Welcome to the first RBA Rate Announcement of 2024, a year that heralds a fresh and insightful approach to our economic updates! This year, we're thrilled to announce a dynamic new partnership: Ben will be teaming up with Evan Lucas for all future RBA insights. With this powerhouse duo at the helm, you can bet we're diving far beyond the basics.
Evan Lucas isn't just any analyst; he's a titan in the world of economics (and he’s appeared multiple times on our show!) As the author of the best selling book, "Mind Over Money: Why Understanding Your Money Behaviour Will Improve Your Financial Freedom," Evan brings a wealth of experience as a market strategist and a fervent passion for investment.
In this month's video, they tackle several pivotal topics:
Now, what are you waiting for? Let's delve into this month's update!
Time Stamps:
World Economic Update Segment:
02:15 – United States Economic Update
24:37 - China Economic Update
36:12 - Eurozone Economic Update
Australian Economy Segment
45:37 - Australian Inflation Data
50:28 - Impact of Fires and Insurance Costs
51:26 - Housing, Education, and Health
52:40 - RBA's Decision
Australian Property Market Update
01:22:14 - Property Market Overview
01:29:32 - Interest Rate Outlook
LISTEN TO THE FIRST 20 EPISODES HERE >>
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👉 Apple: https://apple.co/3ioICGW
👉 Google Play: https://bit.ly/3OT86bW
👉 Web platform: https://www.moorr.com.au/
FREE MASTERCLASS:
- How to Build a Property Portfolio and Retire on $2,000 a week >>
FREE BEST-SELLING BOOKS:
- The Armchair Guide to Property Investing
- Make Money Simple Again
FIND US HERE:
- Website
- Instagram
- Facebook
- Youtube
Welcome to the first RBA Rate Announcement of 2024, a year that heralds a fresh and insightful approach to our economic updates! This year, we're thrilled to announce a dynamic new partnership: Ben will be teaming up with Evan Lucas for all future RBA insights. With this powerhouse duo at the helm, you can bet we're diving far beyond the basics.
Evan Lucas isn't just any analyst; he's a titan in the world of economics (and he’s appeared multiple times on our show!) As the author of the best selling book, "Mind Over Money: Why Understanding Your Money Behaviour Will Improve Your Financial Freedom," Evan brings a wealth of experience as a market strategist and a fervent passion for investment.
In this month's video, they tackle several pivotal topics:
Now, what are you waiting for? Let's delve into this month's update!
Time Stamps:
World Economic Update Segment:
02:15 – United States Economic Update
24:37 - China Economic Update
36:12 - Eurozone Economic Update
Australian Economy Segment
45:37 - Australian Inflation Data
50:28 - Impact of Fires and Insurance Costs
51:26 - Housing, Education, and Health
52:40 - RBA's Decision
Australian Property Market Update
01:22:14 - Property Market Overview
01:29:32 - Interest Rate Outlook
LISTEN TO THE FIRST 20 EPISODES HERE >>
MOORR MONEY MANAGEMENT APP:
👉 Apple: https://apple.co/3ioICGW
👉 Google Play: https://bit.ly/3OT86bW
👉 Web platform: https://www.moorr.com.au/
FREE MASTERCLASS:
- How to Build a Property Portfolio and Retire on $2,000 a week >>
FREE BEST-SELLING BOOKS:
- The Armchair Guide to Property Investing
- Make Money Simple Again
FIND US HERE:
- Website
- Instagram
- Facebook
- Youtube
Hello and welcome to my February economic and RB update. And yes, it's 2024. The world has changed. What do I mean by that? The RBA are now only going to do eight updates, eight cash rate decisions throughout the course of the year. So I thought, well, maybe I should update too, maybe I should set a change. Instead of me just talking to you. I need to bring an expert in, an independent expert, economist who knows all things, about all things. And I'm thrilled to announce that Evan Lucas is going to be joining me for these economic and RBA updates throughout the course of the year. So welcome to the economic and RBA updates, evan.
Speaker 2:Ben, thank you. This is going to be a fantastic year. I'm so excited you put me on. I can't wait to dive into it. There is going to be so much for us to cover this year and, as you said, let's start really heavily with basically building out what 2024 will look like and how we're going to deal with that throughout those eight RBA meetings and everything else in between.
Speaker 1:Yeah, it's a big scene setter for us obviously the first one throughout the year, so we are definitely going deeper. So you need to strap yourself in, but it's worth the wait. We're going to go a lot deeper in terms of the Australian economic data. We'll still keep the same format in terms of looking at some of the big macroeconomic news that's happening offshore, because it does impact our domestic economy, but we are definitely going to be exploring some of the deeper elements and all of the machinations that make up the fabric of the Australian economy and also, obviously, the property market as well. So, if you do hang around to the end, we're also going to share with you our prediction in terms of just how many interest rates we see coming and roughly when they're going to happen as well.
Speaker 1:So what are we waiting for? Let's jump straight into it. I'm thrilled to have you on board, evan. Let's get into it, alrighty. Well, let's start with the biggest economy in the world, like we do every year, looking at the US data. What did we learn? So, looking at their GDP data that was released in January, we saw a 3.3% annualized result for the December quarter and a 3.1% actual quarterly result, after a 4.9% annual rate for the September quarter, and that was much better than the consensus forecast of 2%. So what did you get out of that, evan so?
Speaker 2:what I get out of it is the soft landing which we all keep hearing about is absolutely on in the world's biggest economy. So it is really positive to see that overall GDP is still really strong. In terms of what the longer term trend is, don't forget the US Federal Reserve basically says that if the US can average between 2.5% GDP growth, that's just above what they call their neutral rate. So I take this as a really positive thing that they have managed their economy well. The GDP is moderating back to a much more realistic long-term level and it goes, as I said, quarter on quarter, year on year, back to where they all need it to be, so that they're actually not overheating, not undercooking. So that's my take. I think it's a really strong scenario that 2024 is going to be that year of moderation we need, without it being a crash and a hard landing.
Speaker 1:Yeah. So we know that's on the back of, obviously, the tightening of interest rates and that's on the back of inflation. So let's take a look at the inflation data now. And what did we learn in that inflation data?
Speaker 1:We saw the annual inflation rate in the US went up by 3.4% in December 2023, from a five-month lower 3.1 reading in November. Now, that was higher than market forecasts of a 3.2% increase, as energy prices went down at a slower pace. Meanwhile, prices increased at a softer pace for food 2.7 versus 2.9, shelter 6.2 versus 6.5, new vehicles 1% versus 1.3, apparel 1% versus 1.1, medical care commodities 4.7% versus 5%, transportation services 9.7% versus 10.1%, and continued to decline for the used car market and truck market, which was disinflationary, of negative 1.3% versus negative 3.8%. So that meant that annual core inflation rate also eased to 3.9%, below that critical 4% mark from the previous period, but above expectations of a reading of 3.8%. So, compared to November, consumer prices went up by 0.3% of 1%, and that's the most in three months and above a forecast of a 0.2% increase. So what did you make of their inflation story, evan?
Speaker 2:So I think you've already highlighted something that I really was using as, like, the canary if you know what I mean the canary in the coal mine about how US inflation was moving and where it sat, and why I say that. What was really core to their overall ridiculous spike that we saw during the COVID years and the post COVID years was you talked about used car sales and car sales in general. At one point they were growing at about 15%, not per year, per quarter. So you saw that overly rapid rate of savings coming out quickly, the fact that you had supply constraints and therefore the only thing you get your hands on was used cars. So the disinflationary numbers there are actually again showing that we are getting back into a post COVID world that actually should start to be described as pre COVID. We're backing to where that kind of level is and we want that to happen.
Speaker 2:We need to basically say COVID was this weird period that we all knew and experienced, but we need to get back down to consistency, need to get back down to the biggest economy in the world doing what it does, which is again having inflation hovering around 2%.
Speaker 2:Now I do want to highlight, like everybody else, and what we've been hearing is this word sticky, very economic term. The reason it comes is that the inflation data is moderating. As Ben said, there's disinflation, which means we're still getting price increases, but they're smaller than the price increases from the previous month or previous quarter. So that's a good thing, but it does start to get to an equilibrium above where they want it, and that's because we know the consumer is doing reasonably well and we'll come to that in a minute. We also know, as we spoke just before, gdp is moderating, which is great, but it's still growing at 2, 2.5%, which is good, but slightly stronger than what we were comparing to pre COVID. So the inflation data is there. The inflation data is moderating to their 2%, which is DFL and C. That's where they want it to be, but there will be hiccups and that's slightly going on at the moment.
Speaker 1:Well, I think if you look at that long-term chart there that you've brought up as well, it's really clear to see that ultimately they've been able to evidence that 2% target range for a long period of time and you can see that really big spike that's also occurred when it comes to this latest phase of inflation that's rolled through the system.
Speaker 1:Okay, let's move our attention now, because obviously that makes a lot of sense in terms of where is all that coming and what did the Fed reserve do? So we saw that in their January meeting the Fed reserve kept the Fed funds rate unchanged at a 23 year high of 5.25% to 5.5% for the fourth consecutive meeting, which was in line with expectations. Now, in terms of their view, they now made it very clear that they want to hold rates at the current level until inflation is moving sustainably towards that 2% target that Evan mentioned. So during the press conference it was really clear that Jerome Powell, the chair, said it would be appropriate to begin reducing rates sometime this year, but the central bank will continue to make decisions on a meeting by meeting basis and he doesn't think March is a time where he'll see a cut. So how did you read his press conference after the result?
Speaker 2:So it needed to happen. And what I mean by needed to happen. So you alluded to the fact that all of the data points we've just discussed are very much the front end thinking for whether US Federal Reserve is, but all of them are on the same page that we're not at a point yet where cuts are coming and markets we love to talk about this and particularly we're not talking about property here, we're talking about things like bonds and equities. They are sometimes a little bit irrational and they do tend to get ahead of themselves. We call it the elastic band, where they expand and contract a little bit too hard.
Speaker 2:So the expectation from the market that we were going to get and this is what they were saying, we were going to get a rate cut in March was well and truly too far ahead of where we were supposed to be.
Speaker 2:And he's not only poured cold water on the March meeting being the first rate cut in the new cycle, he's basically said it's not going to happen.
Speaker 2:So we saw a repricing in US markets from the expectation that rates would fall from their current ban, which is in that 5.5% to 5.75%, down to about 4.75 to 5% by the end of the year. The timing of that has changed. The speed and the drop that it's going to be is roughly the same, but what the market is now saying instead of it being March it's going to be June, and that came out of what he talked about. So again, we do need inflation to be probably at 2% in the US to really be at a level that they're comfortable, or at least really falling towards that 2% at a probably faster speed than we're currently doing. They also want to see that employment, which we'll talk about in a sec is going slightly higher because wages in the US are quite strong. Still, the employment market's quite tight, so there's still little things that are adding upward pressure in inflation. That's just telling them that we're going to cut rates this year, just not yet.
Speaker 1:Yeah, I think it's a story of most economies when they're looking at their cutting, and that is really about the employment story, because we know that there's a natural lag that occurs. So let's jump into the unemployment data and see what we learned over these past couple of months, and even just as early as last week. We got the non-farm payroll increased by 353,000 jobs in January. So the Labor Department Bureau of Labor Statistics said almost double 180,000. That was predicted by analysts. So the unemployment in the US remained at steady at 3.7% in January 2024. And that's unchanged from the previous month and below market's consensus of an increase to 3.8% Now.
Speaker 1:The activity rate was also flat at 62.5% last month and in Australia we call that the participation rate, so for context and it remains at the lowest level since February of 2023,. The number of unemployed individuals decreased by 144,000 to a reading of 6.212 million, whilst the count of unemployed individuals dropped by 31,000 to a reading of 161.15 million people. So that's people employed, I should say, not unemployed. So how did you take that read in terms of? I think Jerome Powell must have known this data when he was talking about basically not going too early on rates.
Speaker 2:Yeah, and he's also pointed out very clearly that it was probably a slight aberration in terms of seeing that 350K jobs added. That's well and truly above what they have been averaging over the last three rolling month average and the last six mulling run average. So they do try and again, like with everything, try and get it back to what they referred to as core, get it back to a more consistent, seasonally adjusted level. So they have been seeing the average monthly employment gain of about 200,000 jobs in the US. So it is quite an aberration to see another 150 above the standard that we've been seeing since about August last year. Again, it shows you just how strong even with the slowdown in the GDP figures in the US is being.
Speaker 2:What we know from this is that there is still a drive to employment.
Speaker 2:We also know in the US that what we refer to is under employment, and I'll also talk about this in a minute with Australia.
Speaker 2:Underemployment is those that have a job but are actually looking for more hours of work, and that not only is they got a level of 3.7% on their unemployment, their under employment is about 6.97%, which is the lowest it's been since the 80s.
Speaker 2:So that's that tight market we talked to.
Speaker 2:That's about this and the reason that matters for the US and for everybody is that if you feel secure in your job which is what the labor data is showing your ability to continue to, even in the face of cost of living pressures, still believe you can spend a bit more than you probably usually did, still exists, and you're seeing that in the data and you're seeing that in the inflation figures that, as we talked about before, that they have moderated to 3.3, 3.5%, but it's just starting to get this little up and down jagged bit where it's just not falling through 3%.
Speaker 2:The labor data confirms that that again in the US they've got a tight labor market. Unemployment is low. They're still adding really strong amounts of new jobs into the market. We're not feeling like we have to find more hours. Put that all together and you can understand why the Fed knows it's got to take its foot off the break sometime this year, just not yet Because again, there are still signs that things are coming from the COVID years still a little bit too strong for where they want them to be.
Speaker 1:You look at it and I think that's a really nice segue into the reverse correlation that happens in consumer confidence and sentiment. So if you think about that, the consumer in the US is saying inflation is starting to ease, and I'm seeing that at the petrol bowser, as they call it over there, and I'm also potentially seeing that in job opportunities. So we did see through the University of Michigan's consumer sentiment for the US soared to a reading of 78.8 in January and that's the highest since July of 2021. Now, compared to a reading of 69.7 in December and the forecast of a preliminary reading of 70%, that was a big jump. Now, at the back of that I mean, this is what we're talking about that's on the back of inflation turning the corner and also the strengthening of income expectations as well we saw a nice confidence spike in terms of the US consumer.
Speaker 1:Meanwhile, the gauge measuring consumer expectations also surge 75.9 from a reading of 67.4. And the measure assessing current economic conditions rose to 83.3 from 73.3. So, talking January and December together we talked about those consumer sentiment climbed a cumulative 29% and that's the largest two month increase since 1999, as that recession eventually ended back then. And for the second straight month, all five indexes components rose with a 27% surge in the short run outlook for business conditions and a 14% gain in current personal finance. If you're talking about a sentiment shift at the start of a new year and effectively a reset, we're seeing it here in the sentiment data and I think that's you know. Unemployment remains, employment remains strong, sentiment high and the consumers they're out there spending. That does put a little bit of pressure on sticky inflation you were talking to earlier.
Speaker 2:Yeah, and there's another point to it why consumer confidence surveys for me and I know for you as well, ben so important. Their future intentions? Yes, these are forward looking ideas. And because the consumer has been asked questions like where does your family finance look in the next 12 months? Where do they look in the next five years? What does your previous 12 months look like? And if you compare that, what does it feel like to now?
Speaker 2:So when you hear those questions go into the surveys, you can start to understand why they have been this jump, because you and I and all those commentators around there and those in the economic world, we've been talking about 2024 being different to 2023. We're talking about interest rate cuts coming in. We're talking about the pressure on the cost of living coming out. If you're knowing that that's going to happen and you get those questions, what does the next 12 months look for you? Well, actually, they probably look better than they were in the 12 months that have just been through, because I know that the pressure on my household budget is gonna change. That's what I've been told and that's why I'm not surprised to see any of this. I mean, you're talking about, as you said, that 20 plus percent jump over the last two months compared to what happened in midway through 2023. If you go back also to have a look at this same data when COVID lockdown's finished, it's actually as strong as that. So it shows that again that we had this expectation that 2024 will be different. And that's again getting back to our discussion about the Fed and what the Fed has just said to us. They are a little bit aware that if you're sort of and the RBA here had this idea your inflation psychology that's the term they loved using starts to change because you think you're gonna have more disposable income this year that can actually keep inflation higher. That can lead to that stickiness that they use their terms for, and then the issue that comes with it. So this is why this is a great thing to see.
Speaker 2:This chart that we're talking about right now and those numbers at 78.8% on the consumer confidence from Michigan is great, but it does always have a slight double-edged sword and I wanna say it's a very slight one, because I'd rather have positive outlooks than negative, but it does mean that maybe we just sort of start to spend a little bit more than we're ready to, and so that's the thing that's going on in the US.
Speaker 2:We'll talk about this again with Europe and China and all that other stuff as well, and here in Australia that's what we need to be aware of, and the more stronger central banks out there may use that as an excuse, and let's hope they don't. But just keep this in mind because consumer confidence as I said, forward-looking indicator knows what we want to do, knows that we're feeling a little bit more positive. When you feel a bit more positive, you start to relax the purse strings, you start to relax your budgeting. You can lead to increases across the whole economy because if one person does it, but as a group we all do it, that puts that in there.
Speaker 1:Look, I think it's fair to say, in terms of looking at the data, that the US does feel like it's potentially three to six months ahead of where Australia is, and we've got to remember they had a higher tightening cycle, didn't they? And that's what we saw, surprisingly, in the sort of retail sales results. So I want to talk to them next, in terms of, we saw that the US retail sales soared by 0.6 month over month in December 23, following a 0.3% rise in November and that was a beating forecast estimates of a 0.4% rise Now. This is the biggest increase in three months led by sales of autos 1.2%, excluding autos. Retail sales increased by 0.4% of 1%. Now, sales also went up on non-store retailers 1.5%. Clothing 1.5%. General merchandise stores 1.3%. So we're starting to see the consumer spending over there.
Speaker 1:Miscellaneous store retailers 0.7% of 1%. Building materials and garden equipment 0.4% of 1%, sporting goods, hobbies, musical instruments, books 0.3%, and food and beverages 0.2%. Now, on the other side of the coin, we saw sales decline in health and personal care negative 1.4%. Gasoline stations negative 1.3%. Furniture negative 1%. Electronic suppliers negative 0.3% 1%. And food services and drinking places were unchanged Now, finally, excluding auto gas, building materials and food services the so-called core retail sales rose a strong 0.81% and that's the most since July of 2023. So that just gives you an idea in terms of those retail sales. So, considering the full 2023 result, unadjusted retail sales increased by a very strong 3.2%. Considering the consumer in the US, I heard stats years ago talking about for every dollar spent in the world. The US consumer makes up about 20% of that dollar. So that just gives you some context in terms of how important the US consumer is to the global economy.
Speaker 2:Yeah, and the other part I want to sort of highlight. There is the seasonally adjusted part of that. Don't forget, we've just gone through the festive season and the US has had Cyber Monday, Black Friday, coming in on November as well, so it does feed into what we've been talking all the way through. So the GDP figures, the inflation figures, retail sales are showing decent numbers, but they're back into pre-COVID levels and more consistent levels. So, again, we're not getting these massive fluctuations that we saw in 2022 and 2023, all the way through to about June, where we were getting all over different figures, the speed and power of the change in retail sales. So we're getting back to a more core level. It also showed that actually it was one of the best festive seasons the US has seen. So in terms of the total physical amount of money spent, it was up there.
Speaker 2:I want to caveat that, Don't forget. Us growth in population is rocketing along. It should be more expensive, considering that we've had inflation and therefore the price of goods is higher. So take that as you will, because some people try and use that as a negative. It's not a negative. It should be growing every year because inflation, because of population growth. So you need to look at it as Ben's just described it, from growth per quarter, per month and per year.
Speaker 2:And again, what makes me happy and what makes me know that the Fed has done its job the US is going to land softly is that we are returning to the North. We are trying to get away from the three years or three and a half years of COVID back to something that actually looks like inverted commas normality. I know that's a horrible I hate that word, Ben, but it's the right thing to use in terms of where they want it to be. And the reason you take that as a positive is that if we get back to a normality that we had been consistent with before the pandemic, then monetary policy is working. Monetary policy can then be eased and we can get back to doing what the world does really well, which is making sure that we continue to grow. We're human beings. We always want to improve ourselves, and that's where we're at, and that's retail sales is a great gauge of that.
Speaker 1:All right, so let's summarize the key takeaways and then we'll move on to the China data. So the feds certainly making sure that inflation is tamed, so they are worried about that consumer spending. So, point number one, the consumer is far more confident, so that again is potentially good for the economic outlook. But obviously the other side of the wedge of that again is that inflation story. Employment's surprised on the upside there. So we've got to keep an eye on that.
Speaker 1:And there's a couple of outliers here which we'll talk to in next month's update, and that is around the Middle East tensions and an escalation of activity going on there. And of course we can't also go by without understanding that's the US election year, so there's a lot of noise and uncertainty around that and we obviously need to address that because economists and economies and investment we don't like uncertainty. So we'll need to be talking to those two stories as they start to evolve later in the year. All right, let's talk about China and we'll get through China pretty quickly, because the reality is that the China story is one of a challenging story for them.
Speaker 1:They've had historically for a couple of decades they're really consistent economic growth and so looking at their GDP numbers, we saw the economy grew by a seasonally adjusted 1% in quarter four of 2023, matching market expectations, but moderating from an upwardly revised 1.5% increase in Q3. Now it was the sixth consecutive period of quarterly expansion, and weakness in the property sector continue to drag on the broader economic recovery and we'll talk a little about Evergrande soon and at this time, the government is reluctant to deliver major stimulus packages due to attempts of controlling mounting government debt. So story isn't great there, Evan, is it no?
Speaker 2:and that's the core conclusion out of it at the moment is that Beijing is trying to weigh up the policies it's done for the last 40 years versus the new economic reality that it's now facing. It's a mature economy I mean, it's trying to tell you it's not but it's a maturing economy. Its middle class is now absolutely the core to it. Domestically it is moving towards all of those changes that you see in a maturing economy, and so it can't keep expanding at 6%. It just can't, although back in the day it told you that it had to expand at 6% per annum to maintain full employment and all those kinds of things. It just can't. And then you do. When you get through that expansion phase into that sort of mature phase, you do get a story like Evergrande and a few others, and we'll come to that in a minute.
Speaker 2:So for me, I actually think GDP moderating the way it is, that's the first time the Beijing's actually said that their GDP expectation for a year is gonna have a four year on year in front of it.
Speaker 2:Now it is still high. It's 4.8 to 4.9% but you would never have forecasted China saying that 4% growth or high 4% growth is something that they're aiming for Because, again, the charts that we've shown you and what you can hear in terms of what Ben is saying is that the moderation is happening faster than they were expecting. It's again the mode that they've got around that issue of stimulating building infrastructure and infrastructure projects that the road to nowhere is, the story we all know about is starting to actually move away. They're now actually consolidating themselves, moving into domestic GDP focus, moving into consumption GDP focus, and that will be China's story going forward. It's gonna be interesting for us here as well, because that means that they are gonna shift away from our exports and we're not gonna have that inverted commas, white night that China was with regards to grabbing our rare earth out of the ground, whether that be copper, whether that be iron or et cetera. They'll still be our major trading partner, but it just will be in a different way.
Speaker 1:Let's look at the inflation story there and it's a bit of a non-story, right? I mean we talk about. Look at the last three quarters negative point two, negative point five and obviously we saw prices fell by point three year on year in December, marking that third straight month of declines, which is the longest rate of drop since October of 2009. So their story is not so much inflation but it's disinflationary, or that's the risk here. Now, when we obviously need to look at this from an Australian lens as well, this is obviously meaning that exports for them, which are imports for us, there's a lot more competition for that. So we would expect that we'll be importing a lower cost of goods in those particular markets, so especially clothing, where there's competition in those particular areas, and obviously the dollar for us has gone up a fair bit since November and December of last year. So some of that importing costs we also should be importing lower or disinflationary results in that sort of clothing manufacturing area of what we bring in from China. Any thoughts on their inflation story?
Speaker 2:No, because we need to keep moving very quickly. The only thing to say is that this is actually a fallout from COVID as well. So you talked about that competition. The increase of Vietnam, the increase of India and the increase of other parts of Southeast Asia on their core exports is showing up in this data. They're having to compete. They haven't had to compete before. They're having to actually cut price to get it in here, and that is what is also interesting, because it's not just exports they're having to do it. It's on the import side as well. All of a sudden, their domestic productivity versus Vietnam, versus in India, is not as strong as it was, because they're actually higher labor costs and they're higher costs in general. So that is the other shape that's gonna be going with China. Watch that story. It's a decade story, but it's coming already and Australia is already starting to prepare for it that we are flexing our view to other parts of that region as they become more competitive than what we've been used to, which is China.
Speaker 1:All right. So let me just summarize their interest rates. They again kept everything pretty much as normal. So the one year prime rate, the LPR, which is the medium term lending facility used by corporates and household loans, was kept unchanged at a record lower 3.45% for the fifth consecutive month. And then the five year rate, which is a reference really to the mortgage rates, was held at 4.2% for the seventh straight month. So really nothing to see there In terms of their employment story or the unemployment story. We saw in the data that the surveyed urban unemployment rate inched up to 5.1% in December, and that's from a reading of 5% sorry previously for the last three months. So the unemployment rate for the population aged between 16 to 24 fell to 14.9%, using a new model, compared to the record peak of 21.3% in June, after the release of the data had been suspended since July. So whether we can trust those numbers or not is a big question. I think Evan's sort of giving us the clue there.
Speaker 2:No, and I think it needs to be pointed out very clearly that at the moment, the unemployment data and where it sits needs to be not just taken with a pinch of salt. It's a big handful, throw over your shoulder sort of stuff. I know that's a bit facetious, but the reason it can't be trusted is that, again, there is that blurring of economics into politics, and you have to be open to that. You have to be open to that's how China works and we know that. So it means, therefore, they're also starting to see more young people a look outside of China, so moving to places like Australia, but also taking up second and third university degrees to get around it. So I take their employment data with, as I said, a handful of salt at the moment, rather than a pinch.
Speaker 1:No worries. Well, let's now talk about, then, the consumer sentiment on the back of that. I mean, if China is going to have a prosperity medium to longer term, it has to happen internally. It can't necessarily be on the back of their export story. So what do we see in terms of the consumer sentiment? Consumer confidence in China decreased to a reading of 87 points in November. So this is still pretty lagged data, but that's down from almost 88 points in October. So we're seeing the consumers not buying the Chinese economic story at the moment. So, and consumer confidence in China averaged 110.1 points from 1991 until 19, sorry to 2023, reaching an all time high of 127 points in February of 2021. And then a record low of 85 points in November of 2022. So the consumer over there is really struggling to find any sort of confidence in the story, and I think that also plays out.
Speaker 1:If we move quickly into the retail sales. We can see that the month on month retail sales in China increased only by 0.42 of 1% in December over the previous month. Retail sales month on month in China averaged 0.75% from 2011 until 2023, reaching an all time high of 4.98% in May of 2020 and a record low of negative 10.77% in January of 2020, just as COVID was starting to rise up. So that sort of summarizes that. I don't probably need a comment on that. What we wanted to talk about just quickly is the ever grand story, and then we can wrap up China and move on to the Eurozone.
Speaker 2:So with ever grand, this has been dragging on for about two and a half years and if you didn't see, what happened at the last week of January was that the High Court of Hong Kong has had enough, and it is that term because they had managed to get three major adjournments over the last sort of year and a half. The fourth one they were applying to, they rejected it and the High Court said enough is enough. You are having to liquidate. And why it's so fascinating for the ever grand story is that we'd seen, since this really came about, ever grand at one point had debt that was largest in the world. They had about 550 billion US dollars of net debt across their business and they've been working that down, which has been good, but they're now at a point where they can't find credit. They just cannot find credit is they cannot actually get people to underwrite their story. And Hong Kong has said you now need to liquidate your overall holdings completely. Why I highlighted it is that mainland China was always going to be the question does Beijing listen to this? And so far, the signs out they are. That's what's so fascinating about this is that they are going to abide by the ruling out of Hong Kong. They are going to liquidate ever grand. That therefore spreads out into the overall story around. You know, the construction industry in China, the property construction industry in China Now probably is had its panacea. We're at the peak. We're now at the back end Again. As I said before, when you have a growing economy, like China has been over the last four decades, it does get to a point of actually maturing and we're there and ever grounded.
Speaker 2:My view is that story, it doesn't mean that the China story burst. That's not what I'm saying at all. It just shows that those that have been overly indebted or overly orientated to one sort of trajectory which is probably the way to say it to is probably now coming to an end and ever grand will be. In my view, it's not like a Leamons, that's not a great comparison. It is like what you've seen in the past where you get those mature stories Poseidon's, another one as well. They are all now coming to a China story as well. So 2024, ever grand won't be the end of it. I think it will be signs of that happening. It just means again, as Ben's highlighted, retail sales will be under pressure because of it. Unemployment will be slightly higher. Because of it, the Chinese story and the Chinese growth story will not be the same as what it has been over the last four decades, because it's mature.
Speaker 1:Yeah, look, and we know off the back of the property boom that they've had over the last two decades, that is also a positive for the wealth effect and everything that goes on there. So China's basically got their back against the wall and the government needs to continue to sort of monitor that in terms of how they take that forward. Speaking of economies that are obviously in challenge, and picking up from my last update in December of last year, the Eurozone story is also one that's challenged, and so that's what we're going to see, also in the data. So we look at their GDP data. We saw the Euro area economy unexpectedly stall in the last three months of last year, following a 0.1% contraction in the previous period as compared to a forecast of a 0.1%, for preliminary estimates have shown.
Speaker 1:So what's that mean is that the common block avoided a recession in the end of 2023, but only just amid a better than expected growth from Spain 0.6 of 1%, italy 0.2 of 1%, while the French economy still, and it's Germany which is the largest contraction, which was 0.3 of 1%. Now, in terms of positive contributions to GDP, also come from some of their other smaller economies, which was Portugal 0.8 of 1%, belgium 0.4 and Latvia 0.4, and also Austria 0.2. Now, on the other hand, we did see contractions in Ireland 0.7 of negative, 0.7 of 1% and Lithuania 0.3 of 1%. Now, considering the full 2023 data, the Eurozone GDP expanded by a poultry 0.5 of 1%. What do you make of that, evan so?
Speaker 2:this, unfortunately, is going to slide into politics. So we saw the Eurozone had this renaissance in their post COVID era, where you just saw this absolute explosion as they came out of lockdowns. European exports when we say exports, tourism is a great example. Don't forget, tourism is an export, so the attraction into Europe was incredible. If you look at those sort of tourist hotspots, france, italy, spain, portugal were really driving that on that, being one of the biggest drivers. Don't also forget, germany is the largest exporter out of Europe, france is second and that means luxury goods were also bang up across the globe. So if you have a look at what was going on in the quarters of second quarter of July 2021, third and fourth quarters, that explains that. And then there was this suggestion that Europe was back. Europe was going to really be this place. Then Ukraine happened, so we need to put that out there. Ukraine has been a massive drag. Clearly, tourism fell immediately, particularly in those nations I mentioned before. Obviously, there's a risk around your own personal safety, blah, blah, blah. Then also, they came up against supply constraints, and so 2022, which should have been a better period than it was started to moderate Last year it's back to the big, bad old scenario for Europe.
Speaker 2:They are bickering between each other. They've got issues around finance, with what's going on in Ukraine. Also, some of the what we refer to as the periphery your Latvias of this world, your islands, are also dragging on the overall GDP economy of the whole unit. Plus, now we have the Middle East conflict as well. So, as I said, don't forget Germany, france, massive exporters and massive global exporters. They are having issues around getting it through what's going on in the Mediterranean, through the Middle East and through what goes on around the Sinai and through the Suez Canal. Don't ever underestimate how a linked Italy, germany and France are to that part of the world. That's why they have such a vested interest in getting it done. So their exports into China that we just talked about has been significantly interrupted. Logistically has to go around what goes up the Cape of Good Horn and the bottom of Africa, increased costs. All of that can explain this really flatline GDP figure that we've seen in 2023 and it's not going to change anytime soon.
Speaker 2:In my view. You can see it already. Germany's talking about coming to batten down the hatches. Demand for their overall products car manufacturing, luxury goods, high in engineering isn't seeing the kind of renaissance they were hoping 2024 would bring, with rate cuts. So this does not surprise me at all that the last year they've just managed to stay out of contraction. Do they revoid a recession in 2024? Probably because they have interest rates at 4.5% and Christine Lagarde, the ECB head, she's very, very aware of this and is ready to push the button, probably first, in my view, over all the other central banks. So they will avoid it because they'll stimulate. But the story that was 2021 and this New World Europe story, my view, unfortunately, is going back to pre-COVID, where it's just going to bumble along really anemically.
Speaker 1:Yeah, I think it's a good summation of what's happening there. So we look at the inflation rate in the Euro area went down to a reading of 2.8% year on year in January and that's down from 2.9%. So it's hitting in the right direction and it's in line with market expectations. Now, meanwhile, the core rate of inflation, which obviously excludes those volatile items such as food and energy prices, continued to ease to a reading of 3.3% and that was slightly above forecast of a 3.2%, but still reaching its lowest level since March of 2022. So inflation is heading in the right direction.
Speaker 1:Then we look at what's happening in terms of rates. We did see to your point that the European Central Bank kept interest rates unchanged as a record higher levels in their first meeting in 2024 and pledged to maintain them at significantly restrictive levels for as long as necessary to bring inflation back to its 2% target. So they have the same target as what we see in the US, and that is despite those concerns that Evan was talking about, which is a looming recession and, obviously, the gradual easing of those inflation repressions. So, in terms of the main rate, it remained at a 22-year-old high of 4.5% for that third consecutive time, whilst the deposit facility rate held steady at an all-time record of 4%.
Speaker 1:So there is a lot of challenging times story over there, and we can see that also in terms of the unemployment rate. There is some little good news in that, in terms of still sitting at a reading of 6.4% in December, and that was aligned with most market forecast expectations and is still remaining at a historical low. And the number of unemployed individuals declined by 17,000 from the prior month to a reading of 10.909 million unemployed there across the euro area. Youth unemployment, which I always like to look at reflects those under 25 seeking employment, edged down to a reading of 14.4% from 14.5% in November. Across the major euro areas economy, spain reported the highest jobless rate, of 11.7%, followed by France at 7.3%, italy at 7.2%. In contrast, germany, which has still got those big headwinds because obviously they export a lot of things, still had a very, very healthy unemployment rate, sitting at 3.1%.
Speaker 1:Now what did that mean for the consumer sentiment and so forth? Well, it continues to struggle. So we saw the consumer confidence indicator in the euro area rose by 0.9 points from the previous month of a negative 16.9 in November, and that's the highest in three months and above market expectations of a reading of negative 17.6. The preliminary estimates had shown so consumers are optimistic that interest rates will not go up further and might actually start coming down as inflation continues to slow down Across the euro union as a whole. Consumer sentiment increased by 1.1 points to a reading of negative 17.5, but the course still in negative. Of course there's still a negative sentiment area on the ledger, so not a good news story there in terms of their retail sales. We didn't have any data for December, so no use in really looking at November data. And then the other big news coming out of the euro zone really was the funding story into Ukraine, and I think that is worth taking a moment just to highlight Evan.
Speaker 2:Yeah, and we spoke about it before, we sort of very quickly glazed over.
Speaker 2:The US presidential election is coming this year and that's the reason I highlight that there is a chance that the US could start withdrawing funding out of the Ukraine war.
Speaker 2:So, if you haven't seen it, over the last sort of two to three weeks the euro zone has been negotiating inside itself and strong, armed, hungry, actually, about supporting the European unions push to make Ukraine part of it, and that meant they are now underwriting the Ukraine economy to the tune and this is the figure, listen to it a hundred billion euros in terms of what they're doing across the zone, showing very clearly that if the political fallout across the Atlantic could happen, europe is ready to step in and they're finally starting to realize that they need to step in, that they are hand in hand with what happens in Kiev. So that was the story to be aware of and it will be a story not just for this year but going forward what happens on that Eastern block, what happens with regards to Europe's sort of standing in the space of not just the economics one, but what that means broadly for how they survive and how they deal with the changes that are happening from a political perspective into the economic one.
Speaker 1:Yeah. So I mean, I think, if we take the key takeaways there is, you know, the first six months of this year are going to be a real you know arm wrestle for the euro zone in terms of trying to get their economy in the right order. Those uncertainties will continue to remain. The tensions with Russia and obviously Ukraine, and then also what you're referring to as the Red Sea impact as well. Yeah, so it's not a rosy story for Europe at this particular stage, so we'll keep an eye on that throughout the course of the year. All right, that sort of wraps up our global look.
Speaker 1:Let's now pivot and start talking to the Australian data. We've obviously got a lot to talk about here Now because, effectively, the Australians have long summer holidays, but we also have the 65 day protocols where GDP numbers. We're not going to get them until the early part of March, so we can't report on GDP results for December. So let's move straight into inflation before we announce what the RBA did with rates today. So, in terms of the inflation story, we saw Australia's inflation rate was at a reading of 4.1% year on year in quarter four and that's down from a 5.4% in Q3. And it was a really good result in terms of because market expectations had it at sort of 4.3%. Now, this was the lowest figure since Q4 of 2021, as goods inflation eased further for the fifth consecutive quarter. So a reading of 3.8% versus 4.9% in Q3, and services inflation this is the one we've been talking about. At the end of last year, everyone that service inflation is slowing and we saw that slow for the second straight quarter, from 4.6% sorry reading of 4.6 down from 5.8%. So that is that's the big ticket item that we wanna see in terms of that domestic demand led services inflation.
Speaker 1:So inflation moderated for food, 4.5% versus 4.8, housing 6.1 versus 7,. Health 5.1 versus 5.4, transport 3.7 versus 5.6, recreation and culture, 0.5 versus 5.6, a big drop there. Education, 4.7 from 4.8. And that insurance and financial services still growing at a huge clip here. So inflation is still running at 8.1%, but compared to Q3, that's down from 8.6%. And simultaneously, costs fell in clothing 1.1 versus or negative 1.1 versus 0.9. So that's disinflation. And furniture and household services were also seeing disinflation, with a negative 0.2 of 1% versus 2.5 in Q3. However, prices quickened in areas of alcohol and tobacco, so 6.6% versus 4.9%. Furniture outright in terms of 6.9% versus 4.9. And communications also were seeing inflation increase at 2.2% versus a reading of 1.3%.
Speaker 1:Now let's round the inflation data out. With the core trimmed, mean CPI data, we saw a rise of 4.2% year on year. Now there is the softest rise since Q1 of 2022, after a 5.2% gain in Q3. But remained outside the central bank's target range, and this is where core needs to be to 2% to 3%. Over to you, evan. There's plenty to talk about here.
Speaker 2:There is a boatload to talk about here. So first and foremost, I want to go back you highlighted and if you are watching this on the YouTube channel, I've got a table on here to show you what Ben said about what happened in the September quarter last year to what happened in the final quarter of the calendar year that 5.4%. Be aware it was actually downgraded when we got their last numbers, so it went from 5.4% to a final figure of 4.8%. I'm going to come back to that. I want you to remember that number because it had a very, very influential sort of movement on the RBA for November and the Melbourne Cup number. But with the tobacco number that Ben highlighted, don't worry about that. Every half they tend to move the tobacco number. There is a tax policy it's actually a health policy out there that the tobacco ex-ice keeps going up. They are trying to stop you from smoking, so don't be surprised to see tobacco prices increase. And it only makes up 2.7% of the total waiting. So I'm not too concerned about that balloon.
Speaker 2:The other one is what's going on insurance? We, unfortunately, we know about the horrible events that are going on, particularly on the Eastern States with flooding, but it's not just for us. It's across the globe that natural disasters are raking havoc on insurance premiums, because reinsurance across the globe is ballooning all over the hurricanes you're seeing in places like Florida and into the Gulf of Mexico, the fires that we've been seeing in parts of Europe and also in the US. That affects us because it means that the reinsurance costs that companies get get handed through to us. So that is something that I don't think will change. With regards to the insurance sorry, the inflation mix that you are going to see insurance be a bit of a problem for you. And the other thing I'd always say on that is that do not and this is a bit facetious, but I'm going to say it never get in the way of an insurance company in a bag of money, and they are very clear on that. So what I would say and again, not advice but always review your insurances across the board as often as possible and I know Ben and I know the Empower Wealth guys will help you with that but always look at your insurances because there are ways to get ahead of that inflation figure that we're all having to absorb and making sure you take away from it. So there what I would look, though, housing is moving in the right direction. It is moderating, although it's still high.
Speaker 2:I'd also point out very clearly that things like education and health are getting back to the norm, and I know that's a weird thing to say. Health and education tend to grow at a higher rate than the overall inflation, and I know you know that if you're a family out there, you'd be feeling that changes that's going on, particularly in the education system, the costs there's also other policies that go into it but overall it's getting back to a level that we saw in the pre-COVID world that you know. Health was moving at about 400-bit percent. Education moves normally between three and a half to 4%. So these are positive things, because the services that Ben was alluding to you know, when we heard the governor talk about getting a haircut or going to the dentist, or it was just picked up by the wrong things.
Speaker 2:It's not what we're talking about. It's more about those businesses have been absorbing the increases in goods, have been absorbing the increases in energy, had been absorbing the increases in all those things 2023, the dam burst and they just couldn't keep doing it and they finally started to handing that cost through to you and me when we went and saw them. So that was the concern and that was where services are always the thing to watch, because they're the last ones to move in price. They are, you can always see it. They're the last ones to actually start not only handing it through so they peak later, but they were also the first, the last ones, to start moderating their price. But it's happening.
Speaker 2:And so, as Ben said, the trim mean figure the reason we talk about trim mean, it's the RBA's preferred measure. It's realistically another way of saying core. It strips out energy, it strips out food and all those other little bits and pieces. At 4.15, I want to go to two decimal places because it's been reported as 4.2. It's actually a little bit lower than that.
Speaker 2:The chart that matters is this one for those watching. The reason it matters is that trim mean inflation is ahead of the RBA's expectations, both from what they gave us in November 2022 and November 2023. And that in itself was fascinating, because they actually thought it was gonna be about 4.5%, not 4.15%. So why that's exciting, why we have probably also talked about our consumption being slightly better, that we're slightly more optimistic, is because we know rate cuts are coming and getting back to what we talked about before Rate cuts. Not only are they coming, there's probably gonna be more than what's been forecasted as well, because we're heading back to the target band of 2% to 3% at a faster, steeper rate than what the RBA expected.
Speaker 1:Our beautiful summary. And that obviously then leads to what did the board and the governor-bullet do with today's RBA? Well, two-day meeting, remember? They basically met both on Monday and also today. What did they do? They kept the cash rate on hold, but certainly the messaging has shifted. So we probably have seen the last of any rate rises and, to your point, evan, you believe that there's probably one or two extra that they put in there for good measure and the benefit of hindsight. Back to that number. You were saying the adjusted number in September. Do you wanna talk to that quickly? Yeah, and so that's exactly right.
Speaker 2:So we know they've put on hold today and that's fine. And again, michelle Bullock is probably leaving her powder dry, right, she's certainly a little bit and has always been more hawkish, as we call it, than her predecessor in Phillip Lowe, but I've always believed that they probably have gone. I actually thought they'd gone too far originally. I thought they could hold at 3.85%. The inflation rate was showing signs of easing, that. We knew the pressure that was coming on the household. The so-called mortgage cliff which thankfully never adventuated and it was never going to, but that's sucking out of the savings that we'd had during COVID was happening pretty rapidly and we were showing signs that it was happening fast enough. So I actually thought they went an extra two times.
Speaker 2:But getting back to your point about November, they got spooked because the quarter figure for September was 5.4% at the time. So I understand they went on the data they had at the time, which now looks even more sort of overly sort of reactionary to the inflation figure, because at 4.8 from the previous quarter of June, which was sitting at 5.6, is significantly different than going from 5.6 to 5.4. So that year on your figure, that Melbourne Cup looks like the horse bolted. Excuse the pun in the fact that they have panicked. And now they don't just have a tightening bias, they have a really strong reactionary break in the economy and you know that's happening.
Speaker 2:You can feel it cost of living, you know about that, you know about your mortgage and where that's going. You know that inflation's coming back, which is good. So my view is that they probably didn't need to get caught up with a lot of the jargon that was coming from someone like the IMF or the World Bank, other pressures that were saying we need to have higher rates, the inflation rate in Australia is too high, you're not doing enough. The slow and steady approach they had taken with that is actually working and I think they got talked into the extra one in November and I actually think they got talked into an extra one in June as well.
Speaker 1:So an interesting point. I mean, obviously that's the benefit of hindsight and at the end of the day they had the data and that, so we can obviously always make those comments. I think you know. So the cash rate remains at 4.35%. What are your, what's your view in terms of when we see the first rate cut coming?
Speaker 2:So I still think we're probably gonna have to, unfortunately, wait to the second half of the year. I think the first one, if we're really lucky, will be July, but I actually think it will more likely be what is now the end of August, and then possibly the Melbourne Cup being the second one. That is how I view it For the point of view that they will gain. They've already said it today data dependent, data dependent. Just get used to hearing that term data dependent, data dependent. So they will have had half the calendar year of data to actually allude to them saying okay, inflation still moving quite quickly. It's likely that by June the inflation rate on the year, on year trim mean, will be into the three handle.
Speaker 2:Quite clearly, it's probable also that at the moment, I actually think the unemployment reads are slightly behind where they are. I mean, there's anecdotal evidence that at the end of last year there was a lot of redundancies that came through, there was a lot of unemployment ticking through and you saw that in some of the data and we'll come to that in a sec. But I think all of that is why, come June, all of that data will be out, all of that understanding will be out. All of what happened at the end of last year and the start of this year will be in their hands with them.
Speaker 2:No other option really than to say right, we need to start taking our foot off the break Because, do remember, two rate cuts takes us back to 3.85%. That is still, in the RBA's book, restrictive. They need to get back to 2.5% to be at what they call their neutral rate. So it's still a long, long way away from being accommodative and therefore stimulating the economy. It's just taking a bit of pressure off the household and off the business sector than is currently there.
Speaker 1:Yeah, I think your point to the fixed rate cliff is that it will be material if households continually can't cover through their savings right. So as those savings are depleted, the longer that the rate stays higher, the greater the risk of having increased defaults in the marketplace and greater risk to the broader economy. So I think that's gonna play to their mindset and their decision making, because we know that really, that these types of changes have lag effects into the quarters and if not even half years in terms of before we start seeing them play out in terms of actual economic performance. So I think that's an important message. Let's talk to the unemployment rate now.
Speaker 1:We saw that Australia seasonally adjusted Unemployment rate stood at 3.9% in December. That's unchanged from the November reading and that's an 18 month high and matched the forecast estimates. The number of unemployed individuals edged down by 0.8,000 to a reading of 573.6,000, with those seeking full-time employment jobs falling by 7.3,000 to a reading of 367.7,000, whilst rising for part-time by 6,500 to a reading of 196.7 thousand. So meanwhile, employment unexpectedly declined by 65,100 jobs and 14,200, sorry, 14.2 million, missing market expectations of a 17.6 thousand gain and reversing from the 72.6 thousand rise in November. So full-time employment dropped by 106.6 thousand to 9.75 million, while part-time employment increased by 41.4 thousand to 4.41 million.
Speaker 1:Now the participation rate, which I know you're gonna talk about in a moment, decreased to 66.8, from a record high of 67.3 in November and below forecast of 67.1. Meanwhile, the under-employment rate was unchanged at 6.5%, and that's still 2 points lower than before the pandemic. Additionally, monthly hours in all jobs fell by 10 million, or 0.5 of 1%, to 1,926 million in terms of monthly hours. So lots of moving parts there. How do you read that, evan?
Speaker 2:Yeah, lots of moving parts. So, the way I read it, and again, if you're watching on the YouTube channel, there's a chart on screen that I've got here that shows unemployment that Ben obviously read out at 3.89%, close enough to 3.9, under-employment at 6.5%. Now, remember I said this before but I'll say it again under-employment is the measure of unemployed plus sorry, under-employment is those that are working but are looking for more hours. And then we've got under-utilization, and this is the one that I really wanna highlight. Under-utilization is the combined number of the unemployment rate and the under-employment rate. Now, the chart I've got here has that on the right-hand side. If you're listening to it, what I wanna point out, under-utilization is at 10.3%. You have to go all the way back to 1989 to see that same level. So it shows you that, even with all of the changes and even with the slowing in the employment market and the slide up tick that we're getting in the unemployment rate in October, November, December, that the market here is still booming. We have got an employment market that is incredibly tight and we keep hearing that.
Speaker 2:It also gets back to the point that, yes, cost of living is there. Yes, we know inflation's there. Yes, we know that you're eating into your savings, but your employment status you feel pretty secure, Like you actually genuinely feel relatively secure in your employment or, if you were to lose it, that you think your ability to find a new job is actually quite high, and that's what this is telling you. That's why, for me, the most impressive thing about Australia over the last five years, including 2018, to where we are now so through COVID, is our employment market and our employment possibilities have never been stronger in terms of where we sit. Well, that's why we're such a lucky country and this chart is telling me that because, also, the gap between unemployment and underemployment is narrowing to levels that we also haven't seen for almost 20 years in terms of where it's been. Yes, there's an ugly spike in COVID, because the ABS had no idea how to actually completely deal with what was going on. Nobody did so. If you actually smooth that out and you have a look at where that sort of gap is sitting, we are knowing that. We're also not having to go out and search for more hours, despite the fact, as Ben said for last month, it is moving up.
Speaker 2:Overall, the employment market in Australia is an absolute white knight and I think it should be championed to the end of the grade, because it also means, yes, you're eating into your savings, but you know that you're still making enough money to live through what you've got, pay your mortgage, pay your rent maybe a bit tighter than you hoped, but overall you're not in a scenario where you're super stressed and that you're actually finding yourselves in a point of panic because unemployment's starting to balloon out, the economy's starting to slow down. That hasn't happened and that's why there's pros and cons to that. But I would take the pro, which is that we are dealing with a scenario right now better than anybody could have forecasted, and that's true. Nobody's forecasted this. We are gonna have a soft landing fantastic and that the overall impact will be slowly mitigated out through 24, 25, and 26 of slowing economy, higher rates. Thankfully we're not gonna get the unemployment boom excuse the pun. There could actually be a you know, a negative as well.
Speaker 1:And I think what you're talking about there in terms of the benefits of what you get of a tight labor market, is wages growth increase, and that's a nice little segue into, obviously. Australia's seasonally adjusted wages price index advanced by 4% year on year in Q3 of last year, after a 3.6% gain in Q2, compared with market expectations of a 3.9% reading. Now. This was the highest reading since Q1 of 2009, as wages in the private sector grew 4.2%, the most since Q4 of 2008, whilst those in the public sector were the highest since Q2 of 2011, at a reading of 3.5%. In original terms, the main contribution to the growth were accommodation 5.5%.
Speaker 1:Healthcare and social assistance 4.9%. Arts and recreational services 4.6%. Manufacturing, 4.4%. Transport, postal and warehousing 4.4%. Retail trade 4.4%. Construction, 4.3%. Administrative and support services 4.3% and mining 4%, and electricity, gas, water and waste services 3.9%. So, yep, we've had inflation and wages haven't quite kept up with that. But as inflation goes down, we get to keep those wage gains and that means that our disposable income ultimately buys us more. So, broadly, it's a good news story there.
Speaker 2:Yes, it is, and although some people argue that there does have an inflationary effect, that our wages are growing at some of the fastest rates you alluded to for many, many decades, I would point out that, again, the overall improvement in the economy is actually more important. So it does mean that going forward it may give Michelle Bullock a little bit more room to say we're not cutting rates yet, but she knows she's gonna have to. Not only that, as Ben pointed out, if you compare wage growth to the inflation rate over the last three years, your real wages actually haven't grown. So you know that and that's something she has taken into consideration. So I think this is a good thing.
Speaker 2:We'll be interesting to watch what happens at the end of June, start of July, when we do start to see what the minimum wage will be increased to. Being aware it's increased 17% cumulatively in the last three years. It took eight years before that to get that kind of increase in terms of it. So, all things being equal, it would suggest that we're gonna have some sort it's probably between 910, maybe even as high as 940 dollars a week will be the minimum wage, going up from about 870 bucks now. So take that as you will. It is good. It means people's pay packets are better, their security is better. It will have a mild impact on inflation, but not a level that's gonna drive inflation back towards what we saw. You know, not, I'm not gonna use 2022, because that's not a fair figure but into the mid sort of four handles, five handles of 2023, it won't do that.
Speaker 1:So let's talk about what it means for the consumer and ultimately, from a consumer sentiment and confidence point of view, we've been in the doldrums, right. I mean, ultimately we're getting readings as poor as what we've seen in previous recessions and through, you know, sort of the global financial crisis. But we saw the Westpac Melbourne Institute consumer sentiment index for Australia fell by 1.3% to a reading of 81 in January from a reading of 82.1 in December. So it certainly remains in a pessimistic level for nearly two years as a surge in the cost of living and higher interest rates continue to dominate sentiment. So that's the product of cost of living, high inflation and obviously 13 rate rises. That's what it will do for us, so that's what we do understand. It's still, you know, based on the last inflation, good inflation read and potential expectations of a pause in interest rates or even potentially a cut. I suspect that that consumer sentiment story is going to improve over the next 12 months. But I want to move into retail sales as a consequence of that, and this is, you know, this is about that sort of wealth effect and how much disposable income that we've got available to, and we saw a shocking number in terms of the retail sales. So I'll get through that data and then I'll get you to make a general comment, evan, in terms of what's happening with the consumer in Australia.
Speaker 1:So we saw retail sales in Australia declined by 2.7% month over month in December. Now you know that's the worst than market forecast of a reading of 1%. So it was miles out. And that was after a downwardly revised 1.6% growth in the previous month of November. Now this is the steepest drop in retail since. So retail trailed since August of 2020 as consumers bought forward some of their December spending to November to take advantage of the Black Friday and the Cyber Monday sales, etc.
Speaker 1:Sales were down for most retail industries, namely household goods retailing was negative 5, 8.5% versus a positive 6.5% in November. Department stores negative 8.1% versus a positive 4.1% in November. Clothing, footwear and personal accessories negative 5.7% versus 2.2. Cafes, restaurants and takeaway food negative 1.1 versus negative 0.2 of 1%. And other retailing negative 1.1 versus 0.8 of 1%. So a shocking set of numbers there for the retail sector. Food retailing stayed muted at 0.1 versus a flat result. Retail turnover decreased across the country with large falls in all states and territories, the majority down by more than 2%. Throughout the year to December, retail sales grew by 0.8. And that's the least since August of 2021, after a 2.2% rise in November. Now, what this tells me? These are shocking numbers because of our population story as well here. So population plus inflation meant that the real reading of retail sales is shocking and that should give confidence to Michelle Bullock and the team there to sort of say we've got to be careful that we don't overcook the economy with keeping rates too high for too long.
Speaker 2:Yeah, and I agree. So I also looked at the moment the data has been questioned because the introduction of as you alluded to it before then, about Black Friday and Cyber Monday what that's actually meant to this data, because they put seasonally adjusted numbers into it and blah, blah, blah. So really you need to look at October, november and December together so you look at the three month blended average. It's a contraction of 1.5% give or take and that in itself should say a lot. It gets back to my point before about being spooked on Melbourne Cup Day. That rate rise is well and truly now being shown as overly excessive, considering that spending was already declining quite strongly and quite rapidly. It also shows and it gets back to your point about the consumer confidence number that the family finances not only they've been constrained.
Speaker 2:We are now making conscious decisions about how we're spending. That is clear from everything we're doing going out. We just saw that with the restaurateurs and takeaway. We have cut that out of our lives. We have started to cut out tourism. We know that as well, all of those sort of. Again, the inflation psychology that's the term that the RBA love to use is here. We are now very aware that inflation is a problem and that we've changed our behavior and it's clear in the economics that we are doing that. And so this is a big and I agree with you, a big wake up call.
Speaker 2:Brad Banducci also and this is the head of Woolworth he's actually waiting for this month. He thinks that once the end of back to school has happened, that their overall business will see a significant change in consumption as the household tightens even further. So, being aware that not only is the trend there you know about a 1.5% quarter on quarter decline in retail sales, big, big retailers think it's going to get even stronger in the first quarter of this calendar year. So the reason I actually see it as a good thing I don't like to say that because retail is an absolute lifeblood of this country it does show you very strongly that, a interest rates work. B that we are making the right decisions that the RBA wanted us to do, and C rate cuts can happen sooner rather than later.
Speaker 2:So that's the way to look at it in terms of it is Doesn't mean there's going to be pain not felt in the first half of this calendar year, but this all shows me that the levers that we have had to go through, the pain that we've had to go through is here. It's working as hard as it is to say, which means the sooner it starts working, the sooner it can be released, and that's, that's the silver lining to this, despite very marginal silver lining there, ben, I do apologize, but it is there. It is there despite retail sales showing this and, as I said, it is clear that the household in this quarter will probably again batten down the hatches, pay off their Christmas bill, pay off their overall bills from the end of last year and reassess where they sit once they know where the household now is, that they've got through that spending period and they're back to Adverticom as normal, traditional spending patterns of a day to day living.
Speaker 1:Well, it sort of makes sense in terms of essential versus discretionary spending and and you know, those staples that Brad's sort of looking to try and find, because the way in which I read it is, yeah, it's very hard to get a read on the summer holidays and sort of what's been happening. So so that is really going to show up in terms of just how much those households are hurting, and I've seen some of the data coming through in terms of what people are buying in terms of movement to home, brands and cheaper, cheaper goods, and you know, obviously, cheese and dairy costs have gone, you know, quite high. So people are being more selective about their you know their dips and chips throughout the course of the summer break and so forth. So it is going to be interesting and that, to me, just says just basically how much households are going to be hurting. Good segue over to, you know, obviously, business confidence and conditions. So we'll do a quick summary of that and then we'll just we'll spend a bit of time in terms of making sure that we sort of bring out what we see the themes are and those sort of more important things for the economic drivers, and then we'll talk about property and then we'll close it out with our predictions in terms of where we're going to see, how many rate cuts we're potentially going to see as part of this outlook. So here we go.
Speaker 1:So, in terms of the National National Australia Banks Confidence Index climbed to a negative one in December, and that's a downwardly revised negative eight from the previous month. It was the third straight month of negative readings, but the softest figure in the sequence, supported by a pickup in the mining and retail sectors. So, if yet you know, we've got a chart there as well that tells this story. Meanwhile, business conditions slowed, but stayed above the long run average seven versus nine in November and sales ease 10 versus 13, whilst profits were sustained six versus six and employment is slightly seven. The eight Now. Those leading indicators were mixed. These are the ones we need to be looking at right. This is all. This is a story about inflation and in terms of employment intention. So we saw forward orders easing negative three versus negative four, and capacity utilization fell 82.7 versus 83.6. Importantly, labor and purchase costs growth eased, whilst retail prices dropped sharply to 0.6 of 1%, the lowest since late 2020, from the prior 1.8%.
Speaker 1:So, if I wanted to quote the chief economist Alan Oster of NABB.
Speaker 1:He says the survey shows that economic growth has eased considerably by the end of 2023, after performing better than expected for much of the year, and this slowing is beginning to translate into improvements in inflation.
Speaker 1:I think he summarized that beautifully in the sense that as demand falls, pressure on prices start to slow down, that psychology of buying anything at any price starts to be removed, and then we start to see that inflation story and that overall slowing of the economy, and I think that makes for a good story there.
Speaker 1:So I want to just sort of take away on some of those big key takeaway. So we've definitely got a slowing economy on the back of disposable incomes being eaten away, both from a mortgage repayment point of view, as well as a rental story with those higher rents. We're also going to see and we haven't sort of touched on this yet, but we'll do more about this in the first quarter of the year as we look at the immigration story. So population growth is slowing, so that means obviously the consumption, the size of consumption for the number of population in the country, is going to slow, and then we're going to sort of look at those triggers of what's going to move the interest rate story. So you've got a nice little graph that you want to talk to here, evan, and for those who are on audio, just tell us a little bit about what we're talking about here when it comes to this chart that we're looking at.
Speaker 2:So just what I wanted to show with what's on here. This is the FOMC DOT plots and this is the Federal Market Open Committee. They have a very, very open dialogue with the community, and so every one of the dots on this plot is a member of the board. So that's what this is. Again, for those of you listening out there, their expectation as a group that by the end of this year the US federal interest rates so the federal funds rate, which is a band, is going to be what we call the midpoint will be about 4.625%. So that would mean that they want rates between 4.75% and 4.75%, so significantly below where it is. And that's there. What's really killing.
Speaker 2:Why I just wanted to show this chart is that it also shows the market's expectation from their last meeting to their new meeting. And so the expectation from the last meeting was that by the end of this year, rates in the US was actually going to be about 3.75% to 4%. That's now moved up to 4% to 4.25%, and the start of when those rate cuts happened has moved from being March to June. So again, it just all of those confidence numbers, all that what Ben's been alluding to is just easing back, and that therefore means that we are going to have to accept and I think we know this that the first half of this calendar year will be different to the second half of this calendar year and that expectation is starting to get rooted in consumer confidence, business confidence and everything that we're doing, that it will be a tale of two stories very, very clearly, and the Fed has probably actually put that mode now almost into a certainty.
Speaker 1:And then, obviously, what that means for the Australian economy is we are watching in terms of, and we're a market player in, the global economy as well. So we are definitely seeing what's going to be happening there as well as looking at our domestic story. So we're basically putting bookends on the conversation that we've just had with you today. The first bookend is that domestic demand, and then the other side of it is obviously that global demand in terms of the cost of money. So as the Fed starts to think about moving those downs, that has a positive impact in terms of equity markets, not only offshore but also here in Australia. We saw basically a Christmas rally in both of those particular areas as people started to think beyond the higher inflation and starting to see a world where inflation starts to get lower and that has a wealth effect in terms of the Australian population. So again, the double-edged sword on that, which is what Evan and I want to highlight here, is that that can also mean that inflation getting that you know, walking that last yards in terms of getting inflation inside that target range could be a challenge, and that's why the story of unemployment and exactly what businesses are doing is going to play a role in that and that's going to be led by the demand for the consumer. So I think that's a really nice way to close out the bookends on what has been a significant deep dive in the first part and our first show for the year In terms of the property data.
Speaker 1:There's not a lot I'm going to focus in on here, because Bryce and I will be doing our outlook for 2023 and beyond in a couple of weeks time, but I just wanted to highlight just a couple of really important ones. The first one is building permits. You know the government has this aspiration of basically building you know all of these homes. In a couple of years they're going to get nowhere near it. Building permits in Australia decreased by 24% year on year to December 23, following a 4.6% drop in November.
Speaker 1:For some context, building permits year on year in Australia average 2.09% in terms of growth from 1984 until 2023, reaching an all time high of 63.8% in August of 2001 and a record low of negative 43.4% in February of 2001. Talk about a turning of events in that one year, and that's all got to do with the sentiment of the market at that time and, if you think about it, was also the dot com bubble. That also played a role in that as well. But we've got a problem. I mean, obviously those building approvals aren't coming through, because getting access to money is also not a great situation there. Did you want to put a little bit of icing?
Speaker 2:on that one. The only icing on it is you highlighted the, the HAFF, the Housing Australia Future Fund, the one million aspiration. He's already basically showing it's impossible. I mean, we averaged 220,000 homes per annum and we haven't achieved that. That was. The peak we got was 238 in 2018. Right, so with that we are going to struggle to get a 100,000.
Speaker 1:We did 164 in the last drive months, just to give you some context. Exactly, right.
Speaker 2:So that's my little cherry. It's more of a hand grenade. Of that aspiration is already done. It is going to be unachievable.
Speaker 1:Well, if you think about it also, what does it mean? I mean it does mean supply for rental accommodation is going to be super tight throughout the course of the next few years and that's not going to be alleviated anytime soon. So, and we also know that most small business rental accommodation providers, aka investors, have only passed on around 25% of their ongoing costs. So there will be higher rents. That will just be a factor of the market and if the government's don't allow us to give those higher rents, then you can also see that. You know basically the supply shocks that will also be in the negative direction and we're seeing that in Victoria.
Speaker 1:Let's have a quick look at the what we saw in the data in terms of the core logic results. We saw a 0.4% increase in January, which is a slight increase compared to the 0.3% growth that we saw in in dwelling values in November and also December. So the trend was down up until that point, but again seasonally adjusted. You just don't know where those indicators are. It is the 12th straight month where value increases and it's pretty much. Most economists didn't pick that. But I'm going to shout out Bryce and I's little prediction there, when everyone was saying prices were going to go down. We said to look at the behavior of people and that was property. People try and hold loss aversion, we call it you know. So ultimately people were able to hold, they were picking up second jobs or whatever. So we haven't seen that materialize. The longer interest rates remain higher, there is a risk of seeing property values go down. But if interest rates are tipped to come down, let's say the middle of the year, then we're not going to see any of that sort of materialize. I think it's really nice to just you know at the start of the year. I just want to again put a bookend on the broader update in terms of our property story here. So I'm just going to summarize the housing values through the recent cycles, and so this is from the onset of COVID to January 2024. And then the onset of COVID passed, you know, from a price point of view and a percentage point of view, and the change in the series peak to January 2024.
Speaker 1:So what I'm effectively telling you is which markets peaked, which ones haven't peaked, in what has been the change since COVID? So let's rip through them. Sydney they've had a 24% increase since the onset of COVID. That equates to a $218,000 gain. Now where are they at in terms of the peak of their market? They're still 2.4% below their peak, which was January 2022. Melbourne has only enjoyed a 10.9% increase since COVID got. A lot to do with the lockdowns and the restrictions that happened and, you know, effectively blowing up the economic activity in the state for a couple of years, and so they've only had a 76% gain and then negative 4.2% from their peak, which was in March of 2022. Brisbane has had a 52% increase that flight. So this shows you what short-term demand and supply does. Everyone moved to Brisbane or the Southeast Queensland. So they've enjoyed a 272% monetary gain and they are at peak. I mean they are sitting at the top of their cycle right now.
Speaker 1:Adelaide 53.7% or quarter of a million of a percent gain. They are also sitting at their peak. Perth is 49.9%, $225,000. They're also at their current peak. Hobart has only had a 27.6% 141,000. They are 12% off their March peak. So they've had double-digit decline since that peak of March of 2022. Have increased around 100,000. They're still negative 6.6% since their last increase, which was May of 2014. So they have been the outlier. They are still in a difficult market and for mine, darwin is my smoky over the next two to three years in terms of just the sheer value of income and that market, depending on how the economic situation up there. That one is a little bit of a smoky. I'll talk more about that in the update with Bryce.
Speaker 1:Canberra's only enjoyed a 30.4% or 196,000 dollar gain and their negative 6.7% since their peak, which was in May of 2022. In terms of the regional New South Wales, they've gone 45% 222,000. They're still 5.4% off their May peak of 2022 at the really the end of COVID there. Regional Victoria 33.3% 142,000. They're 6.6% off their May 2022 peak. Regional Queensland 52.7% 211,000. They're at peak. South Australia regional South Australia 52.4% they're at their peak and it's $135,000 gain. Regional WA they're at 50% 156,000 dollar gain and they're at their peak currently. And regional Tassie 42.3% 147,000. They're negative 6.4% off their May 2022 peak. Well, that sort of is the starting point for where property is going to go in in terms of 2024.
Speaker 1:We will take a deeper dive in a couple of weeks when Bryce and I unpack that story, but this foundational conversation that we've had with Evan today and the depth that we've gone into is really going to be important Now.
Speaker 1:We promised at the start of the show that is always going to be about interest rates and we're curious to know in terms of how much interest rate adjustment we're going to see over the next 12 to 24 months. So I'll go first Evan. I believe that we're going to see around 150 basis points or thereabouts as we go through the easing cycle back to more normal. How long that takes is obviously the 64 million dollar question. But yeah, and the reason I'm saying that is because, yeah, that's sort of around that sort of 2.85 is the sweet point between 2.5 and 3. So I'm sort of going in there, based on the current cycle of cash rate. That's where I see it going. So I see a couple of interest rate decreases and then I see further of that if they don't stimulate the economy anytime soon. What's your view in terms of the sort of interest rate outlook?
Speaker 2:bit, so I'm similar. The only caveat I have is slight changes to what the government might do in their cost of living packages.
Speaker 1:Yes.
Speaker 2:That's my catch. I think it's my 12 month view. I've already basically said you, come Christmas this year, I think, will be 50 basis points lower. Yep, I'm with you next year, I think, is where it happens right. So I think you are going to see minimum 4, maybe as much as 5, rate cuts of 25 basis points. Do not rule out a chunky one, do not rule out a half of 1% cut at a market movement particularly, I think June next year is going to be a really telling time. I think that's when this real slowdown will start to happen.
Speaker 2:You know, all of the issues that I've just alluded to in this talk in the first half of this calendar year will come home to roost and the RBA tends to be a little bit lagging in terms of its actions and therefore I don't think it's out of this world to say that they will cut harder than what you know. We're talking about the normal and doing an outside of the box, larger than expected cut to give a bit of a spark, to give a bit of a boost into the economy, to actually get us to move. So I actually think it could see the neutral rate, the 2.5%, being reached sooner than then. What Ben's forecasting, that 20.25 will be there. The only other thing I'm going to say is that and we think about this before the program this extra 10 basis points is driving me up the wall. I actually think they might normalize it that way, whether they do a 15 basis point cut to get it back to the quarter notches. So we're obviously sitting at 4.35%. I think they're going to start removing that extra 10 bits away and getting back into, you know, 4, 4.255, because it is adding a layer of complexity.
Speaker 2:I know it's weird to say that, you know it's just just out there. So that for me, is their signal as well. I think when they start signaling the cuts, they'll normalize back to a level so they may actually go. We're going to take 35 basis points out of the rate and bring it back to 4 rather than 4.1 and then go, and that's why I think we'll get back to 4.2 and a half percent by Christmas next year. Now I know that's aggressive, but I think it's actually likely to happen. I think the China story, other things inside of it, the overall making sure the economy sits true and ready needs to be taken into account and Christmas 2025 will be at neutral.
Speaker 1:Okay, so there you have it. There's our predictions, and and just remember, what are the things that we're looking at? We're looking at business investment and confidence. That then leads into employment, and employment leads into consumer spending, and consumer spending leads into the inflation story, which ultimately leads into the cost of living, and also the repayments and the property market story and the wealth effect and all of that inflation psychology. That goes on. So we're gonna I'm thrilled that I've got Evan on board for the entire year, as we do, as we do these economic and RBA updates on the back of the RBA's decision. So we've got eight of these planned for the year. They're going to be great fun. We're going to go deep into these particular topics, so thank you for hanging around till the end. Always remember that knowledge is empowering, but only if you act on it. And until we see you in March, after the next RBA update, we look forward to you to stay safe and make sure you make every post a winner. Thanks for watching.
Speaker 3:Hey guys, bryce, here again, just want to catch you before you go and let you know if you're new to our community. There are a lot of episodes to catch up on, but it's really important that you start from the very beginning, at episode number one, because episode one through to twenty share all of the foundational pillars and frameworks that you need to know to get the best out of listening to this podcast. So I'd recommend that you start there, and the little tip is to maybe start on one and a half speed. Now, for those of you that are time poor and don't have time to go back from the beginning, don't worry, we've got you covered as well, because we've created a binge guide that goes through all of the details and makes it easy for you to read and get up to speed very, very quickly. So if you go to thepropertycouchcomau forward slash fast track, you will be able to download that binge guide and you will be up to speed in no time.
Speaker 3:And whilst you there, I've got a few extra goodies for you, because we have our top five frameworks that you'll learn on this podcast, as well as the make money simple again ebook, which will help you with the foundations of basic money management so you'll have everything you need to succeed in building your own lifestyle design and getting the best out of this podcast. Now just a reminder that anything that we cover on this podcast is not considered financial advice. We certainly recommend that you get your unique circumstances looked at by your individual advisor and everything we talk about is just general in nature. The folks. I want to encourage you again to go to thepropertycouchcomau forward slash fast track and you can go and get all those goodies and catch up.