In this interview, we navigate the complexities of economic uncertainties, exploring Dr Oliver's blend of trepidation and optimism for 2024.
What event stood out to you in 2023 as crucial for the economy?
The higher-than-expected December quarter CPI released in late January 2023 that saw inflation rise to around 8 per cent year-on-year stood out because it helped usher in five more rate hikes causing more pain for those with big mortgages. Sure the economy has held up better than expected so far and home prices rebounded with both helped by surging immigration but the full impact of the rate hikes is yet to hit and runs the risk of a sharp slowdown or recession with recent data looking a lot softer. The good news is that inflation is now falling rapidly.
How do you feel going into 2024? Is it optimism, trepidation, or a bit of both?
I feel a sense of both trepidation and optimism. Trepidation because the rate hikes are still yet to fully impact the economy with a high risk of recession but optimism because inflation is falling, paving the way for rates to fall in 2024 which should ultimately be positive for the economy and investment markets.
Do you expect the investment landscape to change next year?
The investment landscape will shift from focusing on inflation and interest rate hikes to focusing on slower growth & recession risks initially and then lower interest rates. While the recession risk could be negative for shares in the first half of the year, shares – particularly cyclical shares – should benefit from lower rates and prospects for stronger growth in the second half.
What are your expectations regarding the RBA? Do you expect its new structure to impact its choices?
There is still a high risk of one more rate hike in February, but we think news of falling inflation will head that off so our base case is that rates have peaked and we expect a combination of lower inflation and weaker economic conditions to drive rate cuts starting in the September quarter and ultimately taking the cash rate down to 3.6 per cent by year-end.
I don’t expect the changes at the RBA to significantly change the outlook for interest rates because the RBA still has a 2–3 per cent inflation target. But the shift in focus to the midpoint of the target could be a bit hawkish in the near term as inflation is still above the target. More fundamentally, I fear that the shift to a Monetary Policy Board dominated by outside macro experts will reduce the accountability, responsibility and morale of the RBA and that having each of the Board members deliver public speeches will add to the noise and confusion around the RBA particularly in times of economic uncertainty.
