2017 Publications Director Eddie Watson sits down for an interview with Nathan Cotton, an economist for QIC.

A bit about Nathan

EW: So, let’s start with a bit about yourself. How did you progress from doing Honours, to working at the RBA, and then now at QIC?

NC: I would probably go a little bit earlier, so I originally studied Economics while also working at the Queensland Treasury Department. And around that time I decided I liked the ‘research’ side of economics — I was already doing the Quantitative Methods major at the time, which is probably the ideal strain to do if you want to go to the RBA or something like that, and I also did a research scholarship program at ANU. UQ actually does a similar program now (for more information on UQ’s summer research scholar program, check here — applications for summer programs close in August).

So, I went and did a research project there for a couple of months over summer on monetary policy. That helped a bit as well; this was well before Honours but having some sort of research experience definitely helped. Then the following year, I went and did an internship at the RBA.

EW: Did you do any extracurricular activities such as competitions during your undergraduate degree?

NC: No actually. I think if I had more time I definitely would have gotten involved in those extracurricular sort of stuff, but because I was working that was difficult. I actually did my degree over 4 years instead of 3 because I was working basically full time. So that unfortunately didn’t leave a lot of time to get involved in things like the Economics Society, getting involved in competitions and things like that. For example, the RBA runs their yearly essay competition, but I never really had time to apply for that personally. But things like that are definitely worth going for, if you have time.

EW: Yeah definitely, I personally found a lot of those extracurricular activities were easier to do in first and second year when you, generally speaking, don’t tend to have full-time industry-related jobs lined up. When other things come along, it really is difficult to divert your attention to those things.

NC: Yeah, and the job definitely becomes your priority as well.

So anyway, I wound up at the RBA, and was there for a year and a half. I was in what’s called the Economic Group, and I was an economist in the China section of that group — called the Asian Economies Research Unit.

And now I’ve been at QIC for about 6 weeks.

Work at the RBA

EW: So, what sort of stuff do you do with this research on China? I guess you look at all the data, crunch the numbers and then write a report on it, and that goes on to the decision makers?

NC: Yeah, so broadly there are two components in that. And this definitely applies to other groups more broadly in the economics area as well. You might be responsible for a certain area of the economy: in my case I was responsible for trend prices, inflation and things. When the data comes out, you’d do a quick report on that, highlight the numbers, and highlighting if there’s anything that is unusual, you know for example if inflation is stronger or weaker than expected or something like that, and also thinking like how that might relate to new policy coming out of China.

And then you’d always be working on like a longer-term research project as well, which is kind of cool as well. And so that’s, more broadly, when you’re working in the economics team, the kind of work you do. Whether you’re working in the Australian economy or more global part or something like that, when your data comes out, you’d do a report on it but then also you’d have some sort of research work as well.

Work at QIC

EW: Did that set you up pretty well for what you do at QIC, or is the QIC work a bit different from that?

NC: So, the QIC work is a lot broader in what we do, partly because we have a small team, while the RBA is a whole organisation of economists. Even bigger banks like ANZ will also have bigger teams, and they might have an economics team dedicated to say just looking at the Australian economy for example. At QIC, we just have a small team that does everything related to both the Australian and global economy.

For me personally, that was one of the reasons why this role was attractive to me. Working as an economist here, you have to prioritise whatever is interesting or notable that is happening in the global economy at the time. For example, one of the other economists here had to run scenario analysis on the US Presidential election, Brexit, things like that last year.

EW: Is that all sort of like the statistics side of it will be, you’re running regressions and looking at the data, and from that drawing your conclusions?

NC: Yeah, we usually do regression-type stuff. So, for example, recently I have been working on an on-going global research of the Phillips Curve relationship. In a number of countries, the labour market is doing quite well. In America for example, unemployment rate is historically speaking really low. Looking at official employment stats which came out last Friday night, they’re still adding monthly payrolls at quite a high rate, but it’s not really leading to any wage growth and any inflation. So that’s quite a conundrum, and there’s a question of whether this Phillips Curve relationship is broken down. So yeah, particular things that come up, we’ll run a regression and see if we can estimate that relationship.

But then we also run a global model that has some of those relationships embedded in it. A lot of that is based on say error correction models or something like that. And we’ll run forecasts, simulations or scenario analysis on that on say a quarterly basis. We might also go in and re-estimate some of the individual equations in that big model if we think they might need to be changed or updated.

EW: So, to put that in the border context, your job is to be looking at all the data and then getting a picture of how the economy is going and what is coming in the future? How does that fit within the broader role of QIC as a company?

NC: Yeah so one of the examples is, as you said, trying to get a sense of what is happening heading into the future. We’ll try and estimate or forecast cash rate paths or interest rate paths of say the Australian or US economy. So that can then go into models for our investment teams — so like their fixed income investing.

A number of our investment funds have systematic approaches to valuations, and what goes into the fair valuation of those assets will be like an interest rate path going out into the future. So, some of what we do will feed into their interest rate forecasts and things like that.

We also have a big real estate investment practice, so like office towers or shopping centres. That’s globally as well, it can be Australia or the US or something like that. So, say with shopping centres, the team will be interested in what’s going on with standard retail sales and consumer consumption. But how well the investment does could also be related to house prices or turnover — if people are buying new houses, they’re more likely to maybe go out and spend money on furnishings for the house. So, our forecasts for those kinds of things — consumption, retail sales — will then go and help the global real estate team make decisions about their assets.

With infrastructure, for example QIC was one of the buyers of the Port of Melbourne last year. Things as simple as forecasting what traffic through a port might be; estimating trade going forward for example.

EW: Right, so to summarise, QIC goes out and invests in a whole bunch of assets, like bonds, real estate, infrastructure. You’ve got dedicated investment teams making those decisions. The economics team is helping them see the bigger picture of what is going on.

NC: That’s right.

Central Banks and Rate Hikes

EW: Is there any current research at the moment that you’re finding really interesting?

NC: Yeah so, the big thing right now is who is hiking rates. Even now if we look at the dot plot of forecast value of interest rates from the Fed, they don’t match up with what market expectations are in 2018 for US rate hikes. A lot of that is going to be based on what is happening with inflation data: core inflation has been pretty low in recent months. Which kind of goes along with the Phillips curve analysis I mentioned earlier.

EW: Have you also been looking at the RBA as well and what they might do?

NC: So yeah what’s happened lately: the UK has generally come out quite hawkish (probably more than expected); ECB has made a few comments that are slightly more hawkish than expected. As a result, one thing that people were looking at last week with the RBA decision was whether the Governor was making any hawkish comments as well.

It’s a bit different though because Australia is in a slightly different economic cycle compared to the rest of the world. Everyone else globally is in a bit of an upswing of economic recovery (UK, Europe, USA). Australia is still benefiting from headwinds from the mining investment boom.

So, we’re in a slightly different point in the cycle: we’ve still got consistently low wage growth that’s holding inflation back as well. The question for us is what will happen if the Bank of England and European Central Bank start hiking rates or reducing bond purchases; likewise, with the Fed, we want to know what their hikes might be in 2018. Because what that means for Australia: if everyone else hikes, that might dampen our currency a bit. Does that mean that the RBA can then lift rates or does that mean they’ll take the free kick and keep rates low? That’s always part of our work but that’s a particularly interesting puzzle at the moment.

EW: If that sort of thing continues then, say the RBA does decide to hike rates over the next few years, that obviously has an effect on interest rate repayments, right? So, if QIC has a lot of investment in real estate, is that another thing you have to be careful of? Whether the real estate market would move adversely?

NC: Yeah, I mean there’s a few different points on that. For us in the economics team, it would probably be more about how it affects the consumer.

There might be a little bit on how it might affect asset valuations. So obviously while interest rates have been low globally, there’s been this global search for yield, and people have found it hard to find a decent return on investment. Things like property prices and equities have grown quite a lot. So, you’d expect if interest rates come back up again, you wouldn’t see the same strength in capital appreciation in assets and things like that. In that respect, we might look at it.

More importantly though, we would look at its impact on households. If interest rates come up and everyone needs to pay more on their mortgages, that would dampen consumer spending. Because we own things like shopping centres, we’d be interested in how that might affect retail sales.

Advice for Students

EW: If students were interested in working at the RBA or QIC, what sort of things should they be doing in their undergraduate degree? What sort of people do you think would be interested in doing the role that you do?

NC: I think working hard at university and doing the macro and econometric courses will help for roles at the RBA or QIC. Getting some broader experience on top of university, whether that’s a research scholarship/internship or research at government institutions (Federal or Queensland Treasury for example) or a bank, while you’re studying is also really helpful.

Another thing that I think that helps is having a wider understanding of what’s actually going on in the global economy. I think it’s quite easy to just study all the theory, but you need to go beyond and read quite widely. Whether that’s reading a business paper or even the RBA’s periodic reports and research papers. Reading the RBA’s monthly statement and the minutes from the meeting, which both give snapshots into the economy and a summary of what they think is going on in the economy — global economy, housing market — and why they decided to keep rates on hold or raise it or whatever. So even deciding to read things like that to be abreast of what’s happening in economics, outside of the theory, helps a lot.

If you go into an interview and you’re aware of what’s happening in the economy, that looks really impressive.

EW: Great, thank you very much for your time today Nathan.

NC: Thank you.

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