The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Peter Costello

Treasurer

11 March 1996 - 3 December 2007

Transcript of 04/09/2003

TRANSCRIPT
THE HON PETER COSTELLO MP
Treasurer

Press Conference
Thursday, 4 September 2003

Phuket - 6.25 pm (local time)

SUBJECTS: APEC, US economy, Asian economy, Australian economy, Housing, Retail trade, Chinese currency

TREASURER:

In addition to general economic developments, there has been quite a deal of discussion about regional financing mechanisms, the possibility of deepening regional bond markets and harmonizing regulatory systems in relation to that. These measures, of course, which we think would give added stability to economies in the region and it is important that we continue to work on corporate governance and regulatory improvement.

Finance Ministers have issued a strong call for progress on trade liberalisation at the World Trade Organization meeting in Cancun. APEC has set itself an ambitious target of free trade in the Asia Pacific region, we think that it is important that APEC needs to rededicate itself to that task and be a force for trade liberalisation, not just in the region, but globally through the World Trade Organization and we look forward to a positive step forward at the Cancun meeting next week.

JOURNALIST:

Treasurer, isn't the US economy (inaudible) some of the (inaudible) economists that tend to think that recovery, or the economy is still not out of the woods yet. Do you think that (inaudible)?

TREASURER:

Some of the forward indicators are more positive and you have got to remember that the US went into recession late in 2000, early 2001, so it has been growing, albeit very slowly now, over the last year or two. Monetary policy is very stimulatory, there is a lot of fiscal stimulation going on, a very large budget deficit in the United States, additional tax cuts coming on stream, and whilst I wouldn't signal unequivocally that the kind of growth we got used to in the late nineties is about to return, I think there are grounds for cautious optimism in the US economy and all of those factors are coming together, presenting a somewhat brighter view of the future than we have been used to for the last two or three years.

JOURNALIST:

Does it worry you at all that the levers of economic policy in the US may be exhausted (inaudible)? Interest rates are very low, fiscal policy is quite stimulatory, if the steps taken so far do not engineer increased jobs growth in the US, what does that mean in Asia?

TREASURER:

Policy in the United States is very stimulatory both in the fiscal sense and in the monetary sense and I think it is beginning to show results. As I said, after the recession of 2000 it has been a period of slow growth. The US consumer has been keeping growth going but it does appear from some of the leading indicators as if there are signs of business reinvestment and while I wouldn't say we were about to return to the halcyon days of the late 1990's, I think cautious optimism that things are going to be better in the second half of 2003 than they were in the first half of 2003 and I think things will be better again in 2004 - that's good for this region - it is good for this region where so many manufactured products coming out of Asia find their way into final consumer products in the United States - it is good for the region that the United States is starting to recover.

JOURNALIST:

On the Australian economy, with 0.1% growth in the second quarter, was that more or less like a pothole, as some economists have called it, are we going to see an improvement in the third quarter and going forward?

TREASURER:

The domestic Australian economy continues to grow very strongly, consumers are very confident, retail trade is very strong. The expenditure measure of GDP grew by about 1.5 per cent for the quarter and that was nearly totally wiped out by the export position. What was the export position? We had a combination of factors just coming together in that quarter. A tsunami. A quarterly tsunami of SARS which took tourist arrivals down by 17 per cent; the drought, which reduced agricultural production by nearly 30 per cent and you had weakness in the global economy. Now, those factors are all turning. SARS seems to have come to an end, the drought appears to be turning and I've expressed cautious optimism about the global situation. So, while I wouldn't say there are no challenges in the current quarter, the drought is not fully broken, I think in the latter part of 2003 and going into 2004 things will strengthen.

JOURNALIST:

Treasurer, can I ask you about imbalances from a different perspective, there has been lots of concern about mortgage refinancing in the United States (inaudible). The United Kingdom and Australia face similar circumstances with very strong housing markets. Monetary policy is obviously a very blunt tool with which to deflate any asset bubble that might be forming in the property market. Is there a case for policy makers to use more targeted measures, do you think, to take the wind out of property markets (inaudible)?

TREASURER:

Well property markets have been growing strongly in a number of countries, but let me talk about Australia. I think it has actually been a source of strength for our economy in this sense, that you have had weak global growth. We have had some domestic factors that have hit our exports as I have mentioned. The fact that people were confident about rising house prices and the fact that maybe they were able to draw down some equity kept consumption strong and it kept it strong at a time when you would have wanted to keep consumption strong to balance out external factors.

Having said that, I always make this point - there is no such thing as a one way bet on a property market. You saw a major correction in equity markets going on over the last two or three years around the world. People must bear in mind that there is no market that keeps inflating in value indefinitely. And bear that in mind when you are investing in property. There will be corrections in the property market. I always say build in a cushion. You've seen correction in equity markets factored in, you are thinking correction in the property markets. That's my message.

JOURNALIST:

With a 0.8% rise in retail sales (inaudible) does that justify the Reserve Bank's position (inaudible)?

TREASURER:

Well retail trade is very strong in Australia, continuing strong. You apparently can't dent the confidence of the Aussie consumer. They've come through a war in Iraq, the worst drought in one hundred years, SARS and their confidence is still very strong.

Now why is that? Interest rates are low and employment is strong - people are in work, interest rates are low, they're feeling confident to draw down equity on a rising property market. Is that a bad thing? It's not a bad thing at a time when you have got external weakness. As the world turns in our favour and we get a bit of help from abroad we could afford to cope with some slowing in consumer demand - but the world is not in our favour at the moment and so this has actually been a strength for our economy.

JOURNALIST:

I was wondering if you could comment on the debates or discussion or wording in the Joint Declaration particularly with regards to the flexibility of currency regimes and whether or not particular attention was put on the Chinese currency?

TREASURER:

I don't think there has been any discussion of specific countries. There has been a discussion about exchange rate regimes but not with reference to any particular country. I'm not quite sure how the wording has worked out. You will see tomorrow.

JOURNALIST:

Mr. Snow said today that he was very optimistic and hopeful that there will be a mention by APEC (inaudible) encouraging monetary and exchange rate flexibility.

TREASURER:

Well there was a bit of a discussion today on exchange rates and I am not sure that it has been fully resolved. I just don't know. There was some further work that was being done. But, let me make this point, once an economy has reached a certain level of sophistication, floating an exchange rate gives it a lot of flexibility. It is one of the shock absorbers. But we learnt in the Asian financial crisis that you can not do that overnight; that countries have to develop financial systems before they're able to move to that final state of a full floating currency. We learnt that in our own country. I think the experience of the Thais in `97 also showed that. I think countries should work towards strengthening their financial system and the long-term result of that will be fully floating currencies, but it is a question of sequencing and getting it right, and you have got to work towards getting that outcome, otherwise instead of a flexible exchange rate giving you a shock absorption, sometimes it can give you a shock if you are not fully ready for it.

JOURNALIST:

Do you think China should take its time?

TREASURER:

I'm not running Chinese economic policy so I'm not going to tell the Chinese what they should or should not be doing. I make this point. As China comes into the World Trade Organization, as it begins liberalizing, as it begins strengthening its financial system it will be able to move in that direction. But it is a question of timing and sequencing and I am sure that is the issue that will be very much on their minds.

Thank you very much.