Transcript of Question & Answer Session Lessons and Lasting Effects of the Pandemic

John Sealy

Thank you for a great presentation. John Sealy, we manufacture air conditioning products here in Australia. Regarding outlook for inflation, we're already seeing a lot higher inflation in our input costs, not only freight, also components, at least 5 per cent on average. What's your outlook for inflation realistically, because it feels like it's coming quicker than anyone's admitting yet?

Luci Ellis

Thanks for the question, John. There's no doubt that upstream producer price inflation has picked up and we're seeing that right round the world. But there's a lot of things that have to be different for that to fully translate into consumer price inflation, which is what we're mandated to achieve and what matters for the welfare of the Australian people. So certainly, we have seen that in upstream price pressures, but you're not seeing it yet in retail prices. So you can see things like, for example, the global price of many things has gone up; many manufacturers' goods have gone up. The landed price of that in Australia hasn't necessarily risen as much. And then there's a whole swathe of domestic costs and margins that are there in between that landed cost and what people actually pay in the shops. So, around the world, we are yet to see a material lasting pickup in consumer price inflation. I will remind everybody though that when we get to the June quarter CPI, it will look big because the June quarter last year will have dropped out and that was a big negative because of childcare.

There will be these transitory effects as some of the negatives from last year drop out. There have been some localised price pressures around the world. But at the moment, it seems to be mostly upstream, not so much in the sort of retail consumer space. Thanks for that.


Thanks. A quick question about the effect of keeping the borders closed. You haven't discussed that, but what's the impact, do you think, on the Australian economy?

Luci Ellis

Thanks. It's certainly one of the ways that we've been able to limit the number of cases coming in and so in that respect, it's been a key part of pandemic management and there is no trade-off between managing the pandemic and the economy. The economies that have had a good handle on the pandemic early on, have certainly had a smaller contraction and a faster bounce back. But you're right to sort of raise that question because there is this question about how long that can go on. In the forecast we published in May, we had in mind that it would be around the end of the year, early next year. In the budget, the presumption was mid next year. So what that does at the moment is the primary thing that it does is it changes services trade.

So services exports, particularly education exports, are greatly reduced. Services exports in the form of tourism also came down a lot – basically to zero, there are no tourists coming in – but there are also no Australian tourists going out and the question is what people are doing with that money. If they're spending that money in Australia, instead, it ends up being a net positive because Australians actually used to spend more on holidays overseas than foreigners spent on tourism over here. So it's not a 100 per cent certain what the net on the tourism is, but once you add in the education exports, there is a hit because of the borders being closed, but you do have to then trade that off on the fact that we have been able to open up faster.

Having just been through the gamut of getting here from Sydney and not being sure whether I could and, you know, having my little test at the airport and everything – negative – there are going to be some sort of further disruptions and so I think the real question is how quickly we can vaccinate. If we're at the end of this year and still quite low vaccination rates … It's not a sprint. We may have done really well in the first phase of the pandemic, but there could be countries that had really bad first and second waves of the pandemic who are now opening up because they've got vaccinations, they're moving around and they'll be the ones who can, you know, engage in business, travel, win new business. So there is that question of how long that goes on for, and I would suggest that the vaccination rollout is the important part of that.


Luci, you mentioned about the term funding facility of $200 billion and also the $200 billion in bonds. Can you explain, a layman explanation, of what that actually means to the everyday person on the street, and I guess, how that encourages the economy?

Luci Ellis

Sure. I'd be happy to. So taking the term funding facility first, that provided stable low-cost funding to the banking system and, in particular, banks that increased their lending to businesses and particularly small businesses got more than the banks that didn't. And so that was intended to reduce the cost of borrowing, particularly for businesses but also for households, and ensure that banks had the confidence to continue lending. They knew they had stable funding over that period, markets have been quite disrupted at various times particularly in sort of March/April of last year, and so that really lowered the cost of finance and increased the certainty about finance into the economy.

In terms of the bond buying program, the primary effect of that is it lowers the yield curve. So it lowers bond yields all the way out. And by buying government bonds – that's the risk-free rate – and so that pulls down everyone else's yields as well, because the risk spreads are priced off the government yield curve. And so that there also contributes to lower funding costs in the economy, a lower exchange rate than we otherwise would have had, which is good for exporters, and so that's really what it does.

Alistair Hague

Luci, Alistair Hague from Hague's Chocolates. Is your GDP recovery graph skewed by the iron ore boom and prices, because I think the last time iron ore didn't recover like it has. So to that end, doesn't CPI include international travel, which is non-existent now. So you're not comparing apples with apples, or are you?

Luci Ellis

To answer the first part of your question – thanks, I think they're both important points to make. One is, those GDP numbers we strip out prices, it's the real GDP. So when we talk about GDP growth, it's always stripping out the effects of the prices. Absolutely, someone's making a lot of income and a couple of governments are making a lot of tax revenue out of that but the pure price effect does not enter into those numbers. So let me reassure you that that's not skewed. The second point about the CPI and international travel. I mean, there have been a lot of special factors on the CPI lately. I mean, childcare becoming free – you know, that was just a huge swing and then the reversal – so there's been a huge swings in headline CPI. What the Bureau of Statistics has done is they've basically inferred, they've attributed a price to that bit of production according to the rest of the CPI. I think they've done the best you can under the circumstances to get a clean read on underlying prices and I'm quite content for them to have done that.


Last two down the back, I'm conscious of time. David?


Thank you, Luci. The supply chain is a big concern for me. Inflation's one thing, but do you have any comment on the tsunami that's facing us in terms of worldwide shortage of materials, in particular semiconductor chips. We are facing a tsunami that's going to hit us in the fourth quarter of this year and the first quarter of next calendar year. It won't be about inflation. Industry will stop.

Luci Ellis

Thanks. We're very aware of what's going on in the semiconductor industry. I think that's something we've been watching very closely. I toyed with including this graph, but one thing we know is that the three biggest chip manufacturers in particular, the ones in Korea and Taiwan, they are building new factories as quickly as they can. So it will take a little while, there will be supply constraints and you will see that in prices, but inevitably, and, you know … I gave another speech a couple of years ago called ‘On Lags’ and this just epitomises that issue of demand goes up, supply can't meet it initially, but it does after a little while and then prices come back down again. So the firms that produce semiconductors absolutely are ramping up their production as quickly as they can. In the short run, there could be some disruptions and we are seeing that. And what we seem to be seeing is that oftentimes the firms that then use those semiconductors, particularly in automotive, they're not raising their prices. They're just saying, well, you're going to have to wait six months for that car. So you're seeing rationing rather than a price effect, which again, we're wondering how long that will last.


Last question, Damien.


Well, thank you, Luci. Just following on from that question, I guess. COVID has had such a widespread impact. There's been winners and losers. One of the aspects of this pandemic is the relationship with China. Are you seeing the current conditions or do you have any views on how the current conditions with China will play out in the economy?

Luci Ellis

I don't think I have time to give a comprehensive explanation of that. We have a team in Beijing operating out of our embassy. They are part of our liaison in the same way that our team here in Adelaide is, and so we get a lot of on-the-ground understanding about what's happening. Fundamentally it has been very difficult for exporters of, particularly agriculture and particularly where delays can be really problematic for the value of your exports. You know, if you're selling refrigerated meat or lobster or something, those things are really difficult and that's something we're keeping a close eye on.

But as I mentioned in my speech, in fact in May, China recorded the biggest ever trade deficit with us, because iron ore – even though they've stopped buying coal from Australia – but the iron ore number is just so huge that, you know, in the end, in value terms, we're exporting more than ever before in total, but it is distributed differently. So there are a lot of complex issues around that and, you know, again, when the borders do open and students start returning, there's a question about the country composition of that and I think it's very hard to predict how exactly that will play out.