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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

14 October 2012

Treasurer's economic note

Barely a day passes without the release of an indicator measuring one part or another of the Australian economy. Studying this data is essential when fine-tuning the nation's economic settings and making policy decisions. But the fluctuations in the daily figures can only tell you so much. Over my five years as Treasurer I've relied on first-hand accounts to help fill in the gaps and gain a more complete picture of what's going on in our economy. These have come from talking to people from right across the country: managers of businesses large and small, community leaders, and industry representatives, as well as the employed, the unemployed and the retired. Listening to their experiences informs my understanding of where the economy is and where it might be going. Often these personal stories help explain a change evident in the data. At other times, they may pick up a trend before it even shows up in the official numbers.

In a similar way, I've always considered meetings with other finance ministers and international policy makers to be an important opportunity to assess global conditions, adding an extra dimension to the regular flow of data from overseas. After attending more than twenty G20 meetings, I've come to know some of my counterparts very well and I have great respect for their assessments of the international outlook. The critical perspective provided by these meetings has helped calibrate our policy settings at home and get the big calls on the economy right, most notably when the Government was putting together the stimulus package that kept Australia out of recession during the global financial crisis. Certainly, the IMF and World Bank meetings  I've just completed in Tokyo this weekend have come at a useful time given the renewed uncertainty in the world economy.

Challenges for Global Growth

There was little doubt expressed at the meetings that global growth has slowed in recent months, with the crisis deepening in Europe and many advanced economies continuing to stagnate. This was reflected in the fact that the IMF on Tuesday revised down its global growth forecasts for this year and next. There was also plenty of frustration about the slow progress in resolving the European sovereign debt crisis. As one of my counterparts said at the meetings it has become 'smart to be dark' about the global outlook, however we have recently seen some promising signals from both Europe and the U.S. The European Central Bank's  announcement last month of measures to stabilise Spanish and Italian bond markets has provided some much-needed breathing space. I made the point at the meetings that European leaders must now seize this opportunity and get on with the necessary reforms. It's clear Europe's monetary union cannot stand on its own; governments across the continent need to make progress towards a wider fiscal and banking union if the euro is to survive in the long term. At the same time, leaders must also implement broader structural reforms to boost growth and competitiveness and get their budgets back on a sustainable footing. On the other side of the Atlantic, we have recently seen more encouraging employment figures. But the U.S. economy is facing a huge challenge at the end of the year with the 'fiscal cliff' looming. If not averted by Congress, the scheduled tax increases and spending cuts could cripple the recovery of the world's biggest economy, a threat highlighted by the IMF during the week.

While our economy and our budget are not immune from events overseas, we face the challenges from a position of unparalleled strength. This was something I was constantly reminded of over the past two days. Sitting around the table in Tokyo, many of my counterparts represented economies where output still hasn't recovered the ground lost during the GFC. Indeed some of my counterparts come from countries where millions of people have lost their jobs in recent years. The contrast with the Australian experience couldn't have been more stark. Our economy is now 11 per cent bigger than it was at the end of 2007 and we have around an extra 800,000 people in the workforce. In addition to solid growth and low unemployment, we have contained inflation, strong public finances and an enormous pipeline of business investment that's generating greater capacity and export volumes.

A Remarkable Achievement

Earlier in this Note I mentioned our record of getting the big calls on the economy right and during the week this record was highlighted by the news that Australia is now the 12th largest economy in the world. As a country with only the world's 51st largest population, this is a remarkable achievement. It shows we punch well above our weight on the global stage. Under this Government, Australia has moved up three places, reversing a decline in our ranking under our predecessors that saw us slip back to 15. In the past five years, our gross domestic product has overtaken that of South Korea, Mexico and now Spain. These are three very different economies from three very different parts of the world; South Korea and Mexico in particular have shown a lot of dynamism and potential in recent years, so Australia's elevation up the batting order is no small feat.

Ranking of countries by size of Market Exchange Rate GDP (Source: IMF)

  2007 2008 2009 2010 2011
1 United States United States United States United States United States
2 Japan Japan Japan China China
3 China China China Japan Japan
4 Germany Germany Germany Germany Germany
5 United Kingdom France France France France
6 France United Kingdom United Kingdom United Kingdom Brazil
7 Italy Italy Italy Brazil United Kingdom
8 Spain Russia Brazil Italy Italy
9 Canada Brazil Spain India Russia
10 Brazil Spain Canada Canada India
11 Russia Canada India Russia Canada
12 India India Russia Spain Australia
13 South Korea Mexico Australia Australia Spain
14 Mexico Australia Mexico Mexico Mexico
15 Australia South Korea South Korea South Korea South Korea

We've outperformed our peers by a long way in recent years and we're expected to continue to outperform them in the years ahead. The IMF forecasts Australia's economy to grow faster  than every single major advanced economy this year and next. It expects growth of 3.3 per cent in 2012 and 3.0 per cent in 2013 – consistent with our economy growing around its trend rate. The IMF also expects Australia's unemployment rate to remain low at 5.2 per cent this year and 5.3 per cent in 2013 – dramatically lower than jobless levels across most advanced economies.

Responsible Budget Management

Despite our strengths, we know there are also challenges. While still relatively robust, growth in our region has moderated due to weaker demand from Europe and the U.S. and the impact of deliberate policy tightening in some economies, particularly in China. The high dollar and changing consumption patterns at home are also weighing on some sectors. The weaker global outlook and recent decline in commodity prices will also hit our budget revenues significantly. These headwinds mean we'll have to find some substantial savings to return the budget to surplus in 2012-13, but we remain committed to doing just that. It's the appropriate strategy for an economy growing around trend and gives the maximum flexibility possible to the Reserve Bank to cut interest rates  further if it thinks that's appropriate. One of the reasons why Australia has recently had its AAA credit rating reaffirmed is because of our strict budget discipline and our proven record of finding responsible savings. The discussions I've had this weekend with my international counterparts simply reinforce the importance of maintaining this strategy. A surplus is our best defence in uncertain times for the global economy and shows we are committed to responsible budget management.

Wayne Swan
Deputy Prime Minister and Treasurer of Australia