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Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

16 August 2011

NO.027

Ministerial Statement on the Global Economy

Parliament House, Canberra

16 August 2011

Mr Speaker, honourable Members are aware that the global economy has been through one of its most difficult periods in recent years, starting with the sub-prime crisis in the US, the collapse of Lehman Brothers, the global financial crisis and the global recession. Despite all of the global turbulence, our economy and our people have shown themselves to be resilient. A resilience built on strong fundamentals, national unity, and a willingness to meet our challenges head on.

This resilience has seen us experience 20 years of continuous economic growth, and it saw us stare down the global financial crisis to emerge as virtually the only developed country to avoid recession. Our strong fundamentals and our enviable track record give us great confidence as we meet the challenges of the future and take advantage of the great opportunities that lie ahead for our nation.

Mr Speaker, throughout this period of global uncertainty I have regularly updated Members on global developments and their implication for Australia. And it is appropriate that I do so again today.

On 6 July, just before the winter recess, I informed the House of worrying signs of a weakening in the pace of the global recovery. I also said that the challenges facing Greece and Europe more generally should not be underestimated, and that a drawn out resolution to the US debt ceiling debate could act as a severe shock to global financial markets.

Since then we have seen evidence that the US economy is weaker than previously thought, we've seen big swings in global share markets, a downgrade to the US Government's triple-A rating by Standard and Poor's and a rapid rise in borrowing costs facing Spain and Italy. Confidence in both global economic prospects and in the capacity of political institutions in some parts of the world to resolve their problems has weakened in recent weeks.

And as I emphasised when I addressed the House on 6 July, Europe and the US face major adjustment tasks to bring their debt levels down to more sustainable levels and to grow their economies.

Mr Speaker as these global events buffet global markets we should bear two things in mind. First, we should remember that 2011 is not 2008. Households are not as highly leveraged, our banks balance sheets are stronger and the emerging economies of Asia are still doing quite well. And while global confidence and global markets have taken a battering in recent weeks, overall, global growth remains reasonably firm supported by continuing strong growth in China and good growth elsewhere in our region.

The second point I want to make is this: Australia is better placed than just about any other nation to ride out the current global turbulence. We have solid economic growth, a strong labour market, an enviable fiscal position, well‑regulated and well‑capitalised financial institutions, and a proven track record in dealing with global instability.

Our underlying strengths do not mean we are completely immune from international events, but they will help protect our economy and the jobs of our people. In saying that, I do not mean to down play the extreme seriousness of the global situation. The unfortunate reality is that this global instability is going to be with us for some time.

International Developments

Mr Speaker, as I have said many times, the recovery for the world economy from the global financial crisis was never going to be rapid or smooth. Despite the initial rebound in global demand since mid‑2009, the need for both the public and private sectors in major advanced economies to strengthen their balance sheets remains.

In Europe, the positive market reaction to the new EU bailout package for Greece and reform of the EU's bailout facility announced on 21 July proved to be short lived. Sovereign debt concerns have infected Spanish and Italian sovereign debt markets. To counter the loss of confidence, Italy has now announced further austerity measures to fast-track its efforts to achieve budget balance. At the same time, Spain has announced further austerity measures and will also be seeking to introduce structural measures to support growth.

The European Central Bank, a key player in addressing the crisis, has commenced purchasing Spanish and Italian sovereign bonds. But further decisive action is needed. The EU is at a critical point in its history. The political courage and vision displayed by its founders is needed today, more than ever.

In the US the agreement to raise the debt ceiling and cut US Government spending over the next ten years averted an unprecedented and catastrophic default by the US Government. But it is only a first step to fiscal sustainability. As President Obama noted, the Standard and Poor's downgrade of US Government debt was driven by doubts over whether the US political system could act to address the problem.

In a perfect storm of bad news we also saw a few weeks ago that US growth for the first half of the year had slowed to a crawl and that revisions to earlier data revealed the US recession to be much deeper, and the recovery much weaker, than previously thought. Two years into the recovery, the level of real GDP in the US has still not recovered to its pre-crisis peak.

Unemployment remains above 9 per cent and growth rates at present are simply not creating enough jobs to make any inroads into this awfully high unemployment rate. Of the more than 7 million US jobs lost during the US recession, just 1 million of those have returned. As well as its social cost, the significant pool of long-term unemployed in the US is destroying future growth potential in the economy.

I have been in touch with Finance Ministers in a number of countries in recent weeks, including the Secretary of the US Treasury, Tim Geithner. They all recognise the importance of working together to provide stability in international financial markets and restoring confidence and growth.

This is a prime objective of the G20 and on 8 August my G20 counterparts and I released a statement affirming our commitment to work together to support financial stability and to foster stronger economic growth. This will be the focus of the G20 meetings coming up in the next few months, attended by the Prime Minister and I.

Facing the world from a position of strength

Mr Speaker, as I said, the global economic landscape is going to remain rocky for some time, but Australia faces the current turmoil from a position of genuine strength. Today I want to outline four core strengths that put us ahead of the pack.

The first of these is our fiscal strength. We have a strong public balance sheet, with lower government debt than most other advanced economies, and a determination to get back to surplus in 2012-13, well ahead of our peers, and despite global challenges.

We have a triple-A credit rating, the best in the world, backed by our strong fiscal position, credible and consistent fiscal rules, a resilient economy and stable financial system. Australia now stands as one of only 14 major countries in the world to hold that rating by Standard and Poor's.

The second reason is the strength of our banking system. Australia's banks are exceptionally well placed to deal with the volatility we're seeing in global financial markets. Their direct exposure to stressed European sovereigns and banks is very small.

Working with the Government and the regulators, Australia's banks have done a lot of heavy lifting since 2008 to build up stronger funding, liquidity and capital buffers. The core capital levels of Australian banks are high by historical standards and they are sitting on larger reserves of liquid assets. They have significantly lengthened their funding profiles and built up their deposit bases. Our banks have confirmed they are very well advanced in meeting their funding requirements - and could go a long period without needing to raise money offshore. I am of course in regular contact with our banks and our financial regulators who clearly advise that our banks are strong, stable and well-funded for the period ahead.

The third reason we are well placed is the continuing strength we're seeing in our region. For the first time in our history, we are located in the right part of the world at the right time, continuing to benefit as we are from the thriving economies of Asia. Around two thirds of our goods and services are destined for Asian markets. Our exports to China and India, two of the world's fastest growing economies, are almost double those to the US and Europe. While some of the goods we export to China go into their exports to the US and Europe, around 80 per cent are predominantly for China's own domestic use.

And as the region's economic transformation continues, we should not forget that the middle class in the Asia-Pacific is expanding at an extraordinary pace – adding something like 110 million people a year to its ranks. This is creating a growing pool of internal demand and providing opportunities for exports to the region. China and Asia will never be immune from a deep slowdown in the US and Europe, but in the midst of global volatility, robust Chinese growth will remain underpinned by rapid industrialisation and urbanisation.

The fourth reason is our underlying economic strength. Because of the actions we took during the global financial crisis, we face this renewed global turmoil with low unemployment and more people in jobs. Every Australian should be proud of this fact.

It's easy to forget that we went into the global financial crisis with around the same rate of unemployment as that in the US. Our unemployment rate now stands at 5.1 per cent, while in the US it's over 9 per cent. And while we are seeing soft patches in some parts of our economy, there are good grounds to have confidence in our medium term growth prospects.

We have an unprecedented investment pipeline that is continuing to build, with a staggering $430 billion planned in resource investment alone. These investments are a vote of confidence in Australia and will provide a continuing solid bedrock of support for our economy in uncertain times. They are very long‑term investments, driven by investment decisions over time horizons well beyond the current market turmoil, and so are unlikely to be knocked off course by recent events.

In fact, 40 per cent of our resource investment pipeline is already under construction or scheduled to commence. Projects like Gorgon, Gladstone LNG, Queensland Curtis LNG and Australia Pacific LNG are already making a significant contribution to our resources investment. Together, these will account for around $90 billion in capital expenditure over the coming years and will lead to a stream of exports.

But with around 70 per cent of our economy driven by industries other than mining, the future is not without challenges. I know that some parts of our economy are doing it tough at the moment. This is particularly the case for businesses and people working in the trade exposed sectors of our economy facing sustained pressure from the high dollar, such as manufacturing and tourism, or in sectors which are still struggling to regain traction after the global financial crisis. The lingering effects of that crisis have meant that credit is a bit tighter and tougher to get, sentiment is more fragile and consumers are more cautious.

At a time of low unemployment and good income growth, consumers are opting to rebuild their balance sheets after a long period of rising debt levels. While this has put pressure on our retailers, it does make Australian households more resilient in these uncertain times.

I don't want to sugar coat the current situation, if the global economy were to weaken materially, that would obviously have an impact here. But our fundamentals are strong, and we have a government with a proven track record of dealing with global instability and that is getting on with the job of rolling out a reform agenda to further strengthen our economy. This reform agenda cannot wait for the uncertainties in Europe and the US to play out.

Building skills and productivity, investing in technology, cutting our pollution, reforming the tax system – all of these plans are just too important for our future economy to be put on the never-never as suggested by those who underestimate our capacity as a country.

Conclusion

Mr Speaker, for the global economy it is clear that a key factor behind the current market turmoil is a loss of confidence. But in Australia we have good reason to maintain confidence in our future.

We can be confident in our economic fundamentals, confident in our linkages to the strongest part of the world, confident in the resilience of our people and confident that we have a government who has passed the test before. And while many Australians are feeling uneasy about the economic outlook, we can take confidence from just how different our situation is here at home. We're not the United States, we're not Europe.

And in uncertain times like these, it more important than ever that we have a mature debate about our economy and where it's heading, rather than damaging rhetoric that risks undermining confidence further and sells our country's prospects short. The risk is that perceptions do not match the reality of our strong economic fundamentals. Too often the headlines or the debates fail to take into account the strengths I have discussed today.

That is the message I have heard loud and clear, as I move around the country taking soundings from businesses and workers who are hungry for information, and who deserve a mature discussion of the future of the global economy and how we best position Australia within it.

For my part, I will continue to methodically assess international developments, plan for all eventualities, keep the reform wheels turning, and update Australians and their Parliament as necessary. And I thank the House for the opportunity to do so today.