Interest rates & inflation vs productivity vs government spending

Three rate cuts then talk of a hike vs a government spending boom vs the big productivity challenge. Sean Aylmer, Michael Thompson and Adam Lang each nominate their top economic story from the year - and choose a winner.

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Episode Transcript

Speaker 1 (00:04):
Welcome to the Fear and Greed Summer Series. I'm Michael
Thompson and good morning, Sean Aylmer.

Speaker 2 (00:08):
Good morning, Michael, morning, Adam, Good morning, Adam Lange.

Speaker 3 (00:11):
Good morning, Michael. Good morning Sean.

Speaker 1 (00:14):
Today and I know you are both very excited about
this one because you were both You both studied economics,
so you were both economists, and you both love the economy.
We all love the economy.

Speaker 3 (00:26):
Still, fans.

Speaker 1 (00:27):
We are looking today at the best economic story of
twenty twenty five.

Speaker 2 (00:31):
I'm not happy about this, though, Michael, because Adam got
in first and so I won his story.

Speaker 3 (00:36):
Yeah.

Speaker 2 (00:36):
Yeah.

Speaker 1 (00:37):
It's a bit of a race with these, isn't it
to see who can nab the best one ahead. I
do think Adam might have done it. Adam, go for it,
take it away. Well, let's see as we start. I
may be looking good, but we'll see who wins the
story at the end of this show. Twenty twenty five
was the year borrowers finally got some interest rate relief,

(00:57):
only to realize it came with big condition. The Reserve
Bank delivered its first rate cut way back on eighteen February,
trimmed the cash rate from four point three five to
four point one, as inflation cooled and growth sload. Second
cut followed on twenty May, taking the rate to three
point eight five, and then a third on twelve August,
down to three point six secnt the detail.

Speaker 3 (01:23):
Like Kathy Freeman running the four hundred Yes. Borrowers felt
the relief almost immediately. Spending lifted and markets surged on
the premise of cheaper money, but by December hadn't that
tone shifted. At the RBA's final meeting on nine December,
Governor Michelle Bullock warned that the risk had flipped back

(01:46):
to rising inflation. She said there were no rate cuts
on the horizon and the Board was now actively considering
the conditions under which it might raise rates in twenty
twenty six. Markets responded immediately, bond yields our favorite lift
did and pricing a real chance of a rate hike
as early as February three. Rate cuts delivered relief in
twenty twenty five, then, at the end one RBA press

(02:10):
meeting and conference delivered a big reality check.

Speaker 1 (02:16):
Yeah, good, good story, big story, very detailed. Sorry that
the contrast is going to be quite extreme, going from
Captain detail to captain all sizzle, no sausage.

Speaker 3 (02:30):
That a strong start, okay, right.

Speaker 1 (02:33):
A question for the two of you. Without government spending,
where would we be back? You know what, don't answer that.
I will tell you we would be in the economic toilet,
That's where we would be. Government spending has been propping
up the economy over the past year, with actually longer
than that, with state and federal spends surging, especially social services.

(02:53):
At the ndis fifty two billion dollars Australia's public sector
wages bill, which has jumped seven point six percent to
two hundred and fifty ffty billion dollars a year extraordinary.
At its peak, government activity made up nearly twenty eight
point five percent of nominal GDP, helping offset that weaker
household spending and soft business investment. But Treasurer Jim Chalmers

(03:14):
has been very very clear it is time for business
to take over as the driver of the economy. Late
in the year we saw that starting to pick up,
particularly with a new business investment surge in data centers.
That kind of thing long way ago, heavily focused on
one sector, but a very exciting start, I would say, Sean.

Speaker 2 (03:34):
So, I think the biggest story of twenty twenty five
has been productivity. It's really the great missing piece of
the Australian economy. It is the holy grail, like it
drives improvements in living standards because it means the economy
conduced more from the same amount of inputs. That allows
people to consume more, enjoy more leisure time. It's all
about the quality of life. It has slowed in Australia

(03:56):
and overseas now this year Treasure Jim Chalmers the Productivity Review,
we talked a lot about it. There's a bunch of
reasons for it. Australia just hasn't innovated as fast as
the US and parts of Europe. We have many low
productivity sectors, so a lot of the service sectors you
think of aged care, hospitality, admin. It's just you know,

(04:17):
when you're an aged care worker and you're helping someone elderly,
is you can't say can you walk faster because I
want to become more productive?

Speaker 3 (04:26):
Measure?

Speaker 2 (04:26):
Yeah, Like it's they're incredible jobs, incredible people. But because
we are so heavy into that and we've invested into
so much into that area so much, our productivity levels
are quite low. Lots of government lending red tape here
as well through the banks skilled there's still gills mismatched
for higher proactive jobs. There's a weaker business investment. We
sort of saw that turning around towards the end. Our

(04:49):
population is getting older, lots of reasons for it, but
it really does remain the big dilemma in the Australian economy.
How do we improve productivity?

Speaker 1 (05:00):
I think Adam Wins, well, do you know?

Speaker 2 (05:03):
I Well, it's funny, I thought, Michael Wins. We've all gone,
we've all gone different ways. I just think that this
last twelve months, I mean the last five years since
COVID really, but the last felve months government spending has
actually kept this economy going, and we would have had
a lot more rate cuts except for government spending. And

(05:25):
as much as Jim Chalmers wants to argue otherwise, yeah,
I just think that's I think Captain Sizzle has been
Captain detail.

Speaker 1 (05:33):
And I think actually someone wise once said that if
we if it wasn't for that, we'd be in the
economic toilet. Yeah yeah, if I someone once said that. Anyway,
all right, you know what, next year, when we do
this next year, we're going to get an independent judge
in because this is not working this idea.

Speaker 3 (05:53):
Okay.

Speaker 1 (05:54):
Thank you Sean, thanks Michael, thank you Adam, thank you Michael,
thank you Sean, and don't forget to hit follow on
the podcast. New episodes every day during our summer series
and regular shows are back from January twelveth are Michael
Thompson and this is Fear and Gray