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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

4 September 2011

NO.033

Treasurer's Economic Note

When we look beyond our shores, our eyes have tended to turn to Washington, New York and London. That's not all that surprising given the strength of our bonds of history, language and culture. Our understanding of our own situation is influenced by events in North America and Europe, filtered through the images we see on television and the reports we read in newspapers. Traditionally, what happened in the two great engines of the global economy was reflected here; in particular, downturns were matched and sometimes amplified. Changes in our economy and in our region mean this is no longer the case. While we're certainly not immune to events on both sides of the Atlantic, there's a danger we lose sight of how different our situation is here in Australia. We don't suffer from high levels of unemployment or weak business investment – far from it, figures out last week showed investment is gathering even more strength. We're not burdened by frail public finances – indeed our budget position is among the strongest in the advanced world. Our parliament is not gridlocked – in fact our lower house has passed around 185 bills. This is not to downplay our nation's challenges, but it's important to realise our challenges are very different to those faced by many other developed economies.

A Different View

You get another perspective on the global economy from policy makers and business leaders in Hong Kong and southern China, where I have just spent a productive couple of days. They are obviously concerned about the fiscal challenges and anaemic growth in Europe and the United States, but they are also confident in the outlook for our region. Emerging Asia, which contributed half of global growth in 2010, will continue to perform and perform strongly. This matters to Australia because around two-thirds of our goods and services exports go to Asia. In fact, exports to China and India are double those to the US and Europe. While it's true some of our exports to China ultimately make their way into the manufactured goods that end up on the shelves of stores in the West, about 80 per cent is for China's domestic use.

Asia's economies are becoming more self sustaining. The building of factories, roads, bridges and other infrastructure is propelling growth across the region. For instance, around half of China's growth is coming from capital investment. And the middle class in the Asia Pacific is expanding at a truly extraordinary pace, with around 110 million people being added to the ranks of the world's wealthy each year. By the end of this decade, Asia is expected to be not just the world's biggest production zone but also the biggest consumption zone, with more middle-class consumers than the rest of the world put together. 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 it has a long way left to run.

A Growing Market

An example of the rising wealth in Asia can be seen in the rapid increase in ownership of consumer goods among Chinese urban households. Between 2000 and 2010, the number of cars per 100 urban households is estimated to have risen from less than one to more than 12; microwave ovens from 16 to 58; computers from eight to 70; and the number of mobile phones from 16 to 188. Another indicator of the transformation we're seeing in the region is the increasing importance of Asian travellers to the world's tourism market. In 1995, around 4.5 million residents from mainland China and 3 million from India travelled abroad for business and leisure. By 2009, the number of Chinese heading overseas had increased ten-fold to 48 million and was close to the level of British and American travellers, while Indian tourists had increased nearly four-fold to 11 million. This surge in Asian travellers is one that will continue and is obviously an encouraging trend for the future of Australia's tourism industry despite the current difficulties imposed by a high Australian dollar.

The benefits and opportunities that hundreds of millions of new Asian consumers will bring to Australia's service industries are already becoming apparent. Everyone knows skyrocketing sales of resources have underpinned the mining boom. What's less appreciated is the fact that services exports to China are gaining quickly as well – at an annual rate of about 20 per cent over the past decade. In fact, China became Australia's biggest export market for services in 2009-10. You may be surprised to learn that despite the big increase in volumes and prices for coal over the past few years, Australia earned more from providing tourism, education and other services to China last year than it did from selling coal. You can see this growth in services demand in my home town of Brisbane, where there are now firms of architects that design buildings for Asian cities thousands of kilometres to the north, and accountants, lawyers and finance professionals doing an increasing amount of business across the region. And our resources sector is exporting a lot more than just bulk commodities. We're seeing a growing market for mining technology, equipment and services, with annual export sales of around $2.5 billion.

The changes in our region show the importance of the Government's focus on training and education to produce the skilled workforce our nation needs in the years to come. It also shows why we're building critical infrastructure like the National Broadband Network that will boost productivity across the economy and open up new business opportunities. And it's why we're delivering reforms, like our changes to the resource tax arrangements, to spread the benefits of the mining boom and help businesses that aren't in the fast lane.

Investing in the Future

One of the best indicators of the strong future for our economy and for our region is business investment. Data released on Thursday provided a resounding vote of confidence, showing companies expect to invest a record $149 billion in Australia this financial year, up nearly one-quarter from what companies invested in 2010-11. Unsurprisingly, mining investment is the principal driver, forecast to be $82 billion, but we're also seeing manufacturers continue to invest in new equipment and facilities with expected spending of $13 billion, up from $12 billion last financial year. These figures show where our economy is heading. This week we'll look back at where we've been with the June quarter National Accounts to be released on Wednesday.

We saw the dramatic impact that the summer's natural disasters had on our economy in the March quarter results. The floods significantly affected Queensland's Bowen Basin coalfields, which supply over half of the nation's coal exports. As has been noted, it's taken longer than expected to get coal production back up and running, but we have seen a recovery in exports in recent months. Still, there's no doubt there are pressures in our economy. Many industries, like manufacturing and retailing, are doing it tough as they battle with cautious household spending and a high Australian dollar. Of course exchange rates are predominantly the product of global forces, which is why I've been arguing at the G20 for some time for all large developing countries to move towards market-based exchange rates as part of the G20's efforts to tackle broader global imbalances, and I took up that case again last week with senior policy makers in Hong Kong and China.

Despite the soft spots in our economy, we shouldn't lose sight of the fact we have a strong budget position – this was highlighted in an editorial last week in USA Today. And we have low unemployment – as opposed to the doggedly high jobless rate in the US that we saw in data on Friday. Unlike Australia, many developed nations have a long, difficult road ahead to reduce their excessive levels of debt and ensure their budgets are on a sustainable footing. The Prime Minister and I will meet European Commission President José Manuel Barroso this week to discuss the challenges faced by the global economy and reinforce Australia's strong support for strong, coordinated reform across the Euro area.

Finally, I'd like to pass on my best wishes to all the dads out there for Father's Day. I'm lucky enough to be heading out with my kids, Libbi and Matt, this afternoon to watch the last regular season home game of Broncos icon Darren Lockyer in Brisbane. He's had a stellar career. Go the Bronks!

Wayne Swan
Deputy Prime Minister and Treasurer of Australia
Sunday 4 September 2011

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