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Saul Eslake – Profile Interview

Profile | 27th May 2012

Richard Aedy | ABC Sunday Profile | 27th May 2012

Saul Eslake – Australia’s household name in economics – talks to Richard Aedy about his return to the financial world and his personal connection with China.

Richard Aedy: Hello, I’m Richard Aedy. Welcome to Sunday Profile. Today’s guest is an example of that rare creature – the famous economist.

Saul Eslake is part of an exclusive club. He’s an Australian economist who is a household name. He made that name over fourteen years when he was chief economist at the ANZ Bank. Whenever inflation or unemployment, productivity or interest rates were in the news, there he was. The GFC – Saul Eslake was on telly explaining what was going on.

Then he stopped. He left the ANZ and went to the Victorian think tank, the Grattan Institute. And he consulted and he thought and he wrote and he spoke.

And now he’s come back to banking, though not with any of the big four. Instead he’s at the rather more global Bank of America-Merrill Lynch.

Saul Eslake has more connections than most with our biggest trading partner and rising power, China. And as you’ll hear, he points out that two decades of ‘let the good times roll’ in the Australian economy has distorted our perceptions a bit. We’ll get to that shortly.

The first thing I wondered was, why after escaping corporate life did he go back?

Saul Eslake: I thought when I left ANZ in mid-2009 that that was it as far as the financial world was concerned. And I was perfectly happy doing what I had been doing part-time at the Grattan Institute, a think tank, and partly running my own little small business, you know, getting people, it was almost an experiment to see whether people would be willing to pay me to do things that I had previously done for free of direct charge to waive the light blue flag at ANZ. So I was doing some writing, doing some speaking at conferences and things, doing some independent consulting and being on a few boards and investment advisory committee meetings.

And I suppose out of that I have a sense of security, which I didn’t have while I was at ANZ, that I could actually exist independently of a large employer, something I didn’t know when I started then.

Nonetheless, out of the blue as it was, I got a call from Bank of America-Merrill Lynch saying, had I thought about going back to the financial markets, to which my answer was no, but you never say never, and would I think about it. And my answer to that was, well, that sort of depends on what you’re going to give me to think about. And that wasn’t really a conversation about money, despite what people might think.

But really the reason I decided to come back was, first of all, because this is an interesting job as chief economist in Australia for a global organisation with people that I initially respected highly, of those I knew. And as I’ve come here and met other people here have been pleasantly surprised – not that they’re smart, which they are – other characteristics of the way they go about their work.

I mean, this organisation does not have a particularly high alpha male content, if I can put it that way, unlike some of the other institutions which I have worked for. It’s a nicer place to work than some of the others that I have worked in.

And one other fact that was attractive to me was this organisation’s willingness at some point in the future to allow me to do the desk work associated with this job from Tasmania. And that helps me fulfil a long time aspiration I’ve had eventually to live the latter part of my life in Tasmania. And my hope has always been that that wouldn’t simply be when I’d ceased to work altogether, but rather it would be part of my working life and part of my children’s growing up experience to be in Tasmania, as it was for me.

Richard Aedy: Because I’ve read that you’ve been house hunting. How close are you to making the move? Because you’ve made no secret of this, you’re a Tasmanian, you want to go home.

Saul Eslake: Well, I don’t want to give too much away lest people that I might be negotiating with put their price up by ten per cent or something like that. But when we see the right place that will be probably the last, hopefully the last house we buy, then we’ll make that commitment and then subsequently we’ll make a decision as to when we actually move, that among other things has regard to my employer’s interests, but also to where my kids are in their schooling and so forth.

So until we do eventually move to Tasmania we’ll be staying in Melbourne.

Richard Aedy: In the new job the global nature of the bank means that you’re more globally focused even though your job is still based here. Is that one of the big differences?

Saul Eslake: In some ways, yes. I mean, when I was chief economist of ANZ, I was the chief economist of the whole organisation, and was therefore responsible for having views about the global economy and the important parts of it, as well as having views about Australia and New Zealand. And while I didn’t do all of that myself, I was responsible for the people who did do it and therefore at the end of the day I was accountable for whether they were right or wrong.

In the organisation I’m working for at the moment, which is a global organisation, there are lots of very talented people all over the world sitting in New York, sitting in London, sitting in China, sitting in Japan, whose job it is to be over those economies in far more detail than I ever could have been from Melbourne. And yeah, that’s a good place to be, given that it’s probably more important now than it was when I was chief economist of ANZ, for the views we put to people about Australia to be informed by solidly-based views about what’s happening in Europe, the United States and especially China.

Richard Aedy: Well, let’s talk about Europe because Greece has been much in the news. I’m not clear on when they’re expected to run out of money. How do you see the situation immediately?

Saul Eslake: Well, it’s highly uncertain immediately because we’re waiting, almost with bated breath, for the outcome of the second run of Greek elections that’s to be held on the 17th of June. That may well produce a government that is opposed to the austerity pact that had previously been agreed with Germany and other European authorities.

And if Greece does elect a government, as the opinion polls suggest the people want, that wants to tear up those austerity pacts then it may well be that there is some combination of a default by Greece on some of its international financial obligations and an exit, forced or chosen, from the euro which would be pretty chaotic for Greece and may well have some pretty frightening consequences for the rest of Europe as markets ask, after Greece, who next?

And while you can construct all sorts of reasons as to why Portugal isn’t Greece, why Spain and Italy aren’t Greece, you could have constructed the same arguments as to why Korea wasn’t Thailand and yet contagion spread from Thailand ultimately to Korea during the Asian financial crisis fourteen, fifteen years ago.

And they’re the things that are scary.

Richard Aedy: Such a contrast, of course, because here in Australia the OECD has essentially just said you’re travelling incredibly well. And I think they’ve also said it’s, you know, a fantastic place to live.

But the patchwork nature of the economy means some parts are travelling better than others. And I think even though we all know that there is a general feeling, perhaps it’s more an east coast thing, that we’re not travelling well. There’s that kind of dichotomy between what the OECD says and how people feel.

Saul Eslake: That’s true and in some ways it tells you something about what twenty years of more or less continuous economic growth, and for much of that period what we would regard as full employment, rising house prices, relatively low interest rates, freely available credit and rising levels of personal wealth can do to your perceptions on life.

And that’s not to deny that there are Australians whose circumstances have gone backwards over the last five years. I mean, obviously that’s true. And it’s perhaps understandable that people whose circumstances have gone backwards aren’t comforted by the fact that they haven’t gone backwards by nearly as much as their counterparts in the United States or Europe.

It’s certainly true that people are anxious about their jobs. It’s true that people are anxious about increases in elements of their cost of living over which they have no control, like electricity or water or childcare fees and things like that.

It’s also human nature I think to remember things that you don’t like that happen to you more readily perhaps than you remember pleasant experiences, although I’m not a psychologist so I can’t really explain why that’s so.

Richard Aedy: But I’m interested as to how much that plays into your analysis. I mean, you’re kind of dealing with human beings…

Saul Eslake: Yeah.

Richard Aedy: …and mass psychology, in a way. And the whole rise of behavioural economics in the last couple of decades show that that is starting to filter in to how people like you make their calls.

Saul Eslake: That’s true. And I think some of the work that’s been done at the forefront of behavioural economics, for which economists and one psychologist have won Nobel Prizes in economics, has had some interesting things to say about the incentives not only facing ordinary consumers but the incentives that people working in some of the more obscure areas of the financial markets, explaining the way they behave.

But I think to take an example that’s relevant to what we’re talking about here, Australians are far more pessimistic both about their own personal finances and the outlook for the Australian economy relative to our history than you would expect them to be given how well the Australian economy in aggregate has been performing.

So I mean we’ve got on the latest figures 4.9 per cent unemployment. They’ve got 10.5 in Europe and 8.2 in the United States. And you’ve had a 38 per cent fall in house prices in the United States compared with an average of 6 per cent here. And yet you would think, to listen to the average Australian, that our experience of those objective facts had been more like those of Americans and Europeans than what it’s actually been.

Now as I say some of that is just simply reflective of Australians not having known hard times in general since the recession of the early 1990s. So to put it on an different perspective, there’s no adult Australian under the age of 40 who’s experienced a recession as a member of the workforce, which is a striking kind of thing compared with for example my parents’ generation whose experience of the Great Depression and of the Second World War and of some of the things that continued after that that petrol rationing that wasn’t abandoned until 1949.

They carried those memories for a long period afterwards. And I think that influenced the way they ran their lives in terms of the speed with which they paid off their mortgages, their reluctance to take on consumer debt to buy cars and household items.

Richard Aedy: This is Sunday Profile. I’m Richard Aedy, and we’re joined today by the economist, Saul Eslake.

I want to talk about what’s happened to the Australian economy for a little while. We’ve had these, several commodity booms. And after most of them we’ve then had problems. We’ve had high inflation and then recession.

You think though this boom is different.

Saul Eslake: I do, partly because what’s driving it is different from the things that have driven previous commodities booms.

If you look over the last century we’ve had three commodities booms since the end of the Second World War prior to this one.

The first in the early 1950s was a by-product of the Korean War when for a couple of years large numbers of people had to fight in frozen conditions and the demand for wool went through the roof.

Then we had the boom in iron ore and coal particularly but some other minerals that was a by-product in part of the industrialisation and urbanisation of Japan as it became our biggest trading partner during the 1960s.

And then we had another briefer one following the second oil shock that was killed by the recession that the United States and other major economies experienced in the early 1980s.

Now the difference between those ones and the present one is that the present mining boom is being driven by the urbanisation and industrialisation of the two most populous nations on the planet – China in particular and to a lesser extend India.

And they are much bigger relative to the global economy and relative to the global supply of commodities than Japan ever was. And moreover they are starting from further behind.

China is also industrialising and urbanising at much faster rate than Japan did at the same stage of economic development.

So by global standards this is simply a bigger thing. And I think it will continue until China’s per capita incomes that are currently, depending on how you measure them, somewhere between $US6,000 and $US8,000 a head, until they reach somewhere between broadly speaking $US15,000 and $US25,000 a head.

And the earliest that I think that’s likely to happen is some time around 2020/21. If that’s right then the demand side of the commodities boom will probably have another decade in it. And that’s without thinking to what extent it might be extended by things that are going on in India.

Now let me add that that doesn’t mean that it will always be featured by rising commodity prices. I think we’ve passed that phase. We’re now in a phase where the supply of commodities is increasing, including particularly out of Australia. And that means that commodity prices will probably fall from here on in, albeit that they’re staying at high levels.

But the other key difference is that we’ve mismanaged all of those commodities booms in the past. We’ve mismanaged them because we’ve not been prepared to accept that if the commodities sector is to grow as a proportion of our national income, which common sense says it will if you’re going to take advantage of the opportunity, what that means is that if the mining sector is going to be bigger as a share of GDP than it was say 10 years ago, something else has to be smaller than it was say 10 years ago. Something else has to be smaller.

And particularly when it comes to manufacturing Australians, not uniquely, have a view which says that manufacturing is inherently more noble and worthwhile than other forms of economic activity and so we tend to resist the kind of structural change that has to occur if we’re to have a commodities boom without it ending in double digit inflation like it’s always done in the past.

And the key thing that’s making that more possible now than it was in the 1950s and the 1970s or early 80s are, number one, that we have a floating exchange rate that can actually rise, which it didn’t do in previous commodities booms.

And secondly that we have a much better behaved workforce, that we aren’t seeing workers going after 20 per cent wage increases, as they did during the resources boom of the early 1980s.

And those two things together I think will manage it more successfully than we have done in the past.

Richard Aedy: But you think we could actually do more, whatever persuasion the government is or has been over the last ten years, that the federal government could do more to capitalise on the situation we find ourselves in with the commodities boom.

Saul Eslake: Governments in office during the first phase of the mining boom, that is the last two terms of the Howard government and in its first year, the Rudd government, frittered away many of the dividends that came their way during a period when mining companies were benefiting from very high prices. The economy more broadly was benefiting from easy credit at relatively low interest rates and rising prices for all kinds of assets.

And rather than saving most of those gains, they frittered them away in tax cuts and untargeted increases in a wide range of welfare handouts.

So we’ve developed over the period when revenue was rolling in easily an expectation that hasn’t since changed that you’re entitled both to low taxes and to lots of different kinds of welfare payments.

And if you think as I do that the mining boom has at least another decade to run then although it’s not an immediate priority now to establish some kind of national savings vehicle to quarantine some of that for future years, as the Western Australian Government did for example in its state budget last week, I think we ought to be thinking about that for the back half of this decade and the early 2020s. And we’re not.

Richard Aedy: And there’s a lot we could do if we did that. And one of the things that you’ve spoken about, and you gave a talk I recall in the Goulburn Valley in Victoria last year, you explicitly linked say a sovereign wealth fund with addressing indigenous disadvantage.

Saul Eslake: Yeah. There are a lot of problems that have been on Australia’s agenda for a long period of time which haven’t been solved in part because the amounts of money required to solve them have seemed beyond our reach.

They include things like fixing the Murray Darling Basin or improving the infrastructure linking up our major capital cities. But they have also long included Indigenous disadvantage that, you know, I think one of the enduring blots on Australia’s record is the dispossession and subsequent treatment of the original owners of this country, the indigenous people.

And the extend of indigenous depravation is massive and fixing it would require a whole lot of things that don’t simply require money but nonetheless also do require an awful lot of money.

Richard Aedy: You are clearly enormously engaged by your job. You get to think about ideas and think about how to resolve big problems. But also at home for a man, I think you’re what, in your early to mid 50s now, you have young children, you kind of have to compartmentalise your life quite a lot.

Saul Eslake: I’m not sure I think of myself as compartmentalising them. I mean…

Richard Aedy: I don’t mean you put your children in a box (laughs).

Saul Eslake: No, no, no, no. I don’t necessarily put my sort of working life in a box either, although there are obviously times when the demands of one outweigh the demands of the other and it’s not a one-way process.

I mean, yes, it’s true that having a family came rather later in my and my wife’s life than it did to other people. That’s in part because we couldn’t, as it turned out, have children in they way that most people do. And it might mean, you know, we don’t end up being grandparents or great-grandparents. But you know, that’s just they way that life’s panned out and I don’t really have any serious regrets about it.

Richard Aedy: Can I ask you about that? Because they’re both adopted from China, aren’t they?

Saul Eslake: Yes, they are. I was adopted myself so I didn’t see anything particularly unusual about that although obviously there’s a sort of cultural and ethnic dimension in my own family that wasn’t present in the family that I grew up.

But yes, my daughter is from Shenyang in the north-east of China, and my son is from Fuzhou which is half-way between Shanghai and Hong Kong. And that adds a dimension to our life and our experience that we wouldn’t have had otherwise.

We have our own connections with Australia’s major trading partner that we wouldn’t have had otherwise.

I’d like to think, although it’s obviously too early to tell, that it adds a dimension to my children’s life that they wouldn’t have otherwise had either.

Richard Aedy: As I understand it your daughter was not treated particularly well before you and your wife sort of came into her life.

Saul Eslake: Oh, I’m not sure I’d put it quite that way. I mean she lived in a Chinese orphanage for two years.

She was well cared for there in a physical sense. I mean, bearing in mind China’s not a rich country and she didn’t come from one of the better off parts of China, she was far better cared for than she would have been if she’d been in similar circumstances in India or Ethiopia or Russia or Romania, for example.

I think she was well fed. She was certainly well cared for medically. She’d had virtually all the vaccinations and so forth that an Australian child of the same age would have had.

What I think she didn’t experience during that time was the kind of emotional nurturing and love that a child in different, more fortunate circumstances, would have experienced.

And again if you think that she lived in an institution where there were roughly fifteen infants for every carer, it’s hard to see how that couldn’t have been the case, you know.

So I don’t, I certainly don’t blame the Chinese authorities, the people running the institution in which she lived, because if that hadn’t been there who knows what her fate might have been. You know she mightn’t have been here at all.

But there was a contrast with our son who was in an institution for the first three months of his life but then was with two foster families prior to him coming into our family at the age of roughly 21 months. And so unlike our daughter, he knew what a family was. He knew what a male was, in particular, whereas my daughter had probably not encountered males until she ran into me. And, you know…

Richard Aedy: That would have been quite a moment for both of you.

Saul Eslake: Yeah. She obviously couldn’t express what she thought at the time, at least not in words. I don’t think she enjoyed the experience.

And it took her some time I think to accept that being adopted, which was a fairly traumatic experience for her, being taken to a foreign country with people who looked different, who smelled different, who spoke words that she didn’t understand, I mean that would be, I can’t imagine how traumatic that would have been but for her it obviously was.

And you know having men as distinct from women around her was probably added to the unusual nature of that experience.

I mean, you know, she’s adapted to it and you know she regards us as being her family in the same way that I regarded my parents as being mine.

Richard Aedy: Do you think that with two such young children, and especially children from China which Australia’s fate seems to be inextricably bound to now, that gives you a slightly different perspective to before having them?

Saul Eslake: Oh well, I certainly think having children changes your perspective on a whole lot of things no matter how you come to have children.

I don’t think there’s any difference about forming a family through adoption than there is in the way that most people do.

It’s just that, you know, you are very sensitive to people who ask, you know, who are the children’s real parents or something like that. I mean that’s in some ways to people who are adopted or who have adopted children the distinction some people draw between real and adoptive parents is sort of borderline offensive. And people sometimes are I think probably not intentionally but nonetheless needlessly and carelessly insensitive about the language which they use.

I mean yes we also have I guess a cultural dimension to our family and some connection with China that the vast majority of Australians, unless they are themselves of Chinese heritage which a growing proportion of our population are, you know have a connection with that.

I mean that also means we need to work on maintaining our children’s connection with their cultural heritage. And that partly depends on their own enthusiasm for learning the language and experiencing the culture but we try and be as supportive of that as we can.

Richard Aedy: Thank you for being my guest on Sunday Profile.

Saul Eslake: It’s been a pleasure. Thanks for having me.

Richard Aedy: Saul Eslake is the chief economist for Bank of America-Merrill Lynch in Australia.


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