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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

17 October 2010

NO.033

Treasurer's Economic Note

Today's economic note follows a week of economic conversations that took me from the floor of the New York Stock Exchange to the classrooms of a suburban Brisbane high school. I spent the start of the week in New York talking to investors and financial institutions about the strength of the Australian economy and our economic plans for the future. I arrived back in the country on Thursday for a meeting with the Board of Taxation and major Queensland companies in Brisbane. By Friday I was enjoying a discussion with Year 11 economics students from schools in my electorate, and was really impressed with their understanding of the economy and their enthusiasm to learn more. Whether it's a Wall Street audience or Queensland businesspeople or Year 11 students in the northern suburbs of Brisbane, there's a real hunger to know more about our economy and a real willingness to participate in important discussions like we'll be having at the Business Roundtable on climate change.

Investor Briefings in New York

While the key message I took away from my meetings in Washington DC was the fragility of the global recovery, my conversations about the Australian economy with business and industry leaders in New York couldn't have been more different. The one thing I kept getting asked was how did we do it – how did we come through the global financial crisis as one of the only advanced countries to avoid recession, and how have we added hundreds of thousands of jobs to our economy when so many of our peers are still wading through the rubble of recession. With strong economic growth, low unemployment, a strong financial system and a solid pipeline of investment, people are looking really closely at our economy – at our economic reforms over the past 25 years, our world-class regulators, and our reform agenda to broaden and strengthen the economy.

I also delivered a speech to the New York Story Exchange on the Australian success story, which was published in the Asian Wall Street Journal as an edited extract. While it focused on our outstanding economic story and prospects going forward, it also highlighted that tireless global engagement is just as important to Australia's future economy as it was to our successful response to the crisis. We weren't immune from the impacts of the global recession, and it's crucial that the G20 agrees to global reforms that will ensure we never again see a repeat of the failures and excesses that led to the global financial crisis.

G20 Finance Ministers' Meeting in Korea

I'll be working closely with my G20 colleagues in Korea this coming weekend on reforms to deliver strong, sustainable and balanced global growth. That includes currency reform, but it also includes so much more. We have to show that we are capable of dealing with the structural reforms that will lift growth across all countries, not just shift it between countries. If the global recovery is to be balanced, and above all if it is to be sustained, developing nations need to see a faster rate of growth in domestic demand, and developed countries need to undertake reforms to increase domestic savings.

G20 Finance Ministers have already made good progress in our efforts to reform the global financial system, and I'm confident we'll agree on global standards that are appropriate for Australia and recognise we won't require the same degree of adjustment as other countries. We also need to press ahead with reforms to ensure international financial institutions like the IMF reflect the increasing weight of Asia in the world economy and are better placed to help countries when they need it.

Australian Dollar

Late on Friday night the Australian dollar briefly reached parity with the US dollar for the first time since the exchange rate was floated 27 years ago. This milestone reflects the stark difference in the strength of our economy relative to other nations, record prices for our commodities, and the effects of diverse and dynamic international currency markets.

Australia has had a floating currency now for more than a quarter of a century, and it has served our nation well as a shock absorber against global events. But we know that there are swings and roundabouts from the higher dollar, and while the dollar has beneficial impacts for consumers through cheaper imports and some businesses through cheaper capital equipment, it also makes it much harder for trade-exposed sectors of our economy to compete, like manufacturing, agriculture, tourism and education. The Government's agenda to strengthen and broaden our economy to increase economic capacity and competitiveness, including by cutting the corporate tax rate, can help ease some of these pressures.

For more commentary on the dollar you may be interested in this article by Ian Verrender, which sets out the reasons for its rise and addresses some of the misrepresentations that have arisen in the current debate about its value. Mr Verrender makes the point that attempts to artificially depress the value of the currency would be counterproductive as they would only succeed in driving inflation and interest rates higher, with damaging consequences for all sectors of the economy. Some of us remember well the last time Australia attempted to fix its currency at the same time we were experiencing a terms of trade boom in the mid 1970s. The result was headline inflation rose from around 5 per cent to 17.6 per cent in a little over two years.

For a more global perspective on currencies, you may also be interested in this article by Ross Gittins, which discusses some of the factors affecting currencies around the world.

Employment in the US and Australia

We can also see the stark difference between the US and Australian economies in recent jobs numbers. There was a particularly poignant illustration of the impact that the global financial crisis has had on employment in the US in one of the graphs shown by Alan Kohler during his nightly news segment last week. It displayed the job losses suffered in the US during the global financial crisis and other severe recessions since World War II, and is recreated below. I've also included a similar graph for Australia, which displays the job losses suffered during severe recessions since 1966 (when the employment series began) and the downturn experienced during the global financial crisis.

The graphs clearly show that the global financial crisis has had a much more devastating impact on employment in the US than that sustained during other post-war recessions, while here in Australia the opposite is true – our timely and temporary stimulus helped our economy avoid recession and the large-scale job losses that occurred elsewhere.

Job losses in the US during various recessions

Job losses in Australia during various recessions
and 2008 downturn

Job losses in the US during various recessions

Job losses in Australia  during various recessions and 2008 downturn

Consumer and Business Confidence

Solid consumer sentiment readings continue to reflect the confidence that comes with strong jobs numbers. The latest Westpac-Melbourne Institute Survey of Consumer Sentiment found consumer confidence rose by 3.3 per cent in October, which Westpac Chief Economist Bill Evans said was "a solid result and in line with our expectations. … The level of the index is around 2.5 per cent above the average for 2010; around 15 per cent above the low point in the year … and 15 per cent above the long-term average for the index." Two years ago, in October 2008, news of the collapse of Lehman Brothers saw the consumer sentiment index fall to just 82.0 points. Now at 117.0 points, the monthly index has been higher than its current level on only 20 occasions in the past 15 years – and seven of those have been since September last year.

The NAB Monthly Business Survey found business confidence slipped slightly in September but still remains well above its long-term average. Business conditions rose above their long-term average in September, with trading conditions increasing strongly, profitability improving, and employment softening slightly but remaining in positive territory. NAB Chief Economist Alan Oster commented that the survey results "continue to highlight the re-emergence of a multi-speed economy in Australia. … Manufacturing has reported negative employment conditions for four months in a row, probably because its trade-exposed sectors have been pressured by slowing global growth and then by the appreciating AUD." At the same time, "trading and profitability are exceptionally strong in mining".

We can see the strength of mining in the business pages of the papers. Just last week it was reported that Rio Tinto produced record worldwide amounts of iron ore, alumina and coking coal in the September quarter, with Rio Tinto Chief Executive Tom Albanese saying "we continue to run our operations at close to or above capacity rates, taking advantage of strong prices for our products." He announced that "Rio Tinto approved capital projects totalling US$4.2 billion during the third quarter, including US$1.3 billion for the Pilbara iron ore expansions … and US$1.6 billion for the development of the Hope Downs 4 iron ore mine in the Pilbara."

Talking to Lateline Business during the week, the chairman of Queensland coal explorer Northern Energy, Dr Chris Rawlings said "Australia is very lucky to be endowed with great deposits. We have the premium coking coal deposits in the world, we have very good thermal coal deposits and we are right on the doorstep of Asia, who has increasing demand of coal … [T]his is an industry that I can see nothing but greater flourishment and greater expansion in the future."

Economic Reform Agenda

Our economic reform credentials received a ringing endorsement from Standard & Poor's last week in their ‘Global Aging 2010: Australia' report. It emphasised that Australia like much of the world faces significant economic challenges from an ageing population, but we are "ahead of many peers in addressing these challenges". The report highlighted the importance of the responsible economic reforms we have already put in place to manage age-related spending pressures – like our reforms to improve the sustainability of pension arrangements, boost superannuation for all Australians, and improve the efficiency of the health system. Standard & Poor's concluded that "Australia's progress in implementing structural adjustments may drive the momentum for it to maintain its long-term fiscal sustainability and creditworthiness."

In a speech in Brisbane on Tuesday, the Prime Minister emphasised that economic reform is not easy, but it works. Julia discussed the reforms we've already made to Australia's health and education sectors and our investments in skills to expand the supply side of the economy. The PM then talked about our ongoing commitment to fundamental reform in areas like putting a price on carbon and water allocations, rightly saying that "one or two big ticket reforms is not enough. In government, we must walk the reform road every day, and minority government is no excuse."

I'm looking forward to working cooperatively with the Parliament on these important reforms. In the space of just six short weeks, the crossbenchers have already shown a real willingness to work constructively with the Gillard Government – Bob Brown and Christine Milne from the Greens and Independents Tony Windsor and Rob Oakeshott have joined the Multi-Party Climate Change Committee, and Tony Windsor has been working with us on the terms of reference for the inquiry into the impact of the Murray-Darling Basin Plan. Tomorrow marks the start of a fortnight of parliamentary sittings, and we'll be working hard to secure the support of the Parliament for important changes in areas like tax, superannuation, corporate regulation and research and development.

Business Roundtable on Climate Change

A key plank of our economic reform agenda is the introduction of a price on carbon. As Climate Change Minister Greg Combet said in his speech to the Carbon Expo Australasia 2010, "just as the reforms instituted in the 1980s were vital to helping us survive the global financial crisis, the reforms we are embarked on now will allow us to prosper in a carbon-constrained future." The introduction of a carbon price will reshape the business environment for all Australian companies, providing businesses with the certainty they need to invest in low-pollution technologies.

The Government has announced that it will establish a new Business Roundtable on climate change to ensure that the views of the business community are front and centre as we progress this important economic reform. I can let you know that we'll be announcing the members of the Roundtable in the next 24 hours. You'll see that they're drawn from sectors right across the economy, including resources, manufacturing, energy, transport, finance, property and retail, as well as peak industry groups. The Roundtable will play a critical role in providing advice to the Government on the economic and business issues surrounding climate change, and the diverse background of its members will ensure it represents a broad range of views.

I look forward to updating you on these and other developments from Korea next Sunday.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 17 October 2010