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Chapter 1: What are the key economic indicators discussed this week?
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 on LinkedIn as well under Stephen Koukoulis. Stephen, good morning.
Very good morning, Michael. a bit of a quieter week this week. In fact, it's a quiet day today because there's a public holiday in most parts of the country, but we are still here and there is still lots to talk about, mostly focusing on the bumper week for data that we had last week. Let's start with the big headline from last Wednesday, the GDP figures.
Chapter 2: How should we interpret the recent GDP figures?
Now, the growth of the economy has slowed. In fact, the number was a fair bit lower than a lot of people were expecting. Just how worried should we be about this?
Not too worried at this stage, a little bit worried, but we know that the economy had to slow down. When you think about what the Reserve Bank has been saying and doing, they were saying that the economy was too strong. Hence, inflation pressures were going up, not down, further away from their 2.5% target.
Chapter 3: What does the GDP slowdown mean for inflation pressures?
So in a sense, it's the slowdown that we had to have, if I can sort of paraphrase Paul Keating of recession we had to have. So the slowdown's coming unambiguously, but at this stage, it appears to be a moderate slowing. Your annual GDP growth is still 2.5%, which in current sort of analysis is okay. But the 0.3 quarterly GDP is, yes, a clear sign that things are coming off the boil.
Chapter 4: Are we facing a potential recession based on current trends?
And in some ways, the Reserve Bank would be welcoming that because it does mean that some of these inflation pressures that were brewing earlier at the start of the year, might just be receding a little.
I don't want to be too negative or... scare people too much, but just how bad is it going to get though? Because I noticed on LinkedIn, you were talking about the, just for us all to keep in mind that in the next quarter, we're going to see the 1% growth rate drop out of the kind of year on year figure.
So does that mean then that we can expect the downturn that we're starting to see now will get worse? Could we actually end up in a recession?
Yeah.
It's a really interesting starting point, I think, too, because 1% of the 2.5% annual figure that we were just talking about was from the June quarter last year. So that drops out when we get the June quarter this year in three months' time.
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Chapter 5: What sectors are contributing to economic growth despite challenges?
And let's just work on a technical assumption for the here and now of 0.5% GDP growth for the June quarter 2026. Mechanically speaking, that means annual GDP drops to 2.0%. So if we get a 0.4%, we're below 2%. And I think that's where some of the more, I'll call it slightly pessimistic. I don't think anyone's outright pessimistic. Not too many people are.
But some of the more cautious approaches to these numbers are that if we do get a figure that's, say, a repeat of the first quarter, another 0.3 for the quarter-on-quarter growth, annual GDP is down at 1.8.
Chapter 6: How is government spending impacting economic growth?
And we probably have per capita GDP flat or negative because population growth is about 0.3, 0.4 per quarter. So unless you're getting that rate of economic growth, per capita GDP is flat to down. And we saw a minus 0.1 in the March quarter numbers last week. So risk of recession, gee, we've got three rate hikes still working their way through the economy. We've still got the oil shock. Mm-hmm.
Come the 30th of June, we have the petrol excise relief, that 26 or 32 cents a litre cut that the government implemented coming off. And I've got the impression they're not going to extend that into the next quarter. So petrol will jump back up into the $2 something region, and that will undoubtedly hit consumer confidence and consumer spending elsewhere in the economy.
What about the parts of the economy that are in fact growing? Because the growth that we saw last week, it nearly came entirely from data centers, which is what we've talked about in the past, that there is a lot of money being spent in this one particular space.
Chapter 7: What are the implications of interest rates on the economy?
But outside of that, there really isn't much going on. How big a risk is that, that it is so centered and not at all essentially diversified?
Yep. In a way, there's always something that drives growth or drives the downturn. So data centers, I'll take the growth wherever we can get it. And of course, that adds to our productivity down the track.
While there's a bit of a leakage to GDP because we import a lot of the machinery and equipment and technology that goes into a data center, we're building them in Australia because they're going to generate productivity and economic growth down the track.
Now, that said, the data centre-driven growth rate is something of a partial concern, I'll say, because household spending is still creeping up, not very strongly. We've got dwelling investment creeping up.
Chapter 8: What insights can we gain from the housing market data?
which is helpful for the housing problem. And one of the other issues that came through in the national accounts, the GDP data last week, was a slowing in government demand. And the debate over the past 12 months or so has been, oh, the government's spending so much money, they're adding to the inflation risks, they're making the RBA's job harder.
And definitely there was an element of truth in that, unambiguously. But what we saw in the March quarter was government demand recording zero growth. So... If you want economic growth, the government demand is not giving it to you. If you want to slow the economy down, the weakness in government demand is welcome.
But that concentration on data centres as the catalyst for roughly half of the annual GDP growth is something of a concern. So to have an extended expansion, you need a little bit more growth in household spending, dwelling investment, these sorts of things.
Now, of course, you mentioned the Reserve Bank before and the fact that they would actually look at these figures and go, okay, all right. And the next step of that is what does it mean for interest rates? The RBA is meeting next week. Is this just a case of now wait and see and see how it does now play out across the next quarter as well before they make any move? The short answer is yes.
And we actually heard Michelle Bullock speak at a Senate Economics Committee late last week as well. And she, without giving away what the RBA will do, because, of course, she's only got one of the nine votes on the Monetary Policy Board, she was hinting that the RBA is probably quite content with the way things have gone since the rate hike in May.
And that is we had a slight ticking in the inflation numbers recently, as we just mentioned, the softer GDP result. Well, the unemployment rate went up. And so you think about what they're going to be looking at when the board papers are presented for, should we hike, should we keep them steady? I think there's a pretty big weight on keep them steady. And let's see the next couple of months.
Let's see what happens internationally. Because again, my observation is that we've taken a little bit of our eye off what's happening in the global economy as we've been focusing on capital gains tax changes and the budget and the GDP figures and all this sort of stuff. But there's still a
a threat to us coming from the international economy, the high oil prices, the supply chain disruptions that we're seeing. So the RBA will not take their eye off that. So I think they'll sort of all fit into this melting pot. They'll give it a big stir and say, hey, rates on hold. It's a pretty easy conclusion.
And just by the way, the markets are pricing in virtually no change at next week's RBA board meeting.
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