Speech Fireside Chat at the Australasian Investor Relations Association (AIRA) Annual Conference

It’s wonderful to be here this morning with AIRA, and to see the association going from strength to strength. Of course, it’s equally special to be here to interview Sarah who, as Ian mentioned, is one of the country’s most important economic policymakers.

Sarah, maybe before we delve into the economic data, if I may start with a personal question, could you tell us a bit about your career and the journey that led you to be the Chief Economist and Assistant Governor at the RBA?

Thank you. And thank you for that wonderful introduction. It’s a real pleasure to be here this morning. I spent most of my career, actually, in the private sector. I’ve always been a macroeconomist. I love economics. I’ll probably go to my deathbed still talking about inflation. But most of that time in the private sector, and I joined the Commonwealth Treasury just in January 2023. So I did a year there and then moved across to the RBA. And, for me, in my current role and in my previous role as well, serving the public, serving the people of Australia, is an honour and a privilege, incredibly humbling. Really gets me out of bed every day to go into work. And I’m lucky to have an absolutely fantastic team that I work with, who do their best work all the time to help me advise the Board and the Governor, to help them make the best decision they can for the public. So, it’s a very motivating role to be in, an absolute privilege, and I’m very lucky. I feel very lucky every day.

Fantastic. Thank you, Sarah. Well, there’s been significant conjecture and debate, obviously, on the inflation outlook, particularly following the recent Federal Budget. I appreciate asking you to comment directly on the Budget, may be a little bit cheeky, and I’m certainly not going to ask you to give it a rating out of 10.

Good.

I might volunteer one myself. I can’t promise anything. So perhaps we can think about this through a different, but still relevant, lens. So, the RBA expects the inflation to move back within the target band of 2 to 3 per cent not until the second half of calendar 2025, and the middle of that range by mid 2026. Obviously, this is at odds with the Treasury forecast. That was unveiled as part of the Federal Budget. How do you assess these forecasts in light of the significant changes in fiscal policy settings?

So one of the main differences between our forecasts and the Treasury forecast – and, of course, they’re different, we have different teams, we do our work independently, we talk to each other regularly but we are independent groups – are the energy rebates and the other cost-of-living supports that were announced in the Budget. When we put our forecasts out in early May, that was before the Budget, we didn’t have advanced sight of that, so it didn’t incorporate that. And so, we’ve had a look since. Obviously we’ve had budgets handed down, not just federal, but also the WA budget and the announcement from the Queensland Government on the energy rebates that are going to be available there. Broadly speaking, we agree with Treasury’s analysis of what’s going to happen to measured headline inflation as a result of those rebates. The ABS tell us pretty clearly, actually, what the difference is with and without rebates in the headline CPI, and so we’ve done our work and we broadly agree with that assessment. That will be incorporated in our next update in August. That’s not to say that’s mechanically what we’re going to do to our inflation forecasts. Every forecast round, we’re considering all of the information that’s come through; the latest data, our assessment of conditions, what’s happening globally as well as locally. All of that comes together in our forecast updates, and that’s what you’ll get in August, but that will include those energy rebates that have been announced.

Thank you for that. So, if we think about the latest CPI numbers, which have been very, very much hot off the press, so to speak, headline inflation is still closer to 4 per cent, and the underlying entrenched inflation since about December has been around 3.5 per cent. So are you concerned about how sticky inflation is and, sort of, its persistent nature in the economy at the moment, whether it be through energy or, more latterly, insurance, or whatever the case may be? It seems to be something that is very difficult to wash out of the economy. And I think Warren Hogan at Judo Bank said this morning that these latest figures are going to test the RBA’s patience. So on that basis, how are you thinking about the inflation outlook?

Definitely hot off the press. We got the April monthly data just yesterday. So, my inflation team are very busily working that through their models and doing their assessment. But to give a sort of very close and high-level take, yes, you’re right, the Board are absolutely focused on the fact that inflation is clearly still above the target band. If you read their statement, every meeting they make that crystal clear and that’s absolutely the case. Yesterday’s data did confirm that there’s still strength in a number of categories. We’ve seen up until this point that’s still there. And that coming together with some of the more volatile moves as well. We saw petrol prices were up. We expected that, actually, looking at the daily data that you can get there. So clearly there’s still some strength in inflation and that’s a key consideration for the Board in their decision making. It’s one of the many indicators that they’re tracking, and that we track, and that is reflected in the advice that we give. But, absolutely agree inflation is still above the target. No argument there.

So would you anticipate any changes in your outlook in the coming month, or otherwise, in terms of your current predictions?

We’re always constantly assessing the new information and updating the outlook, and that’s new data, it’s new shifts in conditions overseas, as I said earlier on, and all of that comes together in our forecast update, and that’s why forecasts are always changing. Equally, we’re also cognisant of risks and how risks evolve as well, and that’s another part of the advice that we give the Board. So, everything’s always moving. I’m very lucky in my job. It keeps me on my toes. Economics is grey, not black and white, and you’re never 100 per cent sure how things are going to play out. So, we’re always humble in what we do and our assessment, and we’re always alive to things changing, and this is one example of that.

So maybe if we dig into a couple of the underlying issues or thematics within the economy, particularly as they relate to the inflation outlook. So if we look at, say, the labour market, and in the May Statement on Monetary Policy, I think the direct quote was ‘growth in unit labour costs also remains very high’, which you would interpret as indicating concerns with underlying wage inflation or ongoing wage inflation. Is there an issue with the absence of productivity gains against that backdrop of what we’re seeing in wages at the moment?

Unit labour costs – that’s a very technical economist term – I can only apologise for it; we do like our technical language at times. It’s basically the cost of businesses producing whatever it is you produce in terms of that labour cost. And it’s a combination of what’s happening to wages, what you have to pay a worker, and any change in their productivity. So, if they get more productive, then you need to use less labour to produce a unit of output, and so that puts downward pressure on unit labour costs. Wages growth and wages lift, and all other things being equal, that will put upward pressure. And we’re seeing some really interesting dynamics through the labour market right now. We think that wages growth is around about its peak and is essentially coming off. And we can see some components of wages growth coming off already, particularly individual agreements. That’s the wages that individuals sort of set with their workers, not set by a union agreement or by award wage, or what have you. And so that’s starting to soften. But equally, we are seeing that there’s a bit of a productivity challenge over the last few years. We had a big cycle in productivity through COVID. There’s been a rebound just recently, but in level terms we’re only sort of getting back to where we were pre-COVID, so it’s a bit of a puzzle. I would say more generally, in terms of what all of that means for inflation, the way we think about it is that wages growth and inflation, they sort of have a more medium/long-term relationship. They have to be consistent with one another. And so that’s really where we focus in terms of that wage and productivity dynamic and how that flows through to prices. So that’s why we’re very watchful of it. So we’re very watchful of both wages and productivity, because obviously we’re looking and advising the Board on when inflation gets back to target, you know, beyond today. And that’s really the dynamic there. So, we’re mindful of productivity, and we’d all like productivity to be stronger. It means that living standards are getting better. That’s a great outcome for the country. And we’re putting that together with the wages and everything else, and that’s how it goes into our inflation forecast.

Looking at another big issue, and there’s more than a few members of the audience who represent organisations exposed to the health of the consumer and households more broadly. There are many signs, certainly from corporate Australia and the listed market, that the consumer is hurting across different aspects of the economy. Where are your expectations for consumer spending for the balance of 2024? And how do you think about monetary policy setting in the context of what’s happening at the coalface with consumers?

We can see that there are some households, some people that are really struggling right now. They’re doing it tough. We can absolutely see it. Consumption, actually, we now have really good disaggregated data where we can put households into different income groups, different age groups, all those kind of slices and dices, and we can see that some groups are really struggling. And what’s really telling through the data for us is that the struggle is coming through because of inflationary pressures. So, prices of things going up, the wages or income are not necessarily keeping up with that in the last couple of years and that’s just really squeezing some people. They’re doing it tough and we’re very mindful of that group. We can see other groups of households where everyone’s battling with higher prices, of course, inflation. Some groups, if you’ve got a mortgage, then higher interest rates, we know that that’s increasing your monthly costs. And for some groups, what we can see, actually is that people are choosing to save a bit more. Higher interest rates are encouraging them to perhaps put a bit more into your offset account, if you’ve got a mortgage, or even if you don’t have a mortgage, you can earn a bit more on a term deposit, or what have you. We can see some of that response happening too. So people are spending less, not through that channel as well. So overall for households then, we think right now it’s still pretty soft spending. We got the retail data last week that confirmed that. That still looks pretty weak. We are expecting a bit of a gradual pickup through the back half of this year. We do think that income growth will start to outpace wages growth. We’ve also got the tax cuts coming through and they’ll have an impact too. So, all of that put together we think will provide a bit of support for households spending. But it will take some time. We’re not expecting an immediate turnaround. And we know right now that spending trend is pretty weak, and that’s pretty clear in the data.

You touched on the difference in composition around the consumer. There’s been some discussion recently about the generational differences in terms of how people are spending, particularly older generations, baby-boomers, relative to maybe younger generations, and their spending patterns and how they’re seeing the world and the economy, et cetera. Are you seeing anything in that regard in the data?

The way we’re thinking about it is more a composition of what might be happening to your income and what’s happening to your outgoings and what that means in terms of your capacity for spending, and then the choices that you make. And we all have our household budgets – I know I have mine – and the bills come in and you work out what you’ve got left, and where you spend and what you save, and things. But what we’re generally seeing is that if you’re in a position where you don’t have a mortgage, for instance, and you own your own home, then you’re not really impacted by rent movements, you’re not impacted by the increase in your mortgage each month, and so that group maybe have got a bit more space in terms of their spending. Other groups that we can see are impacted by those things. You might be a renter and you’re seeing significant increase in your rents when your contract is renewed. Or if you’re carrying a mortgage, then over the last couple of years you probably have seen an increase in your mortgage repayments and so that then constrains your spending perhaps a bit more on other items and products. So, it’s more that product of circumstance that we’re really tracking and thinking about, and thinking about how many different households fit into each group, and the decisions that individuals make. So, we know it’s tough for some groups, and we’re really mindful of that, and other groups perhaps not as impacted. But everyone’s impacted by high inflation, and that’s a really good reason for the Board and for us to be very focused on it.

One of the sort of, I think, contradictions in some of the data has been, to a certain extent, maybe intuitive, at least, business lending. In many respects it’s remained quite robust. Is this just a headline and when you unpack that it’s a different story? So, what’s your perspective on lending to corporates and what that tells us about the different elements in the economy?

It has actually held up reasonably well. It certainly went through a cycle through COVID, as you’d expect, but it’s held up reasonably well. And it actually aligns with business investment trends that we’re seeing. So, business investment has actually been one of the drivers of the economy over the last year or so. And what we’re seeing there is a number of businesses that are seeing increased demand, and we can see there’s some positive demand coming through from the infrastructure projects that governments got underway; other parts of government spending too. And notwithstanding the softening in the growth rate of consumer spending, there was a strong rebound in consumer spending coming out of COVID. So, putting all of that together, a number of businesses have found that it’s opportune to undertake some investment. They’re buying machinery and equipment. They might be investing in digital types of technology: software, moving data and other platforms into the cloud. All of these things count as investments. And there’s a number of construction projects that are underway as well, quite a few office blocks, warehousing, data centres, things like these that are also being built across the economy. So, all of that counts as business investment, and we can see that activity. And, of course, some of that, it’s fairly typical for businesses to potentially take on some debt to fund that.

Great. I’d like to talk about a few of the longer-range issues that are happening within business and more broadly in society, and how the RBA thinks about those in terms of longer-range/medium-term policy setting. Before I do that, given that we’ve talked through wages, productivity, household, consumer, business lending, two questions, if I may. What’s the data that you’re most focused on? What are the data points you’re most focused on at the moment? And then, maybe secondly, what is keeping you awake at night? It may be the same answer.

As a macroeconomist … I’m data-hungry. I look at pretty much everything all the time. But obviously some of those core indicators for the economy, what’s happening with inflation, the labour market, we get the national accounts data next week, which is our holistic read on demand — not just households, but businesses, government, exports as well. So, all of those types of indicators definitely focused on, and we’re very lucky these days, as economists, there’s so much more data that’s more high frequency that we can get our hands on and touch a lot sooner. So, some of the card spending data that our banks publish can be very timely and incredibly helpful. Retail trade data, for instance. Today we get capital expenditure survey from businesses that gives us a bit of a read on what businesses are planning for the next year, not just what they’re doing right now. So, we’re very lucky. We have lots of different data sets that we track, and I have a fabulous team that track it and do all the analysis. That means we can advise the Board on that. But in terms of what’s keeping me up at night, I mean, obviously very focused on inflation and those inflation dynamics. Also, very focused on the international environment and how that’s evolving and how that impacts us here in Australia. We’re not isolated. We are a long way geographically from most other countries, but we’re not isolated economically. So, very focused on that global position and the dynamics there and what that might mean for us here.

Wonderful. Now, I’d like to talk to you about the role of technology, and specifically AI. I’m old enough to remember the Alan Greenspan’s famous comments about technology productivity and what it meant for inflation, which proved, in hindsight, somewhat amiss. But some of his fundamental points were sort of very much relevant still to today. To what extent do you, as a policymaker, and as the Board think through those bigger shifts that are occurring, that are very much playing out in business today. AI is obviously at the top of the tree, in terms of people thinking about what that may mean for jobs, for their own productivity, for their own profitability, all of those kinds of things. How do you sort of see through all of that and think about what should we be thinking about, not just in the immediate term with policy, but on a two, five, ten-year horizon?

I probably should say that at the RBA, our policy instrument, we don’t really have any impact directly on these trends. So, on how AI and other things might play out, but even on how they’re adopted within businesses and things like that. In terms of specific policies that might be related to that, colleagues at the Productivity Commission have done some absolutely fantastic work, and I recommend having a look at that, and obviously the Federal Government has also got their own agenda. In terms of how we think about it, and look at it, and how it comes into our thinking, we’re really observing those trends. As I say, we can’t influence them, but really thinking about what they mean for the pace of sustainable real wages growth in particular, and what they mean about the size of the economy and our capacity to produce the goods and services that we all consume every day. So, if we become more productive, all other things equal, then the economy is bigger than it otherwise would be. That’s the fundamental for improving living standards, which on a very basic level for the country is a great outcome. We’re more observing those types of trends and how they come through over time. What we can see from history, and it won’t be a surprise, I’m sure, to say to people that it does take time for these trends to really embed themselves in a business. It’s not like you invest in your cloud technology, or you bring AI into your business and suddenly it transforms what you can do and you’re twice as productive on day 2 as you were day 1. We know, and when we can see, it does take time to diffuse. It takes time for us all to learn how to use it. I’m sure we can sympathise with that in our day-to-day work. You get a new software program and you’re better at using it six months down the track than you were on day 1. So, we know it takes time, typically a couple of years, even longer. These are very long trends that we’re seeing and we’ll have to observe and see how they play out over time. But stronger productivity growth is a very good thing, all other things equal, and so that’s something that I think everyone would like to see.

Terrific. As a former journalist I can ask questions till I’m blue in the face. But I might pause now and see if we’ve got any questions from the floor.

I’m just interested in the Bank’s views on the risks of stagflation in Australia, the spectre of higher interest rates and no growth at the same time.

I’m certainly willing to discuss, but perhaps not willing to completely talk about what the Board are going to do. I would never speculate on that. But in terms of the outlook, it’s something that we’re obviously looking at and considering and mindful of how all of those dynamics come together. So right now, you’re right, we do have higher inflation, obviously interest rates right now are higher than they have been in the recent past, and growth has definitely slowed quite markedly. So, all of that coming together are current conditions. I suppose in the context of historically ‘what was stagflation?’, thinking back to the 1970s and the early 1980s, that is a different time. We did have much higher inflation rates then, and in some periods of time there, much slower growth as well. So, I’m not sure that we’re exactly there now, but we are constantly mindful and watching, and understanding how our policy settings are having an impact and those other trends that are playing through the economy. So, just generally observing what’s happening and being really forward looking and mindful of the risks. Definitely that’s all part of the job.

Well, if we don’t have another question from the floor, I might jump in with another one. Commodity prices – key driver of the economy. There’s a number of individuals in the room who represent mining and natural resources companies. What’s the RBA’s position in terms of the outlook there and in particular, do you have any views around the rise of critical minerals and how that may drive the economy in the context of being, particularly historically, reliant on coal and iron ore?

Commodity prices, we certainly track them very closely. They’re a really important source of income for the economy. Obviously for our mining sector, but it flows back through in terms of government revenues and into the workers in those sectors, and what have you. So, it’s certainly something that we track. And we can see there has been a bit of a rebound in the last few months. Some commodity prices more than others. Coppers moved quite a bit, for example. But, generally speaking, we have seen a bit of a pickup. And that’s actually quite consistent with the global outlook, where there has been a little bit of a turn in momentum. It’s nothing too strong, it’s not anything like a boom but it’s not unexpected that globally growth made a trough at the end of last year, beginning of this year, and is now picking up a little and we talked about that in our May SMP (Statement on Monetary Policy). In terms of that structural shift you’re talking about, and we would consider and we’re always very mindful of structural shifts more broadly, yes, we’re very actively looking at what the clean energy transition means for the economy, how that’s going to play through the dynamics of what sectors: are they going to be perhaps smaller as a share of GDP over time? and which ones are going to grow relatively rapidly because demand for their products is going to increase. And so critical minerals are part of that, but obviously there’s many, many facets to that. And that’s certainly something that we’ll track very closely over the next 5, 10 years, and beyond that. This is not something that happens quickly. It’s going to take a bit of time. So, yes something we’re mindful of, and we’re expecting those dynamics to play through. But like everybody else, we’ll observe what happens, how the world responds to this transition, not just us here, and what that means for our economy.

I had two [questions]. One is in terms of the domestic economy, you talked about the sort of soft/weak consumer. Which income brackets, age groups, or other profile, is feeling it the most, do you think? And the second question is: you talk about keeping an eye on the international landscape. In particular, which country or region do you monitor most closely, and which aspect of that country/region’s economy are you most kind of concerned about and watching closely?

I mentioned earlier the card spending data that our largest banks now publish, and so you can all go and have a look at that. That’s one of the best sources that we have for the disaggregated household spending. What we can see there is that, by age, they’re reporting that generally younger people are seeing more of a squeeze in terms of their spending, and then it sort of cascades up through the age brackets from there. But as I said earlier on, we think of it in the context of what are the constraints, or what’s happening to the dynamics around income, and what might be driving that, and explaining it that way, rather than linking it to age, per se. In terms of the international economy, what we’re monitoring there, it won’t be a surprise to hear that we definitely spend a lot of our time focused on China. It is our largest trading partner by quite some way, and so we do need to understand the dynamics there, and so we have a team that focuses on that. And in the context of China in particular, like everyone else, we’re certainly looking at balancing out what’s happening in terms of their net export position and demand for their products. And there’s perhaps a bit of strength there from the start of this year. But we can see domestically they’ve clearly got some weakness, particularly in their property sector and the structural change that are happening there. But also in terms of consumer spending and that returning to a pre-COVID trend. So, there’s balances and different pushes and pulls through China’s economy and we’re tracking all of those very closely.

We’ve seen an increase in the youth unemployment rate over the past 18 months. What does that say about the labour market, and is this a precursor of a marked slowing that might be coming?

And we’re tracking all of that information, too. We look at the labour market and think about it very holistically. And so we’re really trying to gauge what’s happening to what we call full employment. So that’s considering the number of people that are working, but also the hours they might be working; whether or not people want to work more hours, what’s happening to job vacancies, all of that information. So, the youth unemployment rate is one of many metrics that we track. What we can see generally happening through the labour market, that it is softening gradually. And so we’re seeing job vacancies track down a little bit. We are seeing the unemployment rate, the youth unemployment rate, tick up a little bit. The pace of employment growth has slowed a little bit. So all of that is consistent with the labour market softening. And as you can see in our latest forecasts, we expect that to continue in a sort of gradual, relatively mild way compared to previous cycles. And so that’s what we’re really looking at. And you’re absolutely right in two earlier questions. As things unfold, if the speed of that softening changes, it doesn’t fully line up with our forecasts, then we’ll obviously review that and update our forecasts and our view accordingly. So, it’s a constant game in our job of tracking what’s happening, of adapting, updating our view, what has played out the way we expected, what hasn’t and why. And so, bringing all of that together to advise the Board on what we think is going to happen going forward, that’s the job.