The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

1 June 2011

Press Conference

Parliament House, Canberra

1 June 2011

SUBJECTS: National Accounts; Carbon Price; Senate Estimates

TREASURER:

Well these figures today demonstrate the inevitable impact on the economy from the summer floods and cyclones. And I think as everybody is aware, these were unprecedented in Australian history and, of course, in economic and social terms they were very costly natural disasters. So it's not surprising to see in the National Accounts that our economy contracted by 1.2 per cent in the March quarter of this year.

Now, of course, the flood waters have receded and the rebuilding has begun, but I think the figures today are an unfortunate reminder of the impact of floods and cyclones back in January and February this year. And of course, the memories of that linger with many people around the country, but particularly in my home state of Queensland – a dramatic impact on families, on businesses and communities. Now, we've said from day one that these natural disasters would have a very significant impact in the March quarter and the figures today confirm that.

The floods and cyclones are estimated to have reduced growth by 1.7 percentage points in the March quarter – 1.7 percentage points. Now we have to be aware that these figures are a backward looking snapshot of what occurred back then. We expected we would take a very big hit from these events and we have and we expected that when we put our Budget together.

Now, despite this temporary hit to our economy we mustn't forget our economic fundamentals are strong and our medium term growth prospects are bright, and it is because of the underlying strength of the Australian economy and our proven track record in handling adversity that we have every confidence that our economy will bounce back strongly.

Now what I want to do is just go through some of the detail of the figures. The figures show that our economy contracted by 1.2 per cent in the March quarter, but grew 1 per cent over the year, now as I said before, important to remember that this is due entirely to the impact of last summer's disasters.

Overall, net exports subtracted 2.4 percentage points from growth in the quarter. That's the largest impact since records began and you can see that very clearly in the chart there, the impact from net exports stands out. It is truly a stunning impact but more broadly you can see in the economy, an underlying strength when it comes to consumption and investment, public expenditure.

Column Chart: Exports Subtract from GDP Growth

So I want to make this point, the impact of floods and cyclones to some extent masks the underlying strength elsewhere in the economy which you can see particularly in consumption and business investment. But also, I think you'll recall during the Budget we made the point that the strength of the economy is not necessarily reflected in every part of our economy so we do have a patchwork economy where some parts are outperforming others but the good news from looking at this graph is that domestic final demand contributed 1.3 percentage points to growth in the quarter, but of course it wasn't enough to offset the impact of the floods and cyclones, and their impact on our exports.

So the biggest impact here comes from the hit to exports, particularly from coal, iron ore and tourism and this is what the next chart shows us. It indicates pretty dramatically the huge hit particularly to coal and iron ore in the March quarter, not confined to the March quarter. You'd also be aware there was an impact the quarter before, and there will be an impact that will linger but the most significant impact was in coal and iron ore. A very dramatic impact indeed, but of course that shouldn't obscure the fact that other sectors were also hit – agriculture, tourism and so on.

Column Chart: Economic Impact of Natural Disasters

So we'll spend a few minutes talking about the impact when it comes to coal particularly because something like 90 odd per cent of Queensland was flood affected, well up to 90 per cent, 85 per cent of Queensland's 57 coal mines suffered production in the early part of the year and of course there were major disruptions to rail lines and ports throughout the State. Now, those coal mines, those rail lines have now largely re-opened, they're back online and we are beginning to see our exports rebound and we can expect that to continue in the months ahead. But as I said it's not just a coal story, it's also a story about agriculture. We lost something like $600 million in agricultural production and of course there's been an impact on tourism as well.

Now, all up, Treasury estimate that the natural disasters will result in a total production loss of around $12 billion with $6.7 billion of that loss occurring in the March quarter.

So I just wanted to lay out very clearly that a mention of this loss to production and its relationship to the hit to growth that we took in the March quarter. But we shouldn't let all of that obscure the underlying strength of the Australian economy. There simply isn't another country in the world that could have emerged from these disasters in such a strong position as Australia.

Once again, we've been through one of the ultimate tests and it has not shaken the strong fundamentals of our economy.

Just consider the following facts; low unemployment at 4.9 per cent – lower than nearly every major advanced economy; strong job creation – nearly 50,000 jobs created in the first three months of this year, despite the natural disasters, and over 700,000 jobs since coming to office and of course you're all aware of the record terms of trade – the highest sustained level in 140 years.

But on top of all of this, there are two other strengths that I want to point to today and in particular it is the unprecedented pipeline of business investment that is gathering pace in our economy. New business investment rose by a strong 2.8 per cent in the March quarter. It's up 5.9 per cent over the past year. New engineering construction is up 21 per cent in the past year, while new machinery and equipment investment is up over 10 per cent over the past 6 months and, of course, as you are aware mining investment has been particularly strong. Its risen by more than 20 per cent in the past year, and that's just the beginning. As you can see from that chart, a very, very strong pipeline of mining investment. The capex figures from last week showed that mining companies are planning to invest a record $83 billion in 2011-12 with further increases expected beyond that and, of course, ABARES estimates a total resource investment pipeline of around $430 billion.

Column Chart: Mining Investment Pipeline

If you just have a look at that map, the blue circles are those that indicate projects that are at an advanced stage but we are just at the beginning of a very, very strong pipeline of investments and what this indicates is that this investment will support jobs, rising incomes, greater export capacity and does present very big opportunities for our country.

Map of Australia showing selected major resource projects

So despite the magnitude of the disasters that we see in the March quarter, they have not altered the strong underlying fundamentals of the Australian economy.

I think what we've demonstrated, yet again, is just how resilient our economy is. We've demonstrated how resilient it was during the global financial crisis. We've demonstrated how we, as a nation, could work together – government, business, unions, the broader community pulled together and we came out of that the envy of the world and, of course, we saw the same resilience during the floods.

So what we see in these figures is not just the problems that came with the natural disasters some months ago, what we also see is the opportunities that lie ahead, opportunities which will give Australia a great deal of optimism about our future. We don't need the numbers on a page to tell us that we took a really big hit back in March and we don't necessarily need the numbers on the page to tell us the strong position that we are in to maximise the opportunities that lie ahead.

But what we have to do as a country is to get the basics right, to get the fundamentals right to maximise the opportunities which will flow, not just from the strength of the rebuild which we'll see in the months ahead, not just from the strength of investment pipeline that we are seeing but from the opportunities that we will see in investing and building a bigger and better workforce and bringing our Budget back to surplus in 2012-13. Getting the basics right, getting the Budget back to surplus in 2012-13, attending to the needs of a bigger and better workforce will maximise the opportunities for the future for all Australians.

So in this adversity we should not let the adversity obscure the strong fundamentals that we have in our economy and our prospects for the future. Over to you.

JOURNALIST:

Treasurer, on the Treasury estimates, did the impact of the natural disasters on GDP, did you also get the Treasury to model what impact it's had on the terms of trade because obviously it's had a part in driving up to the levels they are now.

TREASURER:

Well, the terms of trade are up again and you can see those reflected in today's figures but the Treasury put its forecasts for the terms of trade, not just based on a temporary spike in prices which may have come from supply disruptions in Australia. They're forecasts take that into account and there is no reason at all to …

JOURNALIST:

No separate…

TREASURER:

No not at all. But the reason there is no need for a separate estimate is they took all of these things into account when they were doing their forecast anyway. It is truly stunning what we are seeing in the pricing of iron ore and coal, and you're right to point to the fact that forward markets at the moment are very strong. And part of that may certainly reflect what you're pointing to which is the supply disruptions that have occurred. They've been particularly big in thermal coal for example in Queensland but the prices for iron ore and coking coal and so on, are quite strong, but all the forecasts are based not on temporary factors, but on our outlook for the future, taking into account all of these events. So there is absolutely no need for them to be going back and reviewing their forecast in the Budget.

JOURNALIST:

How do you account for the, what's your reasoning for the big increase in household saving ratio and do you envisage that coming down through the next three to nine months?

TREASURER:

Well, it's interesting isn't it, because if you were to just spend a bit of time reading a lot of the commentary you wouldn't necessarily expect to see the sort of consumption figures that you're seeing here today in the National Accounts. Consumption in the quarter 0.6 [per cent], through the year 3.4 [per cent]. Now that's almost around trend. So simultaneously we're seeing consumption of that order. People are also saving a little more. In fact I think the number in here in terms of household savings is second highest – I could be corrected – on record. This is part of the story that we've been discussing since well before the Budget. You might recall I made the point well before the Budget that there was a complex discussion we had to have about the countervailing forces in our economy. We talked then a lot about a cautious consumer and we do have a cautious consumer and I think that is partially a legacy of the global financial crisis. It's partially a result of what people read about the international economy and what's going on there, and it would partially be a consequence of the fact that our two most significant trading partners had very significant natural disasters in recent months. It's a product of a whole lot of things, but what's underpinning consumption on the one hand is the strength in our employment market and also the modest growth in incomes.

So we know that people have cash and we can see from the figures here that people are consuming, not in excess of where the average is, probably a little below average, but they're also saving. And of course we spoke a lot about the issue of the wealth effect of the global financial crisis in the lead up to the Budget but people are not necessarily anticipating the same capital gains they may have previously anticipated in which they have factored in when they were borrowing and taking credit and so on.

So there's a variety of influences in here but the really good thing, the heartening thing for me, looking – if we could go back just to those contributions to growth table – is that outside of the exports sector in the economy, that there is a degree of solid strength or firmness in the rest of the economy. It doesn't mean to say that everyone in every state at the same time is experiencing that because we know there's a patchwork economy, but there is a degree of evenness, if you like, in the non-export part of the economy and the reason why I take some heart from that is because as I've demonstrated with the other charts we are on the verge of quite a strong investment pipeline really kicking in in the next couple of years.

JOURNALIST:

So Treasurer, does this indicate that there are inflationary pressures at work here?

TREASURER:

Well, there's nothing in the data here that indicates that. It indicates an economy which is coming close to full employment. We've seen strong job growth and as I said during my Budget speech and in the whole discussion we've had, when an economy is coming back to capacity what you have to do is bring your Budget back to surplus which we are doing in 2012-13 to avoid compounding any inflationary pressures that will flow from an economy fast reaching capacity.

JOURNALIST:

Does it need the brakes?

TREASURER:

No I don't think you're seeing anything other than an economy which took a really big hit, a really big hit in the March quarter. That challenged us all, but despite that hit the rest of the economy is showing some modest strength. I wouldn't put it any higher than that because there are significant parts of the economy that don't have modest strength, but there's been a lot of talk for example about what's happening with consumption and those consumption figures there demonstrate that it's holding up. That doesn't mean to say that people are spending in the same way as they were previously spending in Mining Boom Mark I, which was going out to the shop and really giving the plastic a workout. They're clearly not doing that and there is clearly some softness in retail and people are choosing to save. There are a variety of reasons for that and I think I've just run through a number of them and I probably haven't outlined every one because we've commenced this discussion some months ago with a discussion about what's different between Mining Boom Mark I and Mining Boom Mark II.

Now what happened in Mining Boom Mark I was the previous government went on a spending spree at the height of a boom and it pushed up rates solidly 10 times and pretty quickly. In addition to that there was a dramatic expansion of credit, consumption was really, really strong and all of those things were firing at once. Here we've got a story of an investment pipeline coming on and we've got a story of modest strength in the rest of the economy.

JOURNALIST:

Treasurer, following Senate Estimates this morning has Dr Henry retired from the Treasury or simply is he on leave as was suggested this morning and what can you tell us about his new appointment?

TREASURER:

Well, he has retired from Treasury but he is in a part-time advisory roll with the Prime Minister but is currently on leave. Dr Henry is highly regarded by the Prime Minister and by everybody in the Government. He indicated a desire to move on. We indicated a desire to tap into his expertise and as a consequence of that he's in a part-time role with the Prime Minister but he's currently on leave.

JOURNALIST:

Treasurer, the mining industry is in town for their conference this week and some of the leaders have been saying the carbon tax and the emissions trading scheme poses a big sovereign risk to them. Do they have a case or this just a last-minute push by the mining industry to try and have some influence over the shape of this tax?

TREASURER:

Can we have those investment figures back up again, for mining?

JOURNALIST:

What's the source of those by the way, is that ABARES?

TREASURER:

I think it's a combination of ABARES and the capex, but I'm happy to give you all of that, more than happy. I can tell you about the capex off the top of my head because it demonstrates the same point that I'm about to make. That is that companies are investing like they've never ever invested before in the Australian mining industry and they did it right through last year. It kept increasing and it's kept increasing right through this year. So that suggests to me that there's a lot of optimism about the Australian mining industry and a lot of optimism about the future of the country as being a great place to invest and I know for a fact that many of the companies that are making those investments have factored a carbon price into their business plans, as they do anywhere in the world. As they do for any company that is making investments which have timelines of between 10, 20, 30, 40 and 50 years.

Now there is going to be a robust debate about a carbon price and its impact, but I would suggest to you that those figures demonstrate – if we can we go to the map. Look what you can see from that one is that there are a lot of companies that are investing a lot of money right now and many of those will have factored a carbon price into their investments.

JOURNALIST:

Mr Swan, Professor Garnaut was quite critical (inaudible) yesterday. What is your attitude to (inaudible)? Why do you think that they are more negative this time than last time? And (inaudible)?

TREASURER:

Well, first of all most business that you talk to all agree that a market-based mechanism is the only way to go. Now, not everyone, but just about most of the very large companies that are investing in Australia understand that a market-based mechanism is the way to go. Then there is a discussion about how it's done and the detail.

So on that very basic question there's a significant degree of commonality between the Government and the business community. The BCA accepts that. The AIG accepts that. I hope the Minerals Council accepts that. Many of their larger members certainly accept that. But then there's a debate. What I would indicate is that the Government is absolutely determined to do the right thing by the country in the long term and we can't continue to put this in the too hard basket for any longer because what it will do is it will deter further investment if we continue to do that.

So I think getting it in place as quickly as we can is an economic imperative for the country. There will be various views expressed from time to time. There will be people who agree with us. There will be people who don't. I've got broad shoulders. If people want to make criticism they can go for their life. If people want to support us that's terrific, but we will not be deterred from doing the right thing by the country. The right thing by the country, because if we don't get this right then we're not going to maximise the opportunities that I've talked about today. We are simply not going to maximise them.

JOURNALIST:

Treasurer, Barnaby Joyce asked Martin Parkinson in Estimates today what would happen if the debt ceiling was not increased, and he simply (inaudible). What would be the ramifications of it, and have you any indications that that may be …

TREASURER:

Well, I couldn't believe for a second that the Liberal and National parties would be that irresponsible and that reckless. Our net debt level is less than one tenth of other developed economies. It is modest. It has supported our economy at a time of challenge. But we are paying it down, bringing the Budget back to surplus and doing the responsible thing.

We've got in place a fiscal policy that is the envy of the developed world. The sort of fiscal policy that the Americans wish they had and there is no comparison between what is going on here and what is going on there. So any attempt to fiddle with lifting the borrowing limit would be reckless in the extreme and even Barnaby Joyce has said that on the record himself. Only a short time ago, but then again if you look at what they're up to they've got so negative they're now opposing their own policies from the Howard era.

So reckless actions and inconsistency seem to be in the order of the day, along with all of the divisions that we've got in the Liberal and National parties, but I dint see the exchange. I've been a bit busy with these figures this morning.

JOURNALIST:

On these figures, on the GDP, are you confident that it'll be a one-off negative?

TREASURER:

Well, as I said, I think there'll be a strong rebound.

JOURNALIST:

In the June quarter?

TREASURER:

Yes absolutely and I believe there will be a strong rebound just as we took a hit of, you know, a bit over 1 per cent. I'd expect a rebound somewhere of that order. So, yes there will be a strong rebound and you're beginning to see it now in some of the data. You've seen it, I mentioned a little bit in coal, exports have picked up on coal in April. If you start to move around my home state you start to see it a bit more now, because they really, really took a hit. Queenslanders really took a big hit in that period. You can see it in the state data as well.

JOURNALIST:

Talking about estimates this morning. Do you think that the political debate is becoming puerile and sexist? I mean, we had an Opposition Senator actually meow the Finance Minister.

TREASURER:

Well, I think the Finance Minister was absolutely right not to put up with the rudeness and the sexism of Tony Abbott's goons. Now, we're seeing this more frequently. It's on display in the House of Reps, you just don't hear a lot of it. It's been on display for a while now as the Federal Opposition behave in a way in which I can only describe as being feral. It's certainly not responsible and it's not what the country needs. And for all of the reasons I just talked about, such fantastic opportunities for the future, we've just got to get the fundamentals right, and you get an Opposition behaving in such a feral manner without any policy alternative whatsoever. I mean they've got the gall to run around and say they want an election but in the next breath admit they haven't got any policies. I mean how does that work?

JOURNALIST:

Treasurer, on the (inaudible) numbers. You mentioned the mining, the weather downturns cost about 1.6 per cent of GDP which suggests that excluding the disasters, growth would only have been 0.4 per cent which is pretty subdued. What are the reasons do you think? What are the non-disaster sources of weakness in the economy?

TREASURER:

Well, I don't accept the premise of your question. We took a very big hit of 1.7 [per cent] from the disasters, you know, and we're looking at a substantially less hit to overall growth. I'd stick with the point that I made at the very beginning. There is modest strength elsewhere in the economy outside of exports and I'm very encouraged by that given what's happened. Thanks very much.