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Chapter 1: What is the main topic discussed in this episode?
Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Michael Thompson, and every Monday morning we're joined by economist Stephen Koukoulis to look at the week ahead. You'll find him at thekouk.com, that's T-H-E-K-O-U-K.com, and sharing his views and analysis on LinkedIn as well. Stephen, good morning.
Good morning, Michael. Now, this week, it's a bit of a quieter week coming up from the RBA, certainly from the Bureau of Statistics, a bit quieter as well. But we had a bumper crop of data last week and a lot of stuff we need to talk about. I want to talk, first of all, about business confidence and consumer sentiment, which we saw last week, which, in a word, is dismal, right?
How worrying is this? How concerned should we be about where this is going to take us?
You're quite right. And this is one of the early readings we've had on a reaction to the petrol price shock because we haven't had any hard data because it only began in early March. And here we are in the middle of April. So we haven't had that data flow coming through. But the NAB survey on business confidence, the Westpac survey on consumer sentiment were incorporating data.
the effect of this petrol shock. And as you said, consumer sentiment fell 12% in the month to a level of 80. And remembering that 100 is when you've got as many optimists as pessimists, so there's a lot more pessimists out there at the moment. And business confidence fell to minus 29, which was a sharp fall.
Now, at face value, that's really bad, of course, because when consumers and business are feeling very uneasy... when they've got pessimism about their own economic conditions, they tend to cut back their spending, they tend to cut back their investment and their hiring, if you're a business person. So they're really bad.
Now, the only caveat I would place on that is that we've seen in the past the COVID pandemic, the GFC and other occasional short-term shocks, we can see a spike down that recovers relatively quickly. So
My conditioning of that is that if we were to see the oil price revert back to the $70 a barrel region, if we were to see the Straits of Hormuz opening and all these sorts of things, these things would bounce back. But for the here and now, they are pointing to a very, very weak March, April, and even May part for the economy.
How quickly can things turn around then? Because, I mean, those are sentiment and confidence readings. So those could kind of fluctuate a bit essentially month on month. But the things that they flow into would take longer to turn around, right, in terms of, say, household spending. would take perhaps a little bit longer to feed through.
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Chapter 2: What were last week's business confidence and consumer sentiment figures?
And for the here and now, so here we are, middle of April, as I said, They might be put on the back burner for a short while until we see what the effects of this oil shock are. For us consumers, we tend to be a little bit more agile. We tend to react more quickly. We've had the two rate hikes just to go on top of the petrol shock. So people react quite quickly.
And by that, I mean a few months rather than 12 months to the fact that their monthly cash flows are being sort of undermined by, well, the rate hikes and the petrol shock.
Okay. So basically, if you're a business listening to this, it's not necessarily dire. It's not meaning that, sure, these are negative figures at the moment. But if conditions do improve, there is the potential for household spending, consumer spending to pick up relatively quickly off the back of it. Yes, indeed.
And for the here and now, this is sort of the dilemma that we economists have. We have got to react to these numbers when they come out. And they are ā they're not good. They're bad. But as we were sort of saying, if we get the change coming through from the international economy in a positive way ā
If we get things like the Reserve Bank acknowledging that we're going to be perhaps a little bit cautious on the need to hike quite as much, that's obviously a hot debate for the early May RBA monetary policy meeting. And if we get ā because last week, too, we saw quite positive numbers from the Chinese economy.
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Chapter 3: How is the petrol price shock affecting consumer sentiment?
Chinese GDP was 5%, which was stronger than expected. Of course, they're our major export market. So there are things happening ā under the surface, if you like, that are still reasonably positive for our economy. And the other thing about householders too, they've accumulated a lot of savings. So there's a savings buffer there. The ASX is rocketing along. They're doing extremely well.
House prices are going up. So there's a wealth effect there. So there's a million and one moving parts in the economy. The ones that get the attention, probably because they've got a higher weighting in how we analyze the economy, consumer sentiment and household spending, these sorts of things, and the business confidence measures, they've just come out. And yeah, no surprises.
They were weak, as you said.
Okay. Something else that's probably not going to make a lot of consumers too happy, is the commentary last week from RBA Deputy Governor Andrew Hauser in the US talking about inflation here. It was in the States, but he was talking about what's going on in Australia and basically saying that rates will need to go up to keep it in check or to really battle inflation.
Then we had labor force figures showing unemployment steady at 4.3%, still very strong. Are all signs still pointing towards the potential for a rate hike next month?
The short answer is yes. As you said, Andrew Howser, Deputy RBA Governor- talking about a nightmare, I think was the word that he actually used when they're confronting this combination of higher inflation, which by itself demands higher rates unambiguously, but they do have at the corner of their eye or the edge of the radar, what is happening to activity as we were just discussing.
So is the economy weakening precipitously? Maybe. And the unemployment numbers are part of their mandate as well. So they're worried. And you can tell from Dr. Howser's views that the unemployment rate is going to be going up over the months ahead. It was okay last week, but over the months ahead, as the economy slows, we're going to be getting higher unemployment.
So which of these do you choose as the RBA policy-making decision? Do your hike rates kill inflation, but you risk grinding unemployment higher? Or do you try to keep unemployment relatively low and allow inflation to be higher for longer? And that's the dilemma. But Drilling it all down, probably another rate hike.
While it's largely priced in, while people can sort of see, oh, petrol prices are causing inflation, I can understand why they're hiking. I don't like it, but I can understand why it's happening. And I think that's what they'll do. And then my hunch would be they would then pause because policy then would be very tight. 4.35% cash rate, which assumes a 25-point hike in early May.
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