The economic outlook: global, national and local

Coming next is our keynote speaker David Robertson, Chief Economist and Head of Economic and Markets Research from Bendigo and Adelaide Bank.

David's regular economic commentaries draw on decades of economic research and his unique and fresh style of delivery has garnered a loyal following for his regular YouTube segments.

His presentation topic today is The Economic Outlook, Global, National and Local.

Welcome, David.

Thank you very much, Angelina, and good afternoon.

Great to be with you.

Thanks so much for the invitation to be part of the discussion.

this afternoon.

So, look, it's a great time to have a discussion about the outlook as we boldly move into a new financial year and also hot on the heels of federal, state and territory budgets and just with so much speculation,

about where the markets and where interest rates and the economy are heading.

It is just a unique environment economically, geopolitically and technologically and I think the uniqueness of the environment is one of the reasons that there is such a diverse set of views.

about where we're heading and also in some respects contradictions within the economy.

Pretty extraordinary that we're at record highs for stock markets, for property markets and we're not far off a 50 year low for unemployment.

And yet at the same time, we are in a per capita recession, household incomes have gone backwards by the largest amount since the 91 recession.

And, you know, if we look at consumer confidence, not far off record lows, so it is hard to reconcile some of those numbers.

And certainly policy settings, you know, policymakers are facing a very narrow path.

The RBA has been talking about a narrow path for monetary policy for some time.

And Michelle Bullock said in her recent update, her recent press conference a couple of weeks, that she thought the path had narrowed even further.

And it was already pretty narrow, I think, but it's a real challenge for policymakers around the world, for central banks to tighten rates enough to try to deal with inflation, but not so much to force countries into recession.

Australia is very much trying to walk that narrow path at the moment and it's not that different for fiscal policy either.

So it is a very difficult environment, however there is some good news and I do want to make sure I start with some good news and I'll finish with some good news as well.

The good news to start with I think is that interest rates will start to fall next year.

The timing of the rate cuts I think is the hard part but I am expecting an easing cycle to kick off in 2025.

And I'll finish with some good news as well, which is really around relative outperformance of our economy on the global stage, and also some local outperformance.

But the meat in the sandwich is fairly tough at the moment.

Clearly, cost of living pressures are ubiquitous.

And that's not just impacting households, it's having a knock on impact on businesses.

So, challenging conditions.

What I thought I'd do is run through

a few themes and I'll use these themes to build up to 10 predictions for financial year 2025.

And the first theme really is again that we've had the hiking cycle, now we're awaiting the easing cycle.

We had 13 rate hikes in under two years, the steepest climb for interest rates since the mid 80s.

So we've hiked up the hill, but now we need to hike across it and that's what I think

2025 or FY25 will actually look like walking across the top of a fair altitude there with a fairly heavy load on our back and the reason that it's not just a case of the RBA tightening and then easing rates quickly after that is because they need to keep rates sufficiently restrictive for long enough to ensure that inflation is fully contained.

So we will get to

Hike down the other side when we get the rate cuts next year but not yet and I think we need to be realistic and patient about that timing and I'll run through our rationale for when we expect the RBA to start cutting rates and how that lines up to other central banks.

One of the reasons that the RBA need to keep rates higher for longer

in the current environment.

And there are a few drivers of why inflation is so stubborn and sticky at the moment.

But clearly the geopolitical landscape is a factor there.

And geopolitics, arguably, is as scary as it's looked, well, certainly in my lifetime.

But whether or not you look to Europe or the Middle East or to the US or to the South China Seas, it's all fairly tense, isn't it?

So before I get to some local and some national data I do want to run through the global backdrop and its relevance to the outlook.

So having maybe spent 15 or 20 minutes perhaps ruining the mood with reasons to be cautious and patient and sounding maybe a bit paranoid about what's happening overseas I do want to finish on a high with a bit of a reminder that we are very much the lucky country and

I say that frequently, but I've actually got some data to try to verify that assertion.

But also having heard the federal budget and various state budgets, some suggestions about how we can not just rely on our luck, but supplement that good fortune with ambitious reform to try to

ensure our medium-term prosperity and so some comments about the federal budget and its likely impact on inflation and on interest rates.

So I'll use those themes to build up to 10 predictions for FY25.

Now I do have a tradition of always covering off on how last year's predictions went and I don't need to spend any great time on this but just for the record

a year ago, our view was that Australia would flirt with recession, be close to it, but that our major trading partners in Asia would do better than the North Atlantic economies.

And so I think we were around the money with our five

forecasts for offshore.

Certainly China did achieve its growth target India even stronger but the G7 countries were mainly in recession in particular UK, Germany and really it was the exception of the rule if you weren't in recession last financial year or that included the US.

I'm glad we did highlight the likelihood of the gold price going to a record high which is where it remains today.

And AI might sound somewhat obvious in retrospect, but interesting to note Nvidia's share price pretty much tripled over the course of last financial year.

Whereas our predictions for the domestic economy last financial year, just a couple of hiccups there.

We expected a technical recession.

In the end, we got a per capita recession.

So close, but we'll have to take off a mark there.

And our view was that the unemployment rate would reach 4.5%.

In fact, it only peaked at 4.1%.

That was very much influenced by population growth.

But I'll have to fess up to that forecast.

Nevertheless, we were certainly right about inflation remaining above the Reserve Bank's target throughout last financial year and therefore no rate cuts.

and also we were on the money when it came to resi property being most resilient in Queensland SA and WA.

So a self-assessed 8 out of 10 that set the benchmark for today.

So I'll make sure that I get more than 8 out of 10 for today's 10 forecasts.

Okay so let's get stuck into it and the first place to start when it comes to the outlook

for the new financial year is the cost of living crisis.

And look, when we talk about cost of living, what we're really talking about is a crisis in inflation.

When we ask the question, how do we solve cost of living pressures, what we're really asking is, how do we get rid of inflation?

And this chart tracks household disposable income, the black line there, real household disposable income, you would hope

is improving year-on-year, and it averages growth of around about 2% to 3%.

But not the last two years.

In 2023, real household income went backwards by 4% and the year before by 3.5%.

So that's the cost-of-living crisis evident in the chart there.

Now, why has household income gone backwards?

Well, the dark blue section there is prices, i.e.

inflation.

Interestingly, the second largest drag on household income that's come from the light blue section there, which is taxes payable.

And certainly bracket creep has been one of the challenges to deal with from a policy perspective.

So good that the stage three tax cuts have just kicked off.

But I think we're very quick when we consider cost of living and the huge pressures that households are under at the moment to blame the Reserve Bank.

Whereas, if you look at this chart, it's actually clear, the yellow section there, the reserve banks needed to address inflation by putting up interest rates.

It's not the largest drag on household incomes, though.

Inflation is, and to a lesser extent, also tax cuts.

Now, the tax payable, so the tax cuts are timely.

As for where this is heading from here, this chart goes back over the last few decades.

What about the outlook for the next few years?

Fortunately, you can see the black line here is back in positive territory through the back end of this year and certainly into 2025.

And that's for three reasons.

First of all, because of the stage three tax cuts, so less of a drag coming from tax payable.

In fact, the light blue sections above the line

into 2025.

Inflation itself will moderate.

We're expecting inflation to be down to 3% next year, so that will be less of a drag on household incomes.

And then we get the rate cuts next year.

And the timing there is very important to keep in mind.

We can't get the rate cuts until inflation is under control.

So the order of relief will come first of all from the tax cuts, then from inflation moderating, and then from rate cuts.

Now, that improvement in household incomes will start to flow through to discretionary spending and will start to help the economy recover.

But it is going to be difficult until we see interest rates starting to fall.

And interesting to note how this is panning out with similar economies around the world.

US, we expect to start cutting rates from September.

Canada has already started cutting rates.

The Bank of Canada have initiated their easing cycle.

So the European Central Banks, the ECB, the Swiss National Bank, the Riksbank and Sweden have all started cutting rates.

We're expecting the UK and the US to be cutting around about September and then New Zealand not long after that.

But you can see Australia is very much at the back of the queue.

Japan are in an entirely different cycle and perhaps a discussion for another day.

So why are Australia, why is the Reserve Bank going to be cutting rates later than these comparable economies?

Well, for a couple of reasons.

Firstly, we didn't hike as aggressively as most of them.

We only put up our rates by four and a quarter percent, whereas most of those other central banks have gone five percent plus.

Secondly, we were a bit later to start our hiking cycle.

And thirdly, I'll come back to the the specific challenges we're having around services inflation.

and the lack of productivity in our economy.

So in terms of our forecasts for the new financial year, by the end of this calendar year, we don't have any move up or down from the Reserve Bank throughout 2024.

But we do have one cut in the first half of next year, and then another couple of cuts in the second half.

of 2025, taking a standard or catch rate of 3.6%.

Note that we don't have any rate hikes either, and I know there are some high profile forecasters who are forecasting another hike from the RBA.

We're not expecting that to occur, but that's based on the rest of our forecasts where we see, again, fairly low GDP growth through 2024 into 2025, unemployment starting to itch higher, and I think we'll see

that throughout the second half of the year.

We'll get another read on unemployment over the next few days.

And then inflation itself, we do expect to continue to improve.

But core inflation, which is currently 4%, we think will be down at 3.2% by the end of this calendar year.

and only within the Reserve Bank's 2-3% target by next year.

I'll come back to Resi property in the US and the Aussie dollar.

If all of those forecasts look a little bit pessimistic, it is important to keep in mind that we are in a per capita recession.

It's only population growth that's kept Australia out of recession over the last

few quarters.

In fact, we've now had five quarters in a row of real GDP per capita going backwards.

We need sustainable population growth, sustainable levels of net migration, but we really want both of these

Burgundy and yellow sections to be above the line.

And that's what we're expecting next year, but not this year.

So the timing of the RBA rate cuts, well, it all depends on when core inflation is back within the Reserve Bank's target band.

This chart shows our core inflation rate in green there, so we're down at 4%.

If we look at the countries that have cut rates so far, we've got the yellow line there is the ECB, it's the European inflation rate.

orange for the Bank of Canada, so that's why those countries have been able to

enjoy the benefits of break cuts.

The blue line there shows the US who are also making tremendous progress and that's why we expect the Federal Reserve to be cutting rates by September.

The red line there shows the UK who are also making progress but we're a little bit behind the eight ball there again a little bit later in the cycle.

So we are expecting core inflation for Australia to be down close to three percent by the start of next year

But the reason it's taking a little bit longer is, well, there's a bit of a list.

Services inflation here is above 4%.

Yes, we've got wages growth above 4%, but our productivity levels have been lamentable.

Population growth, we need population growth, but at the moment it's actually outpacing the degree to which we're building new dwellings.

And the state street tax cuts are welcome and necessary, but they're not going to help with the pace of core inflation normalising.

And if I could just throw in a fifth reason for the slow rate at which inflation is normalising the geopolitical backdrop, I was going to make some comments about the rise of populism, et cetera, and even some references to the states.

But the terrible violence we've seen across there, perhaps it's more sensible for me to just make these comments at a higher level than being too specific.

Quite simply, the geopolitical tensions are driving deglobalisation and in many respects what we've seen over the last 20 years certainly leading up to the pandemic is globalisation was helpful for inflation and driving cooperative global trade helped keep inflation in check.

Now we're seeing deglobalisation

and very much a fragmenting of the US and US allies, including Australia, versus those marked in this chart in red, which you'd argue are countries that have been more forgiving of what Russia has done in the Ukraine.

And that fragmenting between the two areas

as Capital Economics, who put this chart together, have argued quite sensibly, is adding to inflation.

So the geopolitical backdrop is challenging.

Outright war and tensions have added to shipping costs more recently.

They've certainly added to the price of energy, including the oil price.

And meanwhile, keep in mind, climate change itself is inflationary, and it's only through global cooperation that we're going to

win the war on climate change in the medium term.

So geopolitics matters and is part of the explanation as to why it's taking longer for inflation to come back down to target.

Just on the markets themselves, and really interesting to note that equity markets remain at record highs on most bourses, including the US and here in Australia.

And that's despite the geopolitical backdrop and despite where interest rates are, much of the gains in equity markets have been due to

artificial intelligence and anticipation of how new technologies are going to drive corporate profitability and I think that's right this will be one of the main themes globally over the decades ahead.

It'll be around AI as well as geopolitics and transition to net zero but as for how sustainable the current bull run is

I think we need to be circumspect, particularly as we're going through some tumultuous times in elections, not just here, but in the States and in Europe, etc.

And meanwhile, while I'm on the markets, I just want to make an observation that the Aussie dollar had been losing ground, the red line here in this chart.

been losing ground for some time against the very strong US dollar.

We have been starting to recover.

Our view on the Aussie is that we'll continue to make ground on a trade weighted basis where we're up at a three-year high and we are looking for a weaker US dollar into the year end as the US Federal Reserve start to cut rates at the same time that the RBA keep rates on hold.

And meanwhile the geopolitical backdrop that I've been talking about

is somewhat supportive of commodity prices so with all the disclaimers required our view at the moment is that the Aussie dollar will start to strengthen through the back end of this year and into next year.

Okay in the interest of time I'll just keep going with away from the global backdrop to the local

economy.

And I think the most sensible place to start there is the housing market where we're also see another market which is up at record highs.

And the three main observations I wanted to make about property is firstly, just how diverse the outcomes are really all over the shop, the distribution

of divergent outcomes for property prices.

Secondly, the fact that we are at record highs, in particular in WA, Queensland and South Australia, and record highs in Brisbane, Adelaide and Perth, which is very much a function of the mismatch between supply and demand, but not as evident in the larger capitals of Melbourne and Sydney.

One of the reasons for that is different ratio of new listings coming onto the market vis-a-vis population growth.

But just for the record with respect to increase in property prices, measured from the onset of the pandemic to today, up roughly 52% for regional Australia and roughly 33% for the capitals.

But again, quite divergent outcomes when we consider Perth is up two thirds, Adelaide and Brisbane up over 60% over that four and a half year period.

And yet you look at a city like Melbourne up only 11%.

You can look at that data, of course, and consider, oh, well, good, we've had a shock

via inflation which means an increase in property prices is helpful for household balance sheets but really that's only a paper profit.

It's really cash flow which is challenging most households at the moment and indeed the cost of building new dwellings is one of the feeders back into inflation not just through

housing values but also through rental costs themselves.

So I see a lot of these dynamics more so as a challenge around housing affordability and part of the explanation for rising inflation rather than necessarily an offset for the inflationary shock that we've all been through and indeed if we look at consumer sentiment

Interesting to note, despite the fact that we've now got the Stage 3 tax cuts underway, we really haven't seen a pickup in consumer sentiment since the start of the new financial year.

And, you know, we know that household income is going to be

improving through 2025, again after we've had the tax cuts and as inflation moderates and ultimately with rate cuts.

But this shows the blunt nature of monetary policy, the fact that consumer sentiment is still near record lows for owner-occupiers, not much better for renters, so wallowing near record lows.

It's only moved higher for those who are fortunate enough to own their house outright.

But the reason this is important for businesses is business confidence and business conditions are also below their long-term average, not near record lows like consumer confidence, but certainly challenged by the lack of household discretionary spending.

And for businesses, we're seeing strong demand from overseas with respect to exports.

We've seen the rebound in international tourism, good to see international tourists back.

and international students, but households aren't spending in real terms, it's going backwards.

Certainly non-discretionary spending is still there, but discretionary is very much flatlining and going backwards in real terms.

Okay, so I've exhausted all the bad news there, the challenges.

I do want to finish off with the good news, and that is while we deal with this inflationary shock,

At least we continue to have strong labour markets.

And in fact, our unemployment rate around 4% is one of the lowest in the world.

And, you know, compare that to Canada and Europe, where unemployment's up in the sixes.

No wonder those countries have been earlier to cut official rates than the US and Australia.

So, at the moment, businesses are still employing.

They're still dealing with labour shortages.

If we look state by state, unemployment around 4% everywhere.

It had been lowest in New South Wales, now lowest in WA.

I think if we consider state by state, those trends pretty much match what's happening with housing markets as well, where we're seeing the strongest demand for property in WA, Queensland, and also in SA, similarly for the unemployment rate, which is lowest in Western Australia and highest in Victoria.

And between the two, we're seeing a fair distribution between them.

Fairly low everywhere.

Nevertheless, we are expecting the unemployment rate to rise to about 4.5% between now and year end.

And in some respects, tight labour markets have been adding to inflationary pressures.

A neutral unemployment rate, non-inflationary unemployment rate is probably closer to 4.5, and that's where we expect that number to trend.

But clearly, it's not just been a case of

overseas migration, which has been most heavily distributed towards New South Wales and Victoria, but also interstate migration, which has mainly been away from New South Wales towards Queensland and also to a lesser extent to WA and SA.

So in terms of GDP growth in the year ahead, again, we think it's going to be only 1% by year end, but by the end of the financial year, closer to 2% and strongest in Queensland and also in SA and WA.

Okay, I think I'm just about out of time.

I do want to finish off with my conclusions.

But I just wanted to mention that with respect to the federal budget, important to note that one of the key takeaways from mine for the federal budget is that we are running a surplus.

So the question wasn't could the government afford to spend or not, it was where should they spend in the short term to deal with cost of living support without adding to inflation?

And then in the medium term, how can the government spend in the

the medium term problems that we're still going to have when inflation is behind us, which are mainly around housing affordability, lifting productivity, and the global issues that I mentioned before, that will characterise the decade ahead transition to net zero, geopolitics and technology adoption.

So we saw the spending not just through tax cuts, but also through energy bill rebates.

I think voters will be looking at all of this

thinking, well, we'll promise that the budget would actually lower inflation.

Therefore, will we get a rate cut prior to the next federal election?

And I think that's how voters will draw the connection between the budget and their own outcome.

And so just this latest deceleration in inflation coming back down to target is a bit of a challenge there.

I've got no doubt that CPI, headline CPI will be coming lower because of the energy offsets coming through.

but core inflation might be taking a little bit longer.

Let me just fast forward through the last slide and just highlight that we are, however, AAA credit rated and of course we're AAA credit rated when we've only got federal government debt to GDP of only 20%.

So we're very fortunate to be in that position.

The question is, how can governments

and mainly to federal level, leverage our credit rating and our strong fiscal position to drive greater productivity in the economy.

That is the missing link that we have at the moment.

Okay, I promised 10 predictions for the new financial year.

Here they are.

For offshore, we've already anticipated the rate cuts in Europe and Canada, so we've got those.

I'll chalk them up given we predict them at the start of the year.

Later this year we are expecting rate cuts in the US and UK around September and New Zealand around November.

Our largest trading partner, China, they'll probably be chalking up economic growth of about 4.75% this year but they are

needing to cut rates to achieve that.

And our second largest trade partner, Japan, we think will be also outperforming.

We're certainly seeing that through equity markets.

And I've talked about geopolitical tensions and their consequences, but certainly we expect them to have a material impact on commodity prices, which will be advantageous for Australia.

RBA on hold all year, as we've been saying all year.

No move up or down in our opinion, but three cuts next calendar year.

Inflation back down to target early next year.

Unemployment trend a bit higher.

back to a bit above four and a half percent.

Aussie dollar to rise to above 72 by year end for some of the reasons I've already outlined.

And house prices we think will be more modest in the new financial year than previous.

And indeed, if we're right that they're only gonna be growing by about 5% and inflation's coming down to 3%, then that can be part of the solution for inflation moderating.

So they are the predictions.

I mentioned before that the benchmark was eight out of 10.

In case I don't achieve that, there's my disclaimer.

But I'm very confident that we will achieve at least eight out of 10.

So thanks for the opportunity to share those opinions and views.

And Angelina, I'd be very happy to answer any questions on them.

Thank you, David.

Thank you for such a logical and cohesive presentation in such a short timeframe.

Now, my confirmation, my currency bias is definitely leaving me with some positive news in your prediction and what your concluded presentation was.

So, I've got some questions.

The first one being, nominal Australian economic growth has

anemic at 0.1% in March quarter whilst GDP per capita has been negative for some time now.

You addressed it in your presentation.

So why is the Aussie economy languishing relative to many developed market economies such as the US?

Yes, and look we certainly are lagging the US.

And we're lagging a number of the Asian economies.

I'd argue that, however, we're not lagging when we consider most of the G7 economies.

Certainly, unlike Germany and other parts of Europe, unlike the UK, we haven't gone into recession.

I know we've had a per capita recession, but we haven't experienced a technical recession.

And even if we look at some of the data coming out of New Zealand at the moment, you know, their economy is very quickly starting to decelerate and that's why rate cuts are expected from the Reserve Bank of New Zealand by around about October.

But there's no question that when you have an inflationary shock,

the only response the central bank can deliver to deal with that shock is via monetary policy.

That's what they've done.

They've tried to put up rates sufficiently to deal with inflation, but they also got in mind their dual mandate of trying to protect as many of the jobs as have been created over the last few years and to achieve full employment.

So I'd argue we, yes, we've lagged the US, but

but that we probably outperformed a number of the other North Atlantic economies.

And, you know, we've shown resilience in our labour markets.

The question is, how long will labour markets remain resilient for?

And I think we'll continue to outperform to a degree.

But that's the thing about an inflation shock.

Really, the only way to deal with it is to slow the economy down.

And that's what the Reserve Bank's been engineering.

So do you expect this local economic weakness to continue?

And if not, what is likely to drive an economic recovery from here?

Yeah, look, I do think it's going to be pretty tough for the next six months.

Again, we've only got GDP growth in real terms at about 1, 1.1% by year end.

But as you mentioned, we only had 0.1%

0.1 of a percent growth in Q1 and we're expecting about 0.2 or 0.3 for second quarter.

So gradually picking up.

I think the main reason we do expect a recovery in 2025 is because by then we will have had the

three helpful tailwinds to households coming from the tax cuts and from inflation moderating and then ultimately from rate cuts.

But you know there are a few other factors at play at the moment that are helping our economy.

Export demand is pretty reasonable, service exports are strong and commodity prices are hanging in there

So I think they'll probably be the main tailwinds but no question it's a tough period to get through.

It is tough.

So do you believe the RBA are in control of local inflation at this juncture or are external factors such as energy and commodity supply constraints more likely to influence the direction of inflation?

It's a really interesting one, the degree to which inflationary pressures have been driven by offshore versus onshore factors.

And look, I think, in many respects, it doesn't matter if

the imbalance between supply and demand, certainly the demand side has been driven by fiscal stimulus during the pandemic and pent up demand.

So demand was always gonna be relatively high coming out of the pandemic, but it's the fact that that coincided with a lack of supply, supply chains being damaged through, not through the tail end of the pandemic, and then with what we've seen through China's recovery over the last couple of years,

So even though a number of those factors and inflationary pressures have come from overseas, e.g.

from energy costs, that doesn't change the Reserve Bank's need to try to achieve a better balance between supply and demand.

So I'm not sure it's a case of

needing to control domestic inflation, as opposed to needing to control offshore inflation, simply the RBA have the one blunt tool to use, and that's monetary policy.

And irrespective of whether or not the supply shocks are coming from overseas or locally, you still need to apply monetary policy locally.

So really demand, that's up to the RBA and the official cash rate.

supply, now that is where government structural reform can help and so that's the other part of the equation that we need to keep in mind.

You did talk about the RBA will raise rates again, we don't know exactly when, but if they do raise rates again, what are the investment implications?

Yes, I don't think they need to increase rates any further, they may come to the conclusion they need to but I think it would be a mistake and I'm

expecting that they'll come to the conclusion that they don't need to raise rates anymore.

Recent data just has me coming to the conclusion that they need to keep rates at their current restrictive rate, current restrictive level for longer, as opposed to needing to put them up any further.

But if they did put up rates, really, I think that would be the stagflation scenario coming through, which is, which would be hard to reconcile, I think, with current equity evaluations.

If the RBA came to the conclusion that, look, just inflation's too high, we're going to have to go harder on monetary policy, then you'd think that, well, obviously bond markets will struggle under that weight, but so would equity markets.

So I don't expect it to happen, but it wouldn't be helpful for either of those markets, nor for property markets, if that was the conclusion that they came to, that they did need to hike rates further.

I don't think they will.

Yep, yep.

So when do you believe the RBA will be confident that 2.5% headline inflation target is achievable?

And if and when they reach this position, how many rate cuts do you expect in the next cutting cycle will be?

Yeah, we were expecting the first cut in February and four cuts next year.

We've had to pair that back to the first cut being May and only three cuts next year.

Either way, whether or not the easing cycle in total is three or four cuts, we think that'll take us back from the current restrictive level of 4.35 to a more neutral level.

So a neutral cash rate at the moment we think is around about three and a half to three and a quarter percent.

So if they're able to deliver four cuts through the cycle, then

335 would be very close to a neutral rate.

And we'd only think that they'd then need to keep cutting to a supportive interest rate, an ultra low interest rate, if we really went into a deeper recession, which isn't what we're forecasting at the moment.

So starting in May and probably three or four cuts would be our expectation in the next cycle.

And if the RBA starts cutting rates, how do you believe the equity and fixed income markets will respond?

And are there any other noteworthy investment implications of a shift in the direction of rate expectations?

I think in many respects, equity markets are already factoring in this easing cycle, certainly looking at offshore markets, maybe slightly less so here, given the

view that the RBA are going to be later to start cutting.

I think it depends when they start cutting, it depends why they're doing it.

If they're cutting rates because they think, oh, because they're of the view, great, we've won the war on inflation, the economy needs a bit of help, therefore, away we go, let's start cutting, then I think equity markets and more broadly valuations can continue at these current aggressively higher levels.

But if they're cutting rates because it's a harder landing,

that's when I think valuations will be influenced not just by the outright rates and the 10-year bond rate, but by the broader environment.

And other factors to consider, well, trade wars, geopolitics.

Again, it looks like Trump is more likely to be

the next US president based on the latest opinion polls.

And that will have implications for trade relationships given the tariffs that he's talking about employing.

So the trade and geopolitical backdrop will be relevant for markets as well as just where the RBA is taking interest rates.

And despite high interest rates, the Australian unemployment remains relatively low at 4%.

You addressed that in a presentation.

So why has employment has been so resilient today?

And do you expect this resilience to continue looking forward?

It's pretty extraordinary, isn't it, that we've still got a 4% unemployment rate despite everything we've been through in the per capita recession.

But in many respects, that is due to labour shortages.

There's still work to be done.

There's still a lot of public spending.

a lot of buildings to build what is it 1.2 million houses to be built in the next five years.

So I think for the moment businesses are continuing to hire and continuing to fill vacancies.

The trick will be when businesses come to the conclusion that well actually you know I've still got cost pressures coming through but I can't charge any more for

in a sustainable way, therefore I'm going to just need to cut back elsewhere, e.g.

on staff numbers.

And that's one of the reasons we do think the unemployment rate will be heading a bit higher from here as well as leading indicators like job advertisements and job vacancies.

So I think we should expect the unemployment rate to head up to 4.5% and potentially a bit higher.

labour markets are resilient simply because there's a large pipeline of work to be done, a case of whether or not we can build that bridge between here and getting the vacancies filled.

It's a bad luck, isn't it?

So, global equity markets, including the oil arts, have climbed a world of economic worry in recent months.

Do you believe investors have become too optimistic about the local and global economic outlook?

Well, the market is where the market is, you certainly don't want to take on a bull market.

And the trend is your friend in many respects, once prices are appreciating, they tend to continue to do so.

But let's be clear markets are cyclical.

So we have bull markets and bear markets and at the end of a bull market will come a correction of some sort, whether or not it's a large correction or just a

you know, just a cyclical downswing, we shall see.

Certainly for the medium term and the longer term, I think markets are right to factor in pretty aggressive valuations based on emerging technologies, artificial intelligence, etc.

Who knows where

you know quantum computing and biotech nanotech and and decentralized finance etc where it's all going to take us but that doesn't mean we won't have cycles so I think it's important just to ride out the the current bull market you've got to be in it for the long haul and be aware that of course we're going to have a correction at some stage and

And globally, we're going to need global cooperation to solve a lot of the world's issues.

So it's not just going to be AI solving these issues.

We're going to need to have workable trade relationships to optimise valuations.

Cycle never dies.

So do you believe the market is pricing any incorrect assumptions regarding the economic outlook?

Look, the two things I'd suggest that the markets probably a bit overly optimistic are firstly, if we look at the US and the assumption of a soft landing in the States, the US yield curve just looking at the 10s versus 2s has been inverted for over two years now.

Now, historically, an inverted US yield curve has been a precursor to a US recession every time, you know, almost 100% correlated.

The fact that that hasn't transpired yet just has me thinking that it

It's not that we've avoided recession there, it's just been deferred.

So I think the markets are slightly overestimating a US soft landing scenario.

And secondly, I think inflation over time, especially in the second half of this decade, will settle at a higher level than we've got used to.

There are a few things which are going to drive higher inflation in the medium term.

Climate change is one of them, demographic change and ageing population.

And again, the globalisation, as I mentioned before, I think is inherently inflationary.

So, you know, if we think about the discount rate applied to future earnings, I know we're facing an easing cycle, but I think we'll end up with a

a higher neutral interest rate than had been the case in the past.

We're all in it.

So how can Australian investors best position themselves for what's coming in the 2025 financial year?

Oh look, I think making sure you take a long-term view of the cycle again, diversification, not getting too short-term in your view,

But nevertheless, remaining agile and being attuned to changing global backdrop.

But diversification I think is probably the best way I can answer that question.

And do you have any advice for household aiming to weather the challenging economic outlook?

The households, look, I think it's all about budgeting.

And again, we said at the start, not just of this year, but the start of last year, not to accept, not to expect the rate cuts until 2025.

We're continuing to offer that guidance to our customers and partners.

So being realistic about that timing of the rate cuts, and therefore being able to budget

in a prudent manner.

So getting through an inflation shock is always difficult.

So best to budget realistically to deal with that reality.

And do you think monetary policy is less effective today than in decades gone by when the economy was very different to today?

Look, I think it's tempting to make that assertion.

I've certainly heard it from a number of quarters.

But I haven't got any evidence that monetary policy is less effective today than it's been in the past.

And in fact, if we look at what's happening in the US and maybe here as well, we may be just living through a textbook example of how monetary policy does work.

especially if we manage to avoid a recession in the US and here because having had this inflation shock, you know, it hasn't been fiscal policy that's trying to fix it.

It's only monetary policy.

And for the moment, inflation is moderating.

And in particular, if you look at what's happened in the US, Canada and Europe, it's worked.

But the question is, will economies go into recession at the same time that monetary policy is solving the issues with respect to inflation?

So to conclude, can you please share an investment or economic lesson you've learned this year in your position as a Bendigo and Adelaide Bank's chief economist?

Probably the two things I'd say.

Again, I try to remind myself regularly of

the old, you know, maxims, the important maxims to keep in mind, you know, the magic of compound interest, the need to diversify, you know, history doesn't repeat but it rhymes.

Those old maxims I think help get you through when you have a shock like we've had not just the pandemic but the inflation shock that's followed it.

economic lessons.

That's the only other one that comes to mind for me is I hadn't realised until quite recently that when the criticism that has been levelled at economics as the dismal science, and I've heard that expression used before in a derogatory manner towards economics, that actually the person that said that was criticising

Thomas Malthus for his paper he wrote on why we should get rid of slavery.

So the person criticising economists and calling us dismal was doing so for all the wrong reasons.

So I think we should proudly wear that badge of honour of being dismal as long as we're helping society at the same time.

Thank you.

Thank you, David, for your great insight and for being so generous with your time.

It's great to have you.

Look forward to seeing you next time.

Thanks so much.