Inflation remains the bigger threat to Australia’s economy than recession, according to Bank of Queensland chief economist Peter Munckton. Here’s what it means for investors and households.
Speaking on the new-look Switzer TV show this week, Peter Munckton, BoQ’s chief economist said that the economy is holding up so far under pressure from the Iran conflict, but the biggest fight still to come is once-again, inflation.
Asked whether Australia was now more threatened by inflation or recession, Munckton’s answer was direct.
“I think right now it’s an inflation question.”
Munckton added that prior to the Iran conflict, Australia’s economy was in reasonable shape. He said economic growth last year was “decent”, the jobs market was strengthening, the unemployment rate was low, job ads were picking up, business sentiment was strong and business investment was also “pretty strong”.
Consumer spending had softened a little, but he said inflation was already the main issue coming into the conflict.
Gazing into his economist-crystal-ball, he said that if the current conflict proves short-lived, inflation remains the main concern. If it drags on and oil prices stay higher for longer, the balance could shift and growth risks could become more serious. As he put it:
“If that ends up being the case, then the main thing you worry about is inflation.”
What the RBA (and other economists) missed
Watch the full show:
Munckton’s said on the show that he felt inflation was also coming under control. Many economists – and the RBA – believed recent rate cuts were the right call.
“I was actually on the RBA bus. Actually, I thought that the rate cuts were the right choice. And I actually thought there’d be a bit more to go.”
“The inflation numbers just ended up being stronger than we thought. And why was that. Part of the reason was the economy actually just was in a better shape than we thought.”
He says later data showed income growth in the economy was stronger than first understood. Households ended up having more cash flow than forecasters thought, and that meant more activity across the economy than expected.
“The more than expected income growth allowed two things to happen. One, was it allowed more spending to happen, and the second one actually, which is also good news, allowed more saving to happen.”
He also acknowledged that stronger government-side support (read: spending) and – until Iran – a less damaging international backdrop added to the picture.
What it all means for investors
For investors, Munckton’s message on the new-look Switzer TV program is not to make a heroic call on markets, but to prepare for a wider range of outcomes. Because who loves uncertainty more than the market, right?
While he notes that he’s not offering any advice, adding that he’s no longer in this on the strategy side” (he describes himself as a garden variety chief economist these days”), he makes the broader point that the world has become less predictable, the chance of larger shocks has risen.
That means investors, businesses and households need to be prepared.
“There’s a greater chance of big different events happening over the next one to two years [than] probably we’ve seen for quite a while.”
Rather than trying to pick the next turn, he said households, businesses and investors should stress-test their finances and think through what happens if rates rise again or growth slows harder than expected.
“Given what you understand about your finances, what would happen if interest rates are half to one percentage point higher? What would happen if the economy did slow?”
