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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

7 June 2009

NO.012

Treasurer's Economic Note

Welcome to the latest edition of my economic note. The release of our National Accounts last week showed just what Australians are capable of when we pull together in the face of adversity. While virtually every other advanced economy in the world is going backwards, the efforts of people right around the country have seen our economy go forward. It's a testament to the unity and resilience of all Australians that in the midst of the worst global economic conditions in 75 years, we achieved the strongest growth of any advanced economy.

Global Recession

In last week's note, I referred readers to this OECD table showing recent GDP outcomes for OECD countries. We are still awaiting the March quarter GDP outcomes for a few countries, however of the 30 economies making up the OECD, 29 have contracted at some point since the onset of the global crisis, and 24 are in recession.

We also received further news last week of the impact this global recession is having on unemployment in advanced economies. The unemployment rate for the Euro area reached 9.2 per cent in April, the highest rate in almost 10 years. In Canada, the unemployment rate rose to 8.4 per cent in May. While in the US, the unemployment rate has risen to 9.4 per cent, its highest rate in more than 25 years. The US economy has now shed 6 million jobs since the start of the US recession in December 2007.

National Accounts

The National Accounts released last week showed that the Australian economy has outperformed every other advanced economy, recording positive growth in the face of the savage global recession. The Australian economy grew by 0.4 per cent in the March quarter – the strongest outcome of any advanced economy in the world. The major advanced economies contracted by 2.2 per cent in the same period.

Household Spending

Australia's growth outcome would not have been possible without a solid rise in household consumption. Despite the further deterioration in the global economy, households lifted their spending by 0.6 per cent in the March quarter. This is the clearest possible sign that the Government's cash stimulus payments to households are working to support jobs and growth in our economy. In fact, Treasury estimates that without these cash payments, the Australian economy would have contracted by around 0.2 per cent in the quarter. This means fewer job losses and thousands of families saved the loss of a breadwinner. You can find more information on the household consumption result, and a comparison of Australia and Canada's recent economic performance, in this article by David Uren in The Australian.

Last week's retail trade figures showed our cash payments to households are continuing to support consumption, with the value of retail sales rising by 0.3 per cent in the month of April. It's important to keep in mind that the cash payments are just the first phase of our economic stimulus plan, with most of the stimulus still to flow through in the second and third phases. This stimulus will see 35,000 building sites spring up around the nation, and continue to support our economy and jobs over the coming months.

Export Earnings

The other contributor to Australia's growth in the March quarter was a solid increase in our exports, which rose 2.7 per cent in the March quarter. However, the trade figures for the March quarter did contain some warning signs as to future challenges for the Australian economy. While our export volumes have held up, export earnings have been hit hard by this global recession as the prices of our key commodity exports have tumbled. Export earnings fell by around 7.5 per cent in the quarter, the third largest fall on record. This brings me to this week's Fact of the Week, which is that Australia's terms of trade – the price of our exports compared to the price of our imports – fell by 7.8 per cent in the March quarter, the largest quarterly drop in 35 years. This is one of the consequences of the unwinding of the mining boom, which has done so much damage to the Budget.

Support for Stimulus Strategy

Last week, 21 Australian economists endorsed the Government's strategy to battle this global recession in a published letter in the Australian Financial Review, among them Nicholas Gruen, CEO of Lateral Economics, Saul Eslake, Chief Economist of the ANZ Bank, Bernie Fraser, former Governor of the Reserve Bank of Australia, and Steve Dowrick, Professor of Economics at the Australian National University.

Writing about the Government's cash stimulus payments, the 21 economists wrote "There is no more effective way to stimulate the economy quickly. The success of this measure can be seen in the relative strength of Australian retail sales compared with almost any of our peers. In addition the Government plans to spend many billions more on infrastructure." The 21 economists note that Australia's public finances remain in a very healthy position and argue that "Deploying our strong balance sheet to use otherwise idle resources…to build assets that improve our lives and our economy in the future, seems much more appealing; much more commonsensical than retreating into phobias."

Reserve Bank

At its meeting last Tuesday, the RBA Board decided to leave the official interest rate unchanged at its lowest level in almost 50 years. Interest rate reductions have seen mortgage rates fall to around 5.75 per cent, delivering savings of $750 a month to a family on a $300,000 mortgage. These lower interest rates, combined with the Government's economic stimulus, are helping to cushion Australians from the very worst of the global recession, a point also emphasised by the Governor of the Reserve Bank in his speech last week.

Coming Up

The main economic news this week will be housing finance data for April, and labour force figures for May. While last week's National Accounts were encouraging, we know we aren't out of the woods yet. The full impacts of this global recession still have some way to run, with impacts for jobs here at home. We face a rocky road ahead, and we're going to need every ounce of effort to get through. But I think the clearest message from the National Accounts is that all Australians are ready to do their bit, and to front up to the big challenges that lie ahead of us.

Wayne Swan
Treasurer of Australia
Sunday 7 June 2009

www.treasurer.gov.au
www.australia.gov.au/economicstimulus