The latest edition of my economic note comes to you from Perth, where I spent most of the weekend talking to business people and locals. Coming across to this side of the country reminds me a lot of my home state of Queensland, with both States really feeling the effects of the unwinding of the commodities boom and the resulting collapse in commodity prices. As Federal Treasurer I know how brutal it has been, with a $210 billion write-down in federal government revenues. However I also know that were it not for the Government's substantial economic stimulus, the unwinding of the commodities boom and the global recession would have had a much greater impact on jobs around the country. This was reinforced by three international reports that were all released last week.
The World Bank's Global Development Finance report illustrates the difficult year ahead for the global economy, with the World Bank further downgrading its global economic outlook. It now expects global output to shrink by 1.7 per cent in 2009, with the US expected to contract by 3 per cent, the Euro area by 4.5 per cent, and Japan by a massive 6.8 per cent.
The World Bank report underscores the importance of policy action around the world. It states that the "extraordinary policy responses by governments around the world have helped save the global financial system from systemic collapse." It goes on to say that these actions, combined with fiscal stimulus, will "help reduce the depth and prospective length of the global recession."
The OECD's Economic Outlook confirms that Australia has the best performing economy in the OECD, with lower debt and lower deficits than any of the major advanced economies. It forecasts the Australian economy will contract by 0.4 per cent in 2009, which is the mildest contraction of any of the 30 OECD economies, and one-tenth the size of the 4.1 per cent contraction forecast for the OECD as a whole. Acting Head of the OECD's Economics Department Jorgen Elmeskov said that even with OECD activity suffering its deepest decline in post-war history, "it could have been worse. Thanks to a strong economic policy effort an even darker scenario seems to have been avoided. But this is no reason for complacency; the need for determined policy action remains across a wide field of policies."
The OECD report points to the Government's nation building investments as a key support for the Australian economy, noting "The infrastructure development programme announced in the 2009-10 Budget is welcome and should strengthen fiscal policy impact." It notes that in the current environment, government budgets have provided "a very important cushion for economic activity in the downturn".
Despite Australia's stronger outlook, the OECD report notes that we will not be immune from the impacts of the global recession. It forecasts the unemployment rate in Australia will rise to 7.9 per cent by the end of 2010. Whilst too high, this is considerably lower than the 9.9 per cent unemployment rate forecast for the OECD as a whole.
The IMF's Article IV Consultation concluding statement strongly endorses the Government's economic stimulus, stating "We welcome the quick implementation of targeted and temporary fiscal stimulus. The stimulus provides a sizeable boost to domestic demand in 2009 and 2010 that will cushion the impact of the global recession." It commends our three-stage stimulus strategy, when it says "The transfers to households had an immediate impact on activity that helped underpin confidence. The increase in public investment will continue to support activity in the near term, while addressing infrastructure shortfalls."
The IMF report also praises the Government and Reserve Bank's actions to strengthen the financial sector. It says our bank deposit guarantee has "bolstered confidence in the financial system", and our wholesale funding guarantee has "allowed for continued access to international capital markets."
The IMF report states that projected budget deficits are "appropriate in current circumstances", and that Commonwealth government debt is projected to remain low compared with other advanced economies. It commends the Government's commitment to return the Budget to surplus, noting "Few other advanced countries have adopted such a clear commitment." This is a big tick for our strategy.
This week's Fact of the Week is that more than 97,000 Australians had taken up the First Home Owners Boost by the end of May. The month of May saw the biggest take-up so far, with 19,607 first home buyers using the Boost to enter the housing market. Given the success of this initiative in supporting housing activity, the Budget extended the First Home Owners Boost for six months to 31 December 2009, with the Boost reduced by half for the last three months of the extension period.
As we navigate these difficult global conditions, confidence is absolutely vital. That's why we welcome the results of the Sensis Consumer Report, which found that consumer confidence rose by 18 per cent in the three months to May, the largest quarterly rise on record.
However other data released last week confirmed that we face a rocky road ahead, with the unwinding of the commodities boom to have a devastating impact on export earnings. Australian commodities data showed that earnings from Australia's commodity exports are expected to fall by 18.1 per cent in 2009-10, stripping $35 billion out of the economy next financial year. This will be driven by a sharp decline in minerals and energy export earnings, which are expected to fall by 22.4 per cent.
In the coming week, the US will release their unemployment data for June, while here at home we will receive retail trade figures, building approvals data, and the RBA financial aggregates.
It was encouraging to see that Government efforts to stimulate the economy are working to position Australia as one of the best performing economies in the developed world, but there is no room for complacency when Australian jobs are at risk. It's often difficult to talk about recovery when we know that Australians still risk losing their jobs to the ravages of the global recession. That's why the Government's Nation Building for Recovery plan is all about supporting Australian jobs now, by building the infrastructure we need to take maximum advantage of the global recovery when it comes.
Treasurer of Australia
Sunday 28 June 2009