The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

10 October 2010

NO.032

Treasurer's Economic Note

Today's economic note comes to you from Washington DC where my colleagues and I have once again come together to tackle the issues confronting the global economy. These meetings bring back memories for me, as it was this corresponding weekend two years ago that we introduced the successful bank guarantees in the depth of the global crisis. Earlier in the week, on Tuesday 7 October 2008, the Reserve Bank had cut interest rates by 100 basis points in a move that would be followed days later by central banks right around the world. On Thursday 9 October I was in New York being briefed on the fall-out of the collapse of Lehman Brothers just three weeks earlier. Then on Saturday 11 October I met with my IMF and G20 colleagues and then-President Bush. That night I rang into an emergency meeting back home to brief my colleagues on global developments before returning to Australia on Tuesday 14 October to announce the first of our stimulus packages. Our timely and targeted action was so successful because we had the foresight to plan for our recovery right at the time we were implementing our stimulus. Thanks to the strict fiscal rules we put in place at the height of the global crisis, we're on track to return the budget to surplus in 2012-13, well ahead of any major advanced economy. And our historic investments in nation-building infrastructure are building productivity and capacity as our economy comes up against the challenges of commodity boom mark II.

International Reform in Washington

The past two days in Washington have been a succession of really valuable meetings with my international counterparts and representatives of key economic institutions. Between meetings of the IMF, the World Bank Group and Commonwealth Finance Ministers, I've participated in bilateral meetings with my G20 counterparts from Brazil, Canada, France, India, Korea and the United States and the NZ Finance Minister, and met with the president and managing director of the World Bank and the chairman of the Financial Stability Board.

The clear message from this weekend's G20 and IMF meetings is that the global economy is still brittle and has a long way to go, with the risks to the recovery skewed to the downside. The IMF briefing to Ministers under the Early Warning Exercise was particularly sobering, and highlighted that the risks to the global economy are to the downside and really need to be considered high.

The meetings also highlight to me just how strongly our economy is positioned compared with our peers. We have an economy with strong growth and strong job creation, a large pipeline of business investment ahead of us, and we're on track to get our budget back to surplus in three years, well before any of the major advanced economies.

As I emphasised in my video statement to the IMF and World Bank Group and at the private meetings, we need to continue harnessing the resolve that saw major countries act to defend their economies against the crisis. We focused on ensuring reforms are implemented across member economies that will deliver the sort of strong, sustainable and balanced economic growth we all want to see. We also continued to tackle reforms to ensure international financial institutions like the IMF reflect the changing nature of the global economy and have the capacity to support countries when needed.

We've made good progress with our international peers on reforming our global financial infrastructure, so that we never have a repeat of the destruction we saw during the crisis. Our efforts to protect the financial system are all about protecting the real economy – and through it the jobs and welfare of all Australians. As Luci Ellis, head of the RBA's Financial Stability Department said in a speech last week, "policymakers' concerns about financial stability stem, in the end, from the effects that the financial system can have on the real economy. We care about financial crises because of the economic and human costs they entail, not because of any direct concern for the financial firms themselves." We owe it to every worker who lost their job, every small business that closed its doors, and every pensioner whose savings were wiped out, to strengthen the world's financial infrastructure and ensure we prevent a repeat of the failures that led to the global financial crisis.

IMF Reports

The IMF's release of additional chapters of the Global Financial Stability Report provided a good backdrop to our discussions on global financial reform. The IMF noted that risks in the global financial system remain elevated due to a number of factors, including a lack of progress in addressing ongoing weakness in the banking sector, banking systems' vulnerability to sovereign risks and funding shocks, and increased uncertainty about the transition to a private-sector led recovery among advanced economies. The IMF highlighted that conditions in the global financial system have the potential to jump from benign to crisis mode very rapidly, as we've seen on several occasions over the past three years.

The IMF also released its World Economic Outlook last week. It emphasised that while the global recovery is proceeding largely as expected, downside risks remain elevated and the recovery remains uneven. With most major advanced economies struggling with persistently high unemployment, low confidence and weak private demand, advanced economies as a whole are expected to grow by 2.7 per cent in 2010, before slowing to 2.2 per cent in 2011. The IMF confirmed that Australia's economy is in a strong position and continues to outperform other advanced economies, forecasting growth of 3 per cent in 2010 and 3.5 per cent in 2011. The report highlighted the two-speed nature of the global economy, with still sluggish growth in many advanced economies set against a much more robust recovery in emerging and developing economies, particularly those in our region. Developing Asia is expected to grow by 9.4 per cent in 2010 and 8.4 per cent in 2011, with strong growth forecast for China and India. As I've discussed previously, the strong growth in our Asian neighbours through ongoing urbanisation and industrialisation presents both significant opportunities and challenges for our own economy.

Australian Jobs

We can see the strength of the Australian economy in Thursday's labour force figures, which showed 55,800 full-time jobs were created in September. This follows the creation of 56,700 full-time jobs in August, making it the biggest two-month increase in full-time employment since January 1988. A slight fall in the number of part-time jobs in September saw the overall level of employment rise by 49,500 persons, which was the biggest increase since January this year and around double market expectations. The labour force experienced its strongest growth since February 2009, taking the participation rate from 65.4 per cent to 65.6 per cent and keeping the unemployment rate steady at 5.1 per cent. The Australian economy has now added 360,400 jobs over the past year, with more than 80 per cent of these full-time positions.

It's clear from the IMF's World Economic Outlook that the unemployment problems plaguing many advanced economies aren't expected to dissipate any time soon, with the unemployment rate across advanced economies as a whole forecast to remain above 8 per cent over 2010 and 2011. On Friday night we learnt that unemployment in the US remained unchanged at 9.6 per cent in September. That followed the announcement earlier in the week that the Euro area's unemployment rate for July had been revised up 0.1 of a percentage point to 10.1 per cent, and remained unchanged in August.

The following graph shows the stark difference in unemployment outcomes for the US and Australia over the past couple of years after being broadly similar for much of 2006 and 2007. In the middle of 2007, Australia and the US had broadly similar rates of unemployment, but now unemployment in the US is around twice what it is here at home. While the US economy has shed around 6 million jobs since the collapse of Lehman Brothers in September 2008, the Australian economy has created over 400,000 jobs in that time.

Unemployment rate

Line graph depicting the unemployment rates for the Euro Area, the US, the OECD and Australia between September 2005 and September 2010.  Australia is consistently the lowest of all the regions.

Trade Surplus and Australian Dollar

Strong economic growth in our part of the world helped Australia record its fifth straight monthly trade surplus in August. At $2.3 billion, it was the third largest trade surplus on record and means the five straight trade surpluses recorded between April and August this year total $11.2 billion. The increase in the trade surplus partly reflected a fall in imports after the importation of six super hornets by the Department of Defence in the previous month. The fall in import values was partially offset by a small decline in export values, which fell by 2.4 per cent in August but still remain 27.5 per cent higher than a year ago.

On Thursday night the Australian dollar reached US99.17c – its highest level since the currency was floated in December 1983. The current strength of the dollar reflects the stark difference between Australia's economic performance and that of the rest of the developed world. But I also understand the impact that a high dollar has on trade-exposed industries like tourism, manufacturing and agriculture, which aren't benefitting from higher prices and find it harder to compete in their own global markets. One of the key aims of our new mining tax reforms is to make businesses across all sectors of the economy more competitive by funding a cut in the company tax rate and a tax cut for small business.

Investor Briefings in New York

Shortly I'll travel to New York where over the next two days I'll meet with the CEOs of Morgan Stanley and Goldman Sachs, the chief operating officer of the New York Stock Exchange, and the president and executive vice-president of the Federal Reserve Bank of New York. I'll also deliver a speech to investors at the New York Stock Exchange exactly two years after I first visited the iconic institution during the height of the global financial crisis. Australia has an outstanding economic story to tell, and I'm looking forward to talking to investors about our low unemployment, strong financial system, and solid pipeline of investment. We're a capital-hungry country and a tremendous destination for investment, and our economic plan to broaden the economy and build productivity and capacity will provide an even stronger foundation for investment going forward.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 10 October 2010