the end of that narrative of negative per capita GDP growth.

Stay with me, Sally, we'll be back in a minute. My guest this morning is National Australia Bank Chief economist Sally Old. Productivity. One thing about national accounts. We could all sorts of information on all sorts of economic variables. Productivity is still a big issue in Australia.

Stay with me, Sally, we'll be back in a minute. My guest this morning is National Australia Bank Chief economist Sally Old. Productivity. One thing about national accounts. We could all sorts of information on all sorts of economic variables. Productivity is still a big issue in Australia.

Sally, Yes, that's right. So this has been I guess again a perennial bugbear of the national accounts for the last couple of years, where we just have had very lackluster productivity performance and unfortunately for the first three months of twenty twenty five. But story didn't get any better, and productivity was flat in the quarter, so it didn't go down, but then on the other hand, it didn't go up. And when you actually look at a chart of productivity growth, and we tend to measure that as looking at GDP per hours worked across the economy, it's basically been flat for the last couple of quarters, and so it's telling you that, you know, productivity growth is essentially going nowhere. And so I guess in that sense that's part of the reason why we've got the negative per capita GDP growth, because we're not really generating any growth from using the inputs into production, whether that's capital or labor more efficiently. So hopefully that might change in coming years.

Sally, Yes, that's right. So this has been I guess again a perennial bugbear of the national accounts for the last couple of years, where we just have had very lackluster productivity performance and unfortunately for the first three months of twenty twenty five. But story didn't get any better, and productivity was flat in the quarter, so it didn't go down, but then on the other hand, it didn't go up. And when you actually look at a chart of productivity growth, and we tend to measure that as looking at GDP per hours worked across the economy, it's basically been flat for the last couple of quarters, and so it's telling you that, you know, productivity growth is essentially going nowhere. And so I guess in that sense that's part of the reason why we've got the negative per capita GDP growth, because we're not really generating any growth from using the inputs into production, whether that's capital or labor more efficiently. So hopefully that might change in coming years.

How much of a problem is the lack of business investment or is there a lot more to it?

How much of a problem is the lack of business investment or is there a lot more to it?

No, I think that is an issue for this economy because you know, one of the dynamics that people talk about at the moment is this notion of capital shallowing. And so what's really going on in the Australian economy is that the capital stock, So I guess the outstanding stock of plant and equipment and anything else that businesses use as an input into the production process has basically when we look at it, per worker gone down, and so for every worker that we add, we're not adding more capital. And it means that you know, inaggregate, workers are using less capital to do their job. And I guess the sense is all they'll s equal. That's not a great story for productivity because when we think about how productivity often works in practice, it's like you take an individual and you give them a good set of tools, whether that's a computer or something else, and they can become far more productive. And so this notion of capital shallowing, I think is symptomatic of softness in business investment. But it also, I think is one of the reasons why you know, we're really failing to lift productivity grows.

No, I think that is an issue for this economy because you know, one of the dynamics that people talk about at the moment is this notion of capital shallowing. And so what's really going on in the Australian economy is that the capital stock, So I guess the outstanding stock of plant and equipment and anything else that businesses use as an input into the production process has basically when we look at it, per worker gone down, and so for every worker that we add, we're not adding more capital. And it means that you know, inaggregate, workers are using less capital to do their job. And I guess the sense is all they'll s equal. That's not a great story for productivity because when we think about how productivity often works in practice, it's like you take an individual and you give them a good set of tools, whether that's a computer or something else, and they can become far more productive. And so this notion of capital shallowing, I think is symptomatic of softness in business investment. But it also, I think is one of the reasons why you know, we're really failing to lift productivity grows.

Okay, now, last the Reserve Bank recently cut interest rates twenty five basis points. You were one of the few economists that suggested ahead of time that they should have cut fifty bases points. Now in hindsight's twenty twenty obviously they didn't, but it's amazing how many economists said, Wow, they're a lot closer to fifty basis points than we realized. So congratulations on that. Where do we go with rates, so for the rest of this year.

Okay, now, last the Reserve Bank recently cut interest rates twenty five basis points. You were one of the few economists that suggested ahead of time that they should have cut fifty bases points. Now in hindsight's twenty twenty obviously they didn't, but it's amazing how many economists said, Wow, they're a lot closer to fifty basis points than we realized. So congratulations on that. Where do we go with rates, so for the rest of this year.

So I think the one line summary would be that rates are going lower. And the real reason for that is, you know, as we talked about at the outset, it does look like twenty twenty five will be another year where the economy grows below trend, and so you know what that typically means is that we will see a bit of an upward drift in the unemployment rate from the low falls to around the mid falls. And in that content, the Reserve Bank would be very mindful of not wanting to run what they would call restrictive monetary policy, so they don't want interest rates at a level where they're exerting a headwind on the overall economy. And so I guess the real rationale for lower rates in coming months it's just this idea that they need to get sooner rather than later monetary policy back to a stance that is, I guess, not a headwind but not necessarily a stimulant to the overall economy. And we think that's probably a cash rate in the low threes, so somewhere between three three and a quarter. And so for that reason, we have a forecast that they'll cut at their next meeting in July, follow up with another one in August, and then after a brief pause, deliver a final cut for the year in November. So that'll give another seventy five basis points of rate cuts. And I think should see monetary policy far more appropriate given underlying fundamentals.

So I think the one line summary would be that rates are going lower. And the real reason for that is, you know, as we talked about at the outset, it does look like twenty twenty five will be another year where the economy grows below trend, and so you know what that typically means is that we will see a bit of an upward drift in the unemployment rate from the low falls to around the mid falls. And in that content, the Reserve Bank would be very mindful of not wanting to run what they would call restrictive monetary policy, so they don't want interest rates at a level where they're exerting a headwind on the overall economy. And so I guess the real rationale for lower rates in coming months it's just this idea that they need to get sooner rather than later monetary policy back to a stance that is, I guess, not a headwind but not necessarily a stimulant to the overall economy. And we think that's probably a cash rate in the low threes, so somewhere between three three and a quarter. And so for that reason, we have a forecast that they'll cut at their next meeting in July, follow up with another one in August, and then after a brief pause, deliver a final cut for the year in November. So that'll give another seventy five basis points of rate cuts. And I think should see monetary policy far more appropriate given underlying fundamentals.

And so three point early threes is neutral monetary policy there. How relevant is the Michelle Bullet Government Reserve Banks comments after last rate cut about growth. There seemed to be less emphasis on inflation, that's all we heard about. Suddenly that last meeting, that last press conference, she starts talking about growth a lot more. How important is that?

And so three point early threes is neutral monetary policy there. How relevant is the Michelle Bullet Government Reserve Banks comments after last rate cut about growth. There seemed to be less emphasis on inflation, that's all we heard about. Suddenly that last meeting, that last press conference, she starts talking about growth a lot more. How important is that?

Yeah, it's really important, and that I think, you know, they did signal that May meeting would be a real opportunity for them to have a bit of a rethink about the outlook and about where policy is and where it should go. And so one of the big shifts they did make at that meeting was effectively saying that they're now far more comfortable, far more competent, that inflation is in the middle of that two to three percent target band. And that's a huge shift in thinking from them because they have spent the last couple of years, you know, really worrying that inflation was too high and worrying that they might not have done enough to get it into that target band. So it was really, I think quite significant that they are now far more assured about the inflation outlook and because of that, that gives them the opportunity to bring the other side of the mandate into focus. And that's why, you know, in that last paragraph of the statement they released in May, I said, you know, we still care about inflation sustainably in that two to three percent target van, but we're also mindful in paying due attention to our full employment mandate. And that's a far more balanced central bank in terms of its focus than we've seen in the last couple of years.

Yeah, it's really important, and that I think, you know, they did signal that May meeting would be a real opportunity for them to have a bit of a rethink about the outlook and about where policy is and where it should go. And so one of the big shifts they did make at that meeting was effectively saying that they're now far more comfortable, far more competent, that inflation is in the middle of that two to three percent target band. And that's a huge shift in thinking from them because they have spent the last couple of years, you know, really worrying that inflation was too high and worrying that they might not have done enough to get it into that target band. So it was really, I think quite significant that they are now far more assured about the inflation outlook and because of that, that gives them the opportunity to bring the other side of the mandate into focus. And that's why, you know, in that last paragraph of the statement they released in May, I said, you know, we still care about inflation sustainably in that two to three percent target van, but we're also mindful in paying due attention to our full employment mandate. And that's a far more balanced central bank in terms of its focus than we've seen in the last couple of years.

Sally, thank you for talking to Fear and Greed.

Sally, thank you for talking to Fear and Greed.

A pleasure. Thanks Sean.

A pleasure. Thanks Sean.

That was Sally Old, chief economist at National Australia Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed business news you can use. I'm Sean A. Elmer. I'm enjoying your day

That was Sally Old, chief economist at National Australia Bank. This is the Fear and Greed Business Interview. Join us every morning for the full episode of Fear and Greed business news you can use. I'm Sean A. Elmer. I'm enjoying your day