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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

14 August 2011

NO.030

Treasurer's Economic Note

The wild swings on international financial markets have understandably left many people anxious about the outlook for the world economy. I'd caution against reading too much into short-term movements in the share market. Just as a big gain in trading over a day or a couple of days doesn't mean the challenges faced by Europe and the United States have been solved, a big fall doesn't mean they're insurmountable either. It will take time for these major economies to get their houses in order. Tough decisions will clearly need to be made to reduce their excessive levels of debt and ensure their budgets are sustainable. Unfortunately this means the outlook for the global economy will remain uncertain for some time.

In Australia, though, we need to remember that our fundamentals are strong by any yardstick. As a report by the International Monetary Fund highlighted last week, Australia has very low public debt, low unemployment, a massive pipeline of investment and we expect to bring the budget back to surplus next financial year, although as I noted last week, obviously current global events make that task much tougher.

Working Together

I've been in regular discussions with our financial regulators and local institutions about recent developments in global financial markets, as well as with many of my counterparts around the world. Clearly at a time like this, nations need to continue working closely together to support the stability of global financial markets and promote world economic growth. On Monday, I put out a statement with fellow finance ministers and central bank governors from the G20 to highlight this point. Since the onset of the global financial crisis, Australia has punched above its weight on the international stage. We've pushed for a greater say for emerging economies in the global decision-making process, we've worked hard to strengthen financial and prudential regulation, and we've stressed the need for countries to address economic imbalances. Recent events will only redouble Australia's commitment to working with other nations to meet these long-term goals.

The tyranny of distance is really a thing of the past for Australia. With the shift in global economic weight from West to East, we're finally located in the right part of the world at the right time. With Europe and the US both facing a sustained period of sluggish growth as they deal with their own challenges, the prospects for our region remain much stronger. Around three-quarters of Australia's goods exports are sold to Asia, with around one-quarter going to China alone. In fact, Australia exports more goods to China than we do to the US and Europe combined, and those exports continue to grow. And of course, it's not just a story of China. Australia stands to benefit in the years ahead from strong growth in India, Indonesia, Vietnam and many other emerging Asian economies.

A Changing China

I've been asked a number of times in the past week whether China's economy will likely be dragged down if its export markets in Europe and North America dry up. Of course like Australia, China is not immune from global developments. But I think there are good reasons to be optimistic about the continued growth of the world's most populous nation. The image of China as the world's factory churning out goods for the rest of the world overlooks many of the changing dynamics inside the economy.

Firstly, as it proved during the GFC, China has the policy flexibility to fire up its domestic engines of growth if external conditions fall sharply. Secondly, what's often not appreciated is that capital investments, rather than exports, are increasingly driving China's economy. In fact, in recent years about half the nation's growth has come from building things like roads, bridges and homes. In the past 30 years, investment as a share of GDP has risen from 35 per cent to almost 50 per cent. And thirdly, rising living standards are creating new ranks of middle-class consumers that are driving demand. In 1980, the income of the average Chinese citizen was 2 per cent that of an average American. Today it's closer to 16 per cent. And that will only continue to increase. This has implications not just for China's economic growth, but for Australia's as well.

The new ranks of middle-class consumers in China and the rest of Asia will increase demand for more than just our mineral wealth. It will also benefit Australia's tourism operators, education providers and manufacturers of high-end goods. A staggering fact is that the middle class in Asia is expected to be bigger than that in the rest of the world combined by the end of the decade. It won't be all smooth sailing from here, and certainly China has more work to do to further increase domestic demand, but the underlying trends in our region are positive not just for the next few years, but the next few decades.

Strong Fundamentals

As well as being in the right part of the world, Australia has a proven track record for dealing with global instability. This was highlighted by jobs data on Thursday that showed just how much better the situation in Australia is compared to most other developed countries. Employment was broadly steady in July with a slight uptick in the jobless rate because of the growing size of our labour force. Around 750,000 jobs have been created since this Government came to office, and nearly 190,000 jobs in the last year alone - with more than nine out of ten jobs created in the last 12 months being full-time positions. For some perspective, it's worth comparing our jobless rate of 5.1 per cent with those of other developed countries:

United States 9.1 per cent
Canada 7.2 per cent
United Kingdom 7.7 per cent
Germany 7.0 per cent
France 9.7 per cent
Italy 8.0 per cent
Spain 20.9 per cent
Japan 4.6 per cent
New Zealand 6.5 per cent

Many people overlook the fact that when we entered the GFC, Australia's unemployment rate was the same as the US. If that was still the case, an extra 486,000 Australians would be out of work today. It should never be forgotten that Australia's swift policy response to the global downturn that struck in 2008 prevented tens of thousands of people losing their jobs and countless business failures. We were almost alone among developed economies in avoiding recession.

Coming Up

With Parliament resuming this week, we'll be getting on with the job of passing the Government's ambitious reform agenda into law. In this term of government alone, we have passed around 130 pieces of legislation - a pretty stark contrast to the political gridlock in Europe and the US. The coming sitting period is set to be one of the busiest on record, with plenty of important legislation to be introduced over the next few months, including the Minerals Resource Rent Tax bills and the Clean Energy Future package. This week, the Government plans to introduce important legislation to promote research and development. This tax reform will help channel higher levels of funding into genuine R&D, rather than company spending that would have been likely to happen anyway. Businesses with annual turnovers of less than $20 million will benefit most, as they will receive the highest rate of assistance. Importantly for many cash-strapped small businesses, the tax refund credit can be claimed within months of actually doing the R&D. Small- and medium-sized businesses are the engine rooms of our economy and these reforms will help spur a new wave of innovation and increase productivity in Australian industry.

While I know many Australians are uneasy about the economic outlook overseas, there's a danger we lose sight of how different our situation is here at home. Our fundamentals are strong and we have good reason to be confident about our economy's future. As I move around our boardrooms and our workplaces, I get a sense of quiet optimism that's often not reflected in the media and some of the public debate. We're not immune to what happens in the rest of the world, but Australia remains better placed than any other nation to ride out the turbulence.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 14 August 2011

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