Transcript Panel participation at the Barrenjoey Economic Forum

I might kick off, if that’s all right. And I will put my first question to you, Sarah, and then perhaps some reflections from Felicity and Jonathan. And that’s around this issue of uncertainty and the difficulty of forecasting. Obviously, you’ve heard a few comments from the Reserve Bank over the last couple of weeks, including by the Deputy Governor, and I think it takes non-economists by surprise, to some extent. So, you’ve talked about uncertainty. You’ve talked about being humble. How is that influencing the way that you think and make decisions at the moment?

It’s a really good question. And I’ve had a few people reflect that we use the word ‘uncertainty’ a lot in the latest Statement, the latest Minutes and what have you. I think there are different ways of thinking about uncertainty. There are different sorts of ways it manifests itself.

The environment, the economic environment, that is, is always innately uncertain. We don’t know everything as economists. As I said, no-one’s forecasts are perfect, I don’t think. If anyone has achieved that, please let me know.

But in terms of the sort of uncertainty about the outlook now, I would say this is not like it was in March 2020, for example, which was an extraordinary period of time where things were moving very fast with COVID and we really weren’t sure how things were going to play out. So, we’re not in that kind of situation. But there is uncertainty around the outlook.

I think what is particularly challenging right now is that, clearly, the economy, we’re moving through a turning point. In terms of giving advice to the Board and then their decision around policy and the cash rate, turning points are challenging and hard and they are innately very uncertain. And so I think that’s really what the Board members, the Deputy Governor, Andrew, and Governor are trying to communicate in public as well. Turning points are tough when you’re setting policy. So, there is uncertainty around that, in addition to uncertainty around the outlook. But it’s different in different veins and from a different perspective. And so we’re mindful of the sort of richness of uncertainty, even if we use one word as a catch-all.

Thank you. Any comments from Felicity or Jonathan?

Look, one thing I’d just add to Sarah’s comments is that there’s often a desire from different parts of your client base or stakeholders or the community for a very sort of concrete forecast. And I think there is a really big risk that we go down this path of false precision, suggesting that our forecasts are very concrete and that there isn’t a lot of error. So, I think having this discussion around the error bands and the uncertainty, as Sarah said, at this time when there are turning points is really helpful so that the people that are looking at these forecasts and taking them on board, whether it’s businesses or superannuation fund members or whatever, understand that there really is very wide uncertainty around things.

While, as Sarah pointed out, March 2020 uncertainty was particularly high, beyond that it’s actually very difficult to say when uncertainty is higher or not. If you look historically at what economists say, frequently we’re saying, ‘These times are uncertain because of X, Y, Z.’ For those statistically minded, the reality is we find it really hard to predict the first mean of the distribution. We’ve got no chance of predicting the second moment of the distribution. So, we talk a lot about uncertainty, but I think the fact is we’ve just got to say that all our forecasts always are uncertain and then think about what, does that actually mean? That’s critical for, say, policy setting. It’s critical also for investing.

Thank you. And maybe continuing this theme, if we look to New Zealand in the last few months what we’ve seen there is the more, what they call, real-time indicators that aren’t actually quite real-time, but all of those more high-frequency indicators turned very quickly and they turned simultaneously. And obviously we’ve had a central bank reaction to that. So, I’m interested from all of the panellists in what are the more recent sort of data points? What are the data indicators that you’re looking at that you think can give you slightly more real-time indicators over and above, I guess, what we traditionally looked at pre-pandemic?

I’m happy to go first. I’m very lucky to have a fantastic team who monitor lots of data in great detail. We look at a really broad range of datasets now, and we’re lucky in the profession to have access to so many new datasets, I think, compared to, say, maybe even five years ago. So, for us, we’re looking at a broad spectrum. We do look at, for instance, movements in financial markets, which should be to the minute, to the second. We aggregate that up a little bit, but that can give you a good indication certainly of what’s happening globally and looking a bit more ahead. We’re also looking at all of the monthly surveys. Some of the indicators I showed in my speech are provided on a monthly basis and have been for some time. So that’s really useful for not only seeing what’s happening in almost real-time but also seeing how things are evolving relative to previous downturns, because that’s a really important way we can anchor what’s happening right now, comparing it to what we’ve seen in the past. And some of the more recent monthly indicators that we now get around spending – I think that’s where we’ve seen some of the biggest steps forward. A number of the commercial banks that put out their card spending data, for example, the income data that they can also see coming through for households in particular, and also flows through for businesses – so the revenue that they might be seeing flowing through their accounts. All of these indicators are incredibly useful.

The final bucket of data that we are able to make use of, which is incredibly powerful, are what typically get called microdata. So, for example, the single-touch payrolls data that comes from the ATO. Don’t worry; it is anonymised. I can’t tell you what anyone makes and what tax they pay, but that’s an incredibly useful, very rich, detailed dataset that we are actually getting now, again, not quite in real-time but pretty high frequency. And so we can look at that and analyse that. And some of the comments that I made in my speech were based on analysis of that. It’s a very rich dataset now, which is, as you say, Jo, very, very helpful. The core data definitely has its place at the heart of it all, but being able to supplement is incredibly helpful.

Thank you. Felicity? Jonathan?

Sarah has given a comprehensive answer.

We’ve got a big team.

Yes. I think, though, the point about watching what’s happening overseas – we’ve spoken many times about how the US, Canada, Europe are sort of six months or so ahead of Australia in this cycle of inflation and growth. So, we are watching very closely what is happening overseas and seeing how that might be relevant for the Australian experience.

And the other thing I’d say is, as Sarah said there is so much extra data now, since COVID, we’ve got so many extra little data points, and they don’t always move in the same direction. At the moment, obviously, lots of people are looking at some of these partial data around what is happening with consumers post the tax cuts on 1 July, and looking at various different points. What I find is that it’s really necessary to sort of triangulate some of that data, because you’ve got so much of it not always pointing in the same direction. So, being able to interpret through all of that, I think, is quite important.

Comprehensive answers. So, one small point is a point of caution almost, in that often we look at the things that we have most readily available to us, and so you can tend to then get a bias in the sectors of the economy you’re looking at. And so it’s often useful to look at those series that are going to be much more comprehensive, such as the card payment data that Sarah referred to, where you’re going to be able to pick up more of the services sector, which is a growing part of the economy relative to the goods sector that might be picked up by many more of these series.

I couldn’t agree more. So, we’ll open up questions from the audience. Rory, so quick!

Dr Hunter, in your presentation you highlighted the (inaudible) through a range of data that the economy is operating at levels (inaudible). At the same time, wages growth went from two, two and a half per cent to four per cent is now increasingly clearly slowing towards three and a half, and three and a half has been the wages growth for the past 25 years, and is consistent with the two to three per cent target. Is the analysis that says the economy is operating at beyond full employment actually contradicted by the fact that wages growth is slowing?

No, I don’t think so. I gave the speech and I thought what we put forward was a consistent view. I’d say that the way we’re looking at and thinking about the wages data is that the fact that it’s slowing is consistent with the labour market moving towards full employment. And so everything is sort of going in that direction. As I say, our interpretation thus far is that it’s been a gradual move towards full employment. So, we haven’t had a sharp deterioration in conditions. That’s what we expect to continue. But we’re watchful and mindful that things could move more quickly. And that was the scenario we explored in the SMP. But, no, our view on the wages growth data is that it’s moving back towards what we would think is consistent with full employment, along with the other indicators.

Can I just say, I think the part missing in Rory’s question was ‘what’s going on with inflation and inflation expectations’, because that’s been a critical part in driving wages and an attempt in catch-up which is then passing through the data. And so then I think it helps to triangulate things with what Sarah had said before.

I think that’s right. And I think also the rigidity of our wage setting system – the fact that we got a Fair Work Commission outcome this year that was a little bit below where most private sector economists had assumed. Also – and I don’t really have the answer to this – interestingly, EBA wage growth really never took off; accelerated up to about four per cent but now looks like it’s stabilised, and that’s a really slow moving beast that anchors the Wage Price Index quite significantly, right? So, I think those dynamics within the different wage setting framework has been quite important in the journey.

Thanks so much for your time, Sarah. Maybe if you could talk through the NDIS scheme and function that you play going forward, and your labour market outlook and whether any of the changes to the legislation last month will have any impact on the (inaudible).

We don’t look at individual policies in that way in terms of either federal or state government policies. We’re very much at the aggregate. So, NDIS would be wrapped up in current government spending, which is a component of aggregate demand and GDP. So, we aggregate all of that up and put that in as our forecast assumption. We’ve anchored to announced spending plans from federal and state governments. And so that’s what’s underpinning that forecast at the moment. So, in the context of any recent announcements that are quite policy specific, like the ones you mentioned, those – well, last month not included anyway, because that was after the August forecast in any case – in general we wouldn’t be looking at that level of detail. We look at the top and take it as a top-level assumption.

Anyone else want to jump in on NDIS? Well, I might give a plug for our research, then. So, we published our forecast update, quarterly forecast update, late last night, and we’ve got a little chart in there not specifically around NDIS but we have looked at the growth in public and public related employment, and where the unemployment rate would be if you’d had more typical growth in that segment of the market. And we find that the unemployment rate would be about 70 basis points higher than we see today if you had typical growth coming through that sector. So, it’s certainly playing into economic activity and it’s certainly playing through into the labour market.

One of the things you mentioned was the movement in the unemployment rate is sort of in line with previous slowdowns in GDP. One of the things that has been more surprising, though, is the growth in employment offset by that. Obviously, the supply side has been going very quickly. How do you kind of reconcile in your head the very strong employment growth relative to quite weak GDP growth over the last six months but even over the last year?

That’s the puzzle I think I mentioned in the speech where it’s a surprising outcome for sure. In terms of the growth in employment, we can see the growth in the working-age population and the rapid increase in that. And we’ve obviously had that particular series go on a very strong cycle through COVID with the closing of the borders, and so migration dropping to actually negative for a little while and then rebounding and that sort of natural pickup, that coming through into working-age population and into employment. So, I think that is an important part of the story to not forget.

In terms of the productivity outcomes, they’re surprising. We’re not productivity experts. There’s a very good crew over at the Productivity Commission headed by Danielle Wood who are the experts to go and ask about this. We’re certainly observing it the way everyone else is, and thinking very hard about what the trajectory looks like going forward from here. But I think it’s a puzzle for everyone. I’ve not seen any analysis that’s really got a solid answer for why the productivity performance has been particularly weak relative to history. And that’s true here, but it’s also been true overseas, of course, with the exception of the US, which has had the opposite experience. I think collectively there are some really big, meaty questions there. We’re doing what we can to try and understand it in the context of looking, as you point out, at what it might mean for going forward. But there are others that are digging into this as well on a more fundamental basis. So, I’m afraid I don’t have the silver bullet answer to that one, Jono.

Anyone else want to have a crack at that?

I’m not alone!

It’s the biggest puzzle. I mean, you can say, why is employment growth so strong given GDP growth? You can turn that around and say, ‘Why is productivity growth so weak?’ The three together – and you’ve got two answers for three variables. But it is ultimately the biggest question going on. But I think we should take something from the fact that, across the OECD economies, leading up to the pandemic productivity growth had been slowing for decades. So, we can take into account that the pandemic mucked up our measurement of productivity. There are lots of timing differences, and so we have to sort of look through this period. But fundamentally productivity growth as measured within our national account systems has been slowing, and that’s the baseline coming into this period, which is weaker productivity growth, and that’s part of how it all ends up.

I think that’s right. And, of course, we were fortunate earlier today to hear from Alex from the Productivity Commission. Second plug of the day: we also published just a few days ago a deeper dive piece around productivity. And actually what we find is economists love to talk about it, and investors are typically very bearish on productivity. I think some of that is related to the expectation of what is normal. We have these long-run averages around one and a half per cent that include decades that were truly exceptional and unlikely to be repeated. Maybe we change tack a little bit.

We’ve talked about the uncertainty in forecasting. If I look at our forecasts and we compare them to yours, which all private sector people do, obviously, one of the biggest differences is our assessment around the output gap. Now, obviously the RBA publish a chart with a range of estimates, most of which are positive. I wish you’d put a line in there for your median or your average Sarah, if you could. But on our assessment, we think it’s closed. So, I actually thought I might talk to Felicity and Jonathan about, where do you think the output gap is? And then, I guess, how does that flow through into your thinking around where monetary policy might be headed?

I think the first thing is to say there’s huge uncertainty about this, because we’re inferring a variable that’s unobserved from data that will highly likely be revised. So, the first thing is saying big, wide range estimates around that. An inference that it’s probably a little bit positive seems roughly right, based on what we’re seeing with the unemployment rate or the labour market more generally, wages growth, and the stickiness of inflation. So, I think the inference that it’s probably a little bit positive, but has definitely closed seems about right, I think.

Our view would be that it’s probably still a little bit positive; that as Jonathan said, some of these measures are still suggesting there are sort of issues in the economy. You look at things like measures of capacity utilisation from the NAB survey yesterday – still very high. Lots of those measures around capacity are running much higher than historical averages. So, that would suggest to us that there’s a little bit further to go there. But certainly we’re getting close, we think.

Awesome. Do you want to comment on the output gap, Sarah?

Only to reiterate what Jonathan said about the uncertainty of estimating this variable. We’re always uncertain around our data, as Jonathan points out; it can and does get revised. This is a variable we’re inferring from data that can be revised, and the estimates and the estimates approaches all differ. That’s why we have the band and why we don’t have a point estimate. We don’t actually think about it that way internally, because we don’t think that’s appropriate. We do think it’s appropriate to think of it in terms of where it is in the band.

A couple of points in your speech referred to vacancy rates as a measure of labour market tightness. We read reports that some firms are leaving vacancies open even though they don’t really intend to fill them, partly as a signal to investors, partly as a signal to the labour force that help is coming. Maybe a vacancy now isn’t the same as a vacancy previously? But that doesn’t explain why wages and things like that didn’t really accelerate the way some of those conditions would indicate.

That’s a good question. It actually comes back to how we’ve been looking at and digging into whether or not the Beveridge curve has moved. Because that could be one reason that structurally there are just more vacancies, for the reasons that you point out, that firms aren’t taking them down. I’ve also heard others talk about, ‘Well, it’s easier to have a vacancy these days. You just stick it up on the website and it’s there.’ Compared to 20-30 years ago; it was more effort to put a job advert out.

When we talk to businesses in our liaison, we don’t get a sense that that behaviour is widespread. So, that’s one sort of independent check on the analytics, I suppose. The other thing that we’re looking at quite closely – I showed you the chart that compared that vacancies to unemployment ratio across countries. If what you’re saying is true, I would expect to see that in a number of countries. I don’t know that I think Australia should be unique in that kind of response from firms. In that case, even if that is true, it does still look like we’re a bit high on that ratio, and there’s space for it to come down further. I think probably the answer to your question is that there’s going to be some of that happening in some individual firms, for sure, for all the reasons you highlighted. But in an aggregate overall sense we don’t think that that can explain all of what we’re seeing. And that’s why we do think there is still some space for it to come down. Where it comes down to is the question, and how it sort of plays out from here is what we’re going to be looking at very closely. Of course, on the other side of the cycle, we’ll know much better. That’s always true as well, by the way. We always understand our previous cycles far better than our current ones. The more times we see it, the more we learn; I promise we do learn over time. So, we’ll be better at the next one. But right now, that is, in general, one of the things we’re monitoring very closely.

Any more questions? Sorry. We’re not taking questions from the media, but thank you for putting your hand up. So, perhaps I’ll ask – you’ve got one, Damian?

So, just going to the question, the issue of the vacancy to unemployment rate ratio. So, clearly there’s a bit of a buffer in Australia compared to other countries where that ratio has come down. And obviously that’s feeding into the way the market is pricing different rate trajectories for different economies. But I wanted to kind of change tack a little bit. How are you seeing excess saving post pandemic, excess saving? Because that seems to be another buffer that was talked about a lot but isn’t being talked about a lot now. Particularly when we’ve got tax cuts coming through and things like that, how do you think about that?

That’s a good question. I think, generally speaking, we’re sort of trying to move a bit beyond talking about excess savings. It is hard to imagine, but we’re nearly five years from the start of COVID, and households have obviously been hit by a number of shocks. The pandemic is a large one, for sure, but we’ve had the conflict in Ukraine, the inflation journey over the last few years, the way the cycle has more generally played out. So, we’re more now looking at households in terms of their savings behaviour through a more normal lens, if I can call it that. What we’re seeing at the moment is that the savings rate is below where it was sort of sitting as an average for pre-COVID. So, we do know – and we can see it in other data and indicators, in the outreach and liaison we do with community groups and other not-for-profits, households are squeezed for sure. Some are squeezed more than others. We know that, too. Some people are doing it very tough; others perhaps are in slightly better positions. But overall households are squeezed. Inflation is a big part of that, and part of that squeeze does seem to be coming through in a lower aggregate savings rate. So, households are choosing to save a bit less.

Where household spending goes from here is a really, really important part of the forecast, and it’s a really important piece of uncertainty for us. A big question is, we can see perhaps a trajectory for household income. We know Stage 3 tax cuts have happened. The banks are telling us they’re seeing it in bank accounts. So, that’s definitely there. How much of that is spent when that pickup starts to come through? How much is saved? So, what’s the trajectory for the savings rate from here? These are the really big, tough, knotty questions for the forecast right now. So, to answer your question, we’re not really thinking about it in the context of excess savings anymore, but we are very, very closely monitoring and thinking about what households might do in general in terms of their spending and saving decisions.

I’d just add: I think the further we are from the initial shock the less meaningful aggregate excess savings become because of the distributional effect. We can see with households that clearly there are some households who borrowed at the very low interest rates who were above the interest rate that they were tested on who would be finding it very difficult at the moment. But at the same time we’re seeing the excess payments going into offset accounts at very high levels. So, there are some households, even those who have debt, who are in a very good financial position, and then there are the households who are actually interest receiving households who are doing exceptionally well at the moment. So, the distribution across households has just become so broad that that aggregate position has become, I think as Sarah said, really quite meaningless in many ways. I mean, unfortunately, your excess savings doesn’t help me when I need them. So, as much as I might like to be able to draw on you, Damien.

Did you want to wade in on the household – no? You’re good to go. We field a lot of questions about the tax cuts, and we find investors don’t really like it when we say these have been in economists’ numbers for years and years and years. But the early indicator from the bank data is that a reasonable proportion is being saved. And as I understand it, there’s some polling out there that also shows there’s a reasonable number of Australians who actually didn’t think they got a tax cut, which I think is related to the fact that half the jobs in Australia have their wage set on the 1 July. So, we’re used to our PAYG payslip, if anyone ever looks at that anymore, changing at this time of year. And we also had, of course, the change to the superannuation surcharge. So, it might just take a little bit of time for households to recognise and adjust behaviour. I think it’s also possible that households are waiting for sale events at the end of November. We know households have become increasingly price conscious, so perhaps there’s just a bit of holding on, trying to assess ‘what the change in my disposable income is’. Inflation’s coming down. So, I think there are a few things playing through there. Are there any more questions in the audience? Andrew, you haven’t had a go. And then we’ll circle back.

So, I wanted to touch on the topic that Dr Hunter raised in her speech around Australia’s increasing participation rate, because the remarkable thing about the last year is, even though the leading indicators of demand have been low, employment rates have been incredibly strong. Another little puzzle; let’s leave that one aside. But I was wondering if anybody had any explanations for why Australia’s increasing participation rate has been so strong relative to a lot of countries and to its history?

I can give a few suggestions. Again, we don’t have a concrete answer to that, but there are a few things we can see when you unpack that participation rate. And one of the great things about the labour force data – you do get it by gender and by age group as well, so we can really dig into it in some detail.

A few general comments. We can see that women’s participation has continued to trend up. That’s a much longer running trend. That’s not a post-COVID thing. That’s been going for quite some time. And there are various supports for women to help them get into work, but to keep them in work, particularly around when they might start to have a family. And so that might well be playing through. We can see that in the data.

It’s also interesting to think that, as cohorts move through the workforce, you actually can get structural shifts as well. So, women that are perhaps in retirement age now, when they entered the workforce – in their twenties, say – much less likely that they would work for their full working life. Now it’s changing for every generation. So, we’re also seeing sort of a general glide, if you like, although the composition by size of the population groups also plays into that.

The other thing that we can see as a general observation is that the participation rates for older people have also drifted up. It’s partly the female story, but it’s not completely that, too. There does seem to be some underlying structural trends coming through. But notwithstanding all of that, your point, the cyclical response of participation has been surprising. What we’ve seen in the current cycle is not what we’ve seen in previous cycles. Normally we would see at the very least a pause and, in some of the earlier cycles, an outright fall – could be quite sharp in participation – which just hasn’t come through this time. So, it’s been a surprise, an upside surprise, of course, for employment and labour market performance. But a surprise nonetheless.

Often comparisons are drawn relative to the United States. And an important thing to remember there is that the baby boomer population in Australia is actually much smaller than the baby boomer population in the United States. And so that in itself can actually make a fairly significant difference in aggregate participation rates when making the comparison between Australia and the US.

Rory Robinson, Westpac Treasurer again. We were looking earlier at Graph 13, that vacancies to unemployment rate, and the panellists have made various points. I wonder if one of the missing points is that, back in 2019, Australian wages growth was 2 - 2 ½ per cent and core inflation was one and a half per cent. And that was a problem, as in the economy was operating below full employment; there was a loose labour market and subpar wages growth. So, the discussion where the Australian unemployment – vacancy to unemployment rate has further to come down than those six other countries would be remedied simply by putting a different starting point, as in the idea that we have further to come down to get to full employment – we were already below full employment in 2019. The economy was looser than full employment. So, to get to full employment we don’t need to come down as far. Because part of the journey up was just getting to where we needed to be. So, we have left to come down to be where everything’s consistent with two to three per cent inflation.

That’s a really good question. I think this partly actually is a general example of what Jonathan was just pointing out. Cross-country comparisons innately can be pretty challenging, because there’s always differences. And just another note on that chart – the reason we’ve done it as an index is because we’re very conscious that those vacancy measures are not standard across countries. The unemployment rate measures are more standard in terms of definitions, but vacancies – there’s no sort of national accounts equivalent that’s used globally. So, by making it an index we’re sort of trying to strip out those cross-country differences with a view that they’re not changing over time. And that in and of itself is an assumption, but we have to do something. So, we picked December 2019. I mean, it’s a nice pre-COVID point, but also in terms of picking a point through that sort of 2010s history, it’s a ‘clean-ish’ point. But I do take your point that different countries will be at different points in the cycle at that date. And so that could explain some of the difference. Our view is that it can’t explain all of it effectively. So, yes, you’re right; maybe the line for Australia on that chart doesn’t come down as far as some of the other lines, but we do still think that where it is today is consistent with the economy operating above full employment. So, quite where it ends up at the other side of the cycle – that will tell us something, but we think it’s got further to come down, is the long and short.

This conversation raises a really good point. So much of economic analysis is often around what we’ve seen in the past, and we often compare what we’re seeing today to five-year averages or ten-year averages. But as you said, Sarah, surprisingly the pandemic was five years ago. So, your five-year average isn’t that useful and your ten-year average isn’t that useful because half of that was pandemic related. So, I think that’s been quite challenging for economists at this point. Jono, you had a question?

Yes. Mine’s quick. Mine’s actually about the dwelling cycle, dwelling investment. How are you guys thinking about dwelling investment? Obviously, building costs are a major concern for builders. But building approvals have fallen, particularly amongst apartments, and they look like they’re going to linger much lower for longer. How do you think about the construction industry and just generally the outlook for that sector?

It’s a challenging outlook, without a doubt. I did a speech back in I think it was June on the housing sector. So, for residential construction – that’s much more detail in that. Obviously a few months have passed since, but I think actually a lot of what I said then is still quite true. So, you pointed to building costs, construction costs, being very elevated. We’re still getting reports through liaison that that’s the case. And the construction PPI [producer price indexes] indices are still running very strong. The construction data in National Accounts, in the CPI – it’s all very consistent that there’s still some cost pressure coming through in that sector.

That is part of what’s weakening demand. It’s, if you’re a developer, just the cost of building is pretty high and viability is pretty challenging right now. We are aware interest rates are part of that story. That’s always been the case. High rates increase your cost of borrowing, and that’s an additional cost too. But it’s clearly not the only part of the story right now.

Looking forward from here, we do think that activity will continue to fall a bit, as you can see in our SMP forecasts. And so there’s a working through of the backlog and then there’s less demand coming through after that. We’re expecting a turn in the cycle eventually, but it’s challenging right now for this sector. There’s no two ways about it.

Anyone else want to weigh in on residential?

I think the interesting thing here is that, if you look at approvals, completions, starts as a proportion of the housing stock or as a proportion of the population, they’re all around record lows. And this is at a time when the vacancy rate is also around record lows. So, something is effectively broken in our production process for housing and so some of that is you’ve had this big increase in costs and we’re yet to figure out how you reapportion that, which effectively, when you’ve got a fixed price of the existing stock, means that the cost of land needs to fall in order to make construction profitable. Profitability of construction is clearly a problem when 25 per cent of bankruptcies are in the construction sector. So, there needs to be some realignment in there because we do need to get more construction occurring in Australia.

I think all of these things, it’s all very depressing. It’s a bit like the talk on productivity. But we are starting to see some, at least in the policy space, some real genuine attempts at addressing the issue. The issue around housing supply and housing affordability has been something that has developed over the past two or three decades. It’s not something that just appeared in the pandemic. And so I think there is some good news there, that there does seem to be genuine policy attempts. You look at what the New South Wales government is trying to do and, clearly, there are lots of impediments to that. But I think there are some reasons to be cautiously optimistic that over the longer term we might start to see some relief here in terms of the supply and affordability.

Thank you for bringing the case for optimism. We are also starting to see some increase in household size, so that will alleviate some of the demand side. We focus a lot on international students – very important part of our economy. But, actually, when you look at household formation and household demand, that decline in household size during the pandemic was incredibly impactful.

David Goodman. Aware Super. Thank you for a great speech. Full employment was the topic. I don’t know if it was deliberate or not, but you gave us a speech and didn’t mention NAIRU. Care to give us here a number on where NAIRU is?

It wasn’t deliberate. When I was referring to unemployment and underutilisation gaps, is another way of saying it. In terms of an estimate for it, though, a bit like the output gap – wide error bands. It’s a latent variable. We don’t have the ABS provide us with a series, so we have to estimate it and infer it. And the different models will give you quite wide error bands.

There are comments on record from the Governor and others around where we think it is. We think the current rate is a little bit below but, yes, wide error bands on these things, and you can see it more clearly in the rearview mirror in history than you can in real-time.

Jonathan, you look like you were chomping at the bit to give a point estimate?

I’ll disappoint you again on that front. Sorry. Just to say that I think increasingly the unemployment rate is a less useful statistic of the overall tightness of the labour market because so much more of the adjustment is coming in hours. And so we actually need an hours based underutilisation rate, which gives us a better measure of how the overall tightness of the labour market is. So, then we need the statistical boffins at the RBA to give us that NAIRU.

I will absolutely reiterate that’s exactly how we think about the labour market. It is holistic and, hopefully what came across in the speech was that we really do monitor a wide range of indicators to give us information about the labour market. It is not just about ‘what is the unemployment rate?’

And you’ve added your underutilisation forecasts into the SMP table, which I think has been a really important and useful add for people that are following the economy really closely.

Just a quick thing: the RBA surveys market economists every quarter before the Statement on Monetary Policy. They ask market economists their estimate for the NAIRU. They don’t give them an opportunity to put a range in, and the median in the most recent one was 4.3.

They also ask about the output gap, and there’s no range for that either, Sarah.

I take that on board. We could probably ask you guys for a range.

Great. Have we got any more questions from the audience? No. All right. If not, maybe we’ll change tack a little bit, given that we’ve just had the National Accounts and pretty much all economists are running their forecast review. We’re back in current deficit territory in the economy, which is not where we’ve been, at least for the most recent history. How are people on the panel sort of thinking about that going forward? Gaggle’s silent.

Clearly we’re not thinking about it! It is what it is. It’s not at all unexpected. There was always going to be a moderation in export prices. We were also always going to see a pickup in our payments offshore as the global interest rate cycle picked up. Australia has become effectively like a leveraged hedge fund. We’re borrowing and then we’re investing in equities offshore. And so our net payments are going to be very much driven by that interest rate cycle and economic cycle with dividends. So, it was inevitable that we were going to have an increase in our payments because, as interest rates picked up, we’re not receiving interest income but we’re having to pay more interest income. Combine that with the export prices; we had a moment of sunshine where things looked amazingly good. It was always going to pass.

Just to revert back to a point you brought up, Jo, in terms of household sizes picking up. Maybe that’s starting to flatten out market rents. And a point the Governor made on Thursday, ‘But that’s not going to show up in the ABS measure of rents for quite some time.’ How does the Bank think about inflationary pressures in the economy as opposed to ABS measures of inflation?

We certainly think about that. So, on the inflation side, I suppose the equivalent to my labour market speech, if it was an inflation speech, would be telling you about a lot of the different indicators we track for inflation, and we are forward looking in that. So, the official inflation data is innately backwards looking in and of itself. And that particular component of it, just because of the mechanics of the stock of rental contracts versus the market rents being the new contract, if you like, means it does take time to catch up, as it were. But, no, we’re looking forward. I think, in fact, Deputy Governor Hauser put it best: we’re not trying to target what inflation was in whatever the data print that we’re going to get in a few weeks time is; we’re trying to target inflation in the future. So, we are innately forward looking. So, we would, of course, in general consider forward looking dynamics, that one in particular.

So maybe related to that, I might come back and pick on you a little bit, Jonathan. So, just to wrap up; we’ve got a couple of minutes. When do you think core inflation in Australia gets back in the band?

Look, that’s the big question, isn’t it? And the RBA has been pushing out its forecasts for when that occurs. And the question is whether we focus on when it gets inside the band or whether it’s getting to 2 ½ or close to 2 ½. There has been an increased focus as a result of the Review in the centre of the band, and I think that probably aids communication for the central bank. So, I think, to an extent, we should be focusing on that. When you’re looking at forecasts, then, of that being sort of late 2026, that has been pushed out – the length of time that inflation is outside the band increases. On that metric, it will start becoming the biggest test to the inflation target on the upside. So, I think it’s clearly problematic that it is pushing to sort of late 2026. And so, even if you think – we’ve been talking a lot about uncertainty around our economic forecasts. Even if you think you’ve got balance around that economic forecast, the implication is that there’s a complete skew around the policy risks as a result of that forecast.

Thank you. Did you want to add to that? Or I’ve got another tricky question for you.

The one thing I’d add is that I agree with Jonathan; it’s a long time before the RBA is expected to get into the band. I think when we look more into the medium term the outlook for inflation is possibly a little bit different to what it was pre-pandemic; that we’re more likely, I think, in the new world order of getting upside inflationary shocks from the fragmented geopolitical environment, from deglobalisation, climate change – all of these things are more likely, I think, to give us these upside shocks. And so it means when you do have such a long timeframe before you are planning or hoping to get back, there are a lot of opportunities to have upside shocks in the meantime that may mean that push gets pushed out again.

That’s a really important point. I think there’s a lot of debate about, is inflation permanently higher, a lot of uncertainty about how much higher. But it does seem a reasonable assumption that we’ll see more volatility in inflation and, therefore, the need for more active management to anchor inflation expectations, which we talked about a little bit before. Luckily, Sarah, we’re out of time, unless you had a comment on something that we haven’t been asked about?

No. Our forecasts are what they are, I think. I would recommend reading the SMP.

A little bit of light reading for everyone! Look, I knew this panel would go quickly, and I guess for me it certainly has. For me, personally, an absolute pleasure to sit up here with my colleagues and my friends. So, if everyone could just join me in thanking Sarah Hunter, Jonathan Kearns and Felicity Emmett for their time and openness on a wide range of topics.