Brad Olsen: Infometrics Principal Economist on the economic difficulties in Australia

Economic difficulties across the ditch appear to echo the struggles felt in many New Zealand households.  

The Reserve Bank of Australia has delivered a brutal reality check to the nation on the cost of living, as it expects the situation to worsen.   

It warns prices will never return to pre-pandemic levels.  

Infometrics Principal Economist Brad Olsen told Mike Hosking it's the same story here.  

He says it would be a sign of very tough economic times if businesses were cutting their prices so drastically. 

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Episode Transcript

Speaker 1 (00:00):
Money matters. We like the kind of Michelle Bullock's Gibshi
is the reservank governor. Of course, who latest is that
the cost of living crisis is here to stay? Are
the vulnerable are set to be at the brunt part
of the advice is to stop comparing prices to pre
pandemic levels because it's never going to change. Brad Olsen's
Inpometrics principal economist to and as well as Bradley.

Speaker 2 (00:17):
Good morning, good morning.

Speaker 1 (00:18):
Didn't we sort of know that because I mean outside
of fruit and vegetables and seasonality and stuff, once a
price goes up, no one's bringing it down, are they?

Speaker 2 (00:27):
Well? Generally, and I think most people have got that,
although I think if you don't, and particularly this applies
to businesses. If you've got a business out there and
you're waiting for your cost structure and similar to get
back to twenty nineteen levels, you're probably going to go
broke before that happens, because you're right, things just generally
don't go back down. And importantly, if your inflationary pressures
are going negative, if you've got people that are having

(00:49):
to cut prices, one of course you're not expecting your
own wages to be cut back to twenty nineteen levels.
And two if a business is having to cut prices
that steeply to stimulate sales, that are really in the
thick of it. So generally speaking, although I'm sure everyone
goes I'd love to have cheaper prices, normally, the reason
that you get cheaper prices is pretty dark economic times.

Speaker 1 (01:10):
Tell you. The other thing she said that I thought
was interesting monetary policy, and this is part of a
growing debate, and I see it a little bit here
as well. Monetary policy isn't the driver of the housing boom.
Not that we have a housing boom, but their housing boom,
which counteracts what our RBU say is doesn't it in
the sense that they're saying. But look at the lower
interest rates. Look at lower interest rates. That's money, money
in your pocket, You spend the money, and off we go.

(01:31):
So who's right?

Speaker 2 (01:32):
Well, well, I mean this is the fascinating thing looking
at the two housing markets. I mean, Australia is hitting
a new record just about every day. New Zealand house
prices are sixteen percent below the peak, even though we've
cut interest rates a whole lot more. I think what
it goes to show is that when you've got quite
constrained supply, and that's what we're both New Zealand and
Australia were before the pandemic, then when you move interstrates

(01:54):
you're able to see such a bigger spark up in
the housing market. But New Zealand had the high levels
of building consents in half a century, going back a
couple of years, so we really expanded supply, which means
that we're seeing much less of an interest rate impact
at the moment. In Australia, last year they hit the
lowest number of building consents in a decade, so thus
struggling on the supply front. It sort of goes to

(02:16):
show that, yeah, interest rates are pretty important, but so
is figuring out how you build the damn things.

Speaker 1 (02:21):
And this is what I'm reading more and more of
in this side of the economy, and this suggesting that
maybe the role, or the value or the weight of
these interest rate cuts from the Reserve Bank have been
overstated generally. Do you think that's true.

Speaker 2 (02:36):
To a degree? I worry though, that part of this
is sort of feeding into this idea that you know,
there's a really strong wealth effect from the housing market,
if only house prices would start to pack up a
whole lot more, we would start to see stronger consumer
spending because households feel better. And I really worry about
that as a concept, like do we really as an
economy want to sit there and go, Look, we're willing

(02:57):
to see better economic times, but at the expense of
the housing market and k locking people out. So as
uncomfortable as it is, and trust me, we're seeing that.
I'm actually happy that we're decoupling housing growth from economic growth.
And importantly, households are still spending. That rubbish GDP result
we got last week actually still showed that underlying spending
activity by households was rising. It was that business investment

(03:21):
had pulled back, so on the whole again, deeply uncomfortable,
but I think we're probably going to be in a
better place long term from decoupling those two major economic drivers.

Speaker 1 (03:30):
Always a pleasure might go well Brad Olson, who's inflementric's
principal economist.

Speaker 2 (03:35):
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