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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

29 March 2009


Treasurer's Economic Note

Welcome to my second economic note and thanks for the positive feedback on the first one. I want to kick off this week's note with a brief review of international economic developments.

Data released last week showed that both the US and UK economies contracted by 1.6 per cent in the final three months of last year, the worst outcomes since the early 1980s. Across the Tasman, we got news that the New Zealand economy suffered its fourth straight quarter of negative growth, with output falling by 0.9 per cent in the December quarter.

A term you may be hearing a lot about is 'toxic assets'. These are the bad assets emerging from the US sub-prime crisis that are infecting the balance sheets of US and European banks and clogging the arteries of the global financial system. These assets reduce the ability of banks to lend to business and households and are undermining confidence in the global financial system.

The extent of the problem of toxic assets and related losses brings me to the Fact of the Week from Bloomberg. Credit-related losses since the beginning of the financial crisis now total more than US$1.2 trillion globally. That's higher than Australia's annual GDP and also exceeds, by a considerable margin, the banking losses recorded during previous crises such as the Asian financial crisis (1998-99), the Japanese banking crisis (1990-99) and the US savings and loan crisis (1986-95).

The problem of toxic assets has been at the very core of the global financial crisis and taking action to resolve it is a key step on the road to recovery. That's why the Prime Minister and I have been calling for global action from G-20 leaders to address the problem of toxic assets.

Last week the US Treasury released details of a plan to remove toxic assets from bank balance sheets and help restore credit flows in the economy. The initial market reaction to this plan and additional actions by the US Federal Reserve has been positive, with share markets around the world recording strong gains during the week. You can read more about the US Treasury plan in this article in The Wall Street Journal by US Treasury Secretary, Timothy Geithner.

The Prime Minister and I will be discussing toxic assets at the G-20 Leaders' Summit in London later this week. I'll be meeting with my counterparts from both developed and developing countries to discuss further actions we can take to restore economic growth and support jobs.

The PM has also been in the US discussing the global financial crisis in a really successful meeting with President Obama.

Last week, in a speech to the Sydney Institute I outlined the challenges we are facing at home and abroad, and how with the right policy action we can come through this global crisis with an even stronger and more resilient economy. The key point I wanted to emphasise in my speech was that while the short-term is full of challenges, the long-term is full of promise.

I also pointed to some of the strengths we have going for us that are not evident elsewhere in the world. One of those strengths is our financial system, which has so far weathered this global crisis much better than those in many other countries.

That was also highlighted in the Reserve Bank's Financial Stability Review also released last week. It reported that our financial system remains soundly capitalised and well regulated. Unlike many of their international peers, Australian banks have retained their high credit ratings, despite the difficult global environment. The RBA also noted that the Government's bank guarantee arrangements "have been successful in sustaining depositor confidence and in ensuring that Australian banks have continued access to capital market funding."

Another one of our strengths is that our housing market has held up much better than other countries. For those interested in reading more on this I would refer you to a speech delivered last week by the head of the Reserve Bank's Economic Analysis Department. It also details how policy action – both lower interest rates and the Government's First Home Owners Boost – is working to support the housing sector.

Last week, I also announced a temporary guarantee of state borrowing to support jobs and protect vital nation building plans. Without it, nation building infrastructure and even more jobs would be put at risk.

In the past week, new figures from the Australian Bureau of Statistics demonstrated the profound impact the global recession and falling share markets have had on the financial position of many Australians. The value of household financial assets fell by around $110 billion in the final quarter of last year, as stock markets around the world tumbled.

In the coming week we will receive further news of the state of the global economy, including the US employment situation on Friday night. The unemployment rate in the US has already hit a 25 year high and more than 4 million Americans have lost their jobs since the US recession began.

The coming week will also be a busy one in terms of Australian economic data. We will get a reading on Australia's credit markets which are so vital in supporting economic growth. We will also receive new figures on building approvals and retail trade. We know that retail activity and jobs outcomes have been much stronger than they would otherwise have been, as a result of our economic stimulus plan which has helped to cushion the blow from the global recession.

Data on Australia's trade balance for February, to be released on Thursday, will reveal how our export industries have been affected by the global economic turmoil.

While there are no quick fixes to this global recession, with the right action globally and here at home, we can come through this stronger and more prosperous than before.

Thank you again for your interest and for taking the time to read this note.

Wayne Swan
Treasurer of Australia
Sunday 29 March 2009