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

5 December 2012

Press Conference

Canberra

SUBJECTS: National Accounts; Interest Rates; Global Economy; Labor Party

TREASURER:

Today's GDP figures really shine a light on the resilience in the Australian economy despite some very challenging global economic conditions. I'm pleased to say that despite one of the sharpest falls in commodity prices since the Global Financial Crisis, the economy grew by a solid 0.5 per cent in the September quarter. This gives Australia around-trend growth through the year of 3.1 per cent. That sees our economy outpace every other major developed economy. Unsurprisingly, there has been some moderation in growth from the above-trend pace in the first part of the year, and global weakness has taken a toll on some sectors. For example our major trading partners slowed noticeably mid-year, with conditions in Europe and the US weighing heavily on growth in our region. Just take the September quarter alone: there we saw commodity prices fall sharply; the dollar remain high; Europe officially went into recession; and Japan, which I remind you is our second largest trading partner, experience a severe or sharp contraction. These have been difficult conditions, so I think it's worthwhile contemplating what we have achieved in these difficult conditions. Yes, it is the case that there is patchiness in some sectors of the economy, not everybody is on easy street, but there is a lot to be proud of in these numbers. Trend growth, for example, strong investment, modest consumption and early signs of a recovery in housing. So I think it's just another reminder that, unlike other developed economies , we face these very uncertain global conditions with quite resilient economic foundations.

Now just to go to some of the detail, as I said before, we've got GDP growth at 0.5 per cent in the quarter and 3.1 per cent over the year. We always said that global headwinds would impact on growth and, of course, commodity price volatility would have an impact on our economy, and these factors have contributed to quite patchy conditions in some parts of the economy, some sectors and also some other parts of the country. Now what we can see in this chart here is that iron ore spot prices in the September quarter were 20 per cent below levels in the previous quarter, hitting their lowest point since the GFC, largely due to weak steel demand in China. So you can see that here, a 20 per cent drop, at one stage they were 35 per cent lower between June and early September. That's another indicator of the difficult conditions of the global economy, therefore reflected in commodity prices.

Sharp decline in the iron ore spot price

Sharp decline in the iron ore spot price

Therefore in those circumstances, it's not surprising either that we've had a cautious consumer and we've had a prudent borrower in those circumstances as people have observed the debate about what is happening in the international economy. Of course, the response of households has been to save. So we see the household savings ratio remain elevated at 10.6 per cent in the quarter. These factors, combined with the higher dollar, have contributed to softer incomes, including profits, which declined 1.3 per cent in the quarter. Weaker profitability, particularly as a result of commodity prices, was of course you would recall, a key reason that we downgraded revenues in the mid-year budget update by $22.5 billion. Of course, we're still concerned about what is happening to revenue. But while weaker revenues will make it more difficult, we're committed to returning the budget to surplus in 2012-13. As I've said before, we'll always ensure our budget is appropriate for the economy and jobs and these figures don't change our consistent approach. It's heartening to see in the figures today the underlying resilience of our economy despite all of these challenges I've spoken about before. Growth in the quarter was supported by an increase in all private sector expenditure components, with only public demand declining. This shows that the private sector is more than offsetting the impact of fiscal consolidation across both levels of government.

It was particularly encouraging to see strong business investment, modest growth in consumption, resilient export growth and signs of an early recovery in dwelling investment. Business investment made the biggest contribution to growth in the quarter, surging ahead to reach 18.5 per cent of GDP - and you can see that in the chart that business investment has reached a 50-year high.

Business investment at 50-year highs

Business investment at 50-year highs

New business investment rose by a strong 5.6 per cent in the quarter, driven by a robust growth in engineering construction and machinery and equipment. In fact, engineering construction was up 8.9 per cent in the quarter to be a remarkable 30 per cent higher over the year, which I think does puts some of the debate about the resources boom back into perspective.

Today's figures don't just confirm that investment was impressive in the quarter, they confirm a remarkable milestone for our economy. They show that more than $1 trillion of business investment has occurred in our economy since the Government came to office - $1 trillion. This is a resounding vote of confidence in the country given one of the most turbulent periods we've seen in the global economy in nearly 80 years. And as we saw last week there's still more to come, with last week's capital expenditure figures pointing to an expected $173 billion of planned investment this financial year. We also saw last week that the value of committed projects in the resources sector remains enormous, reaching a record $268 billion. Now the sector hasn't been immune to lower commodity prices, but these projects are largely locked in, building export capacity and paving the way for an improvement in productivity growth.

And while you can't read too much into quarterly numbers, there's still a lot to see elsewhere with these figures, particularly the figures on productivity growth. We see productivity growth in the market sector up by an above-trend rate of 2.9 per cent over the year. So let's put all this together: we've seen a modest increase in consumption, 0.2 percentage points to growth in the quarter, despite households taking a cautious approach to spending and we've seen very strong investment. It wasn't surprising to see consumption moderate in the quarter, but it still remains a solid 3.3 per cent higher over the year, which is around its trend rate.

The good news is that there are early signs of stabilisation in housing, with dwelling investment recording its first increase in over a year, and investment in detached housing recording its largest quarterly increase since June 2010. This does confirm that lower interest rates are starting to provide some support to the housing sector. What we are beginning to see here are the benefits of our fiscal strategy, and its ability to facilitate a transition, not just from public to private-led growth, but also from mining to non-mining sectors, as we give the Reserve Bank of Australia scope to adjust interest rates.

So in summary we've got some pretty good vital signs here: strong resource investment in the face of volatile commodity prices; modest consumption growth with stronger household balance sheets; resilient export growth in the face of a higher dollar; and weak global demand and signs of stabilisation in the housing sector. And I guess unlike most of the developed world, what we've got is a great combination of solid growth, low unemployment, plus contained inflation and lower interest rates. All of this now points to an economy which is nearly 13 per cent larger than when the Government came to office, powering ahead of every major developed economy as you can see from that chart.

Australian economy outperforms

Australian economy outperforms

Now it's not been unusual for me to stand here before you and talk about the resilience of our economy and how that has been achieved in what have been, over the past five years, very challenging global economic circumstances. I just hope these figures today put a bit more perspective into our national economic debate, which as I've said on many occasions, too often is hijacked by doomsayers and the naysayers. Of course, none of that is helped by Mr Abbott's aggressive negativity, his blatant disregard for the facts, which all do the country an enormous disservice. Now for months, Mr Abbott has been saying that a carbon price was going to destroy the economy and of course at one stage he claimed that our economy had simply stopped growing.

Well if there's any doubt in the mind of the Opposition, let me make this very clear. We had solid growth in the September quarter and we had that with the carbon price. Our country is known for its resilience, and I think we can see that yet again in the figures today. There aren't too many developed economies in the world that have got the combination that we have got. Low unemployment, solid growth, a very significant investment pipeline, contained inflation, lower interest rates, low public debt and public finances in good shape. That's a combination which is a far off fantasy for just about every other advanced economy around the world.

And of course on top of that, we've had 21 years consecutive years of economic growth. Having said that, not everybody out there is doing it easy, not every family or every household, not everybody is doing it easy. There are sectors of the economy that are under pressure and there are various parts of the country that are experiencing that more than others. But I want to make this point - as we end 2012, we do end with the world's most resilient economy, and my hope is we can start 2013 with a more sensible economic debate. All this is really down to the hard work of the Australian people, not just over the past five years, but over a longer period than that. What we have to do now as we go forward over the next five years is to convert the economic success of the past in the future by maximising the opportunities that will flow to this country from growth, particularly in our region. That's why the Asian Century White Paper was so important. The Government for our part is fairly and squarely focused on those reforms for the future which will continue to strengthen the economic foundations which have served us so well through what has been a very difficult period. We'll keep working to convert our economic success into enduring gains and we will always have at the fore our objective of a strong economy and fairer community, not just for the weeks ahead but for the next decade and beyond.

Over to you.

JOURNALIST:

Treasurer, your MYEFO forecast suggests you've got to have growth picking up for the next 3 quarters to match what you predicted a few weeks ago, is that achievable and where do you think that growth will come from? Where will that pick-up in growth come from?

TREASURER:

I think we should always be wary by just taking one quarter. I think the forecasts in MYEFO are broadly consistent with the data that we're seeing today, except when it comes to nominal growth. I think it would be fair to say that this data is somewhat weaker than MYEFO. What do I mean by nominal growth? What I mean is growth in prices and incomes and you can see the full impact of the savage reduction in commodity prices reflected in weaker nominal growth in the figures that are before you today. So that's a challenge for revenue.

As I indicated in my earlier remarks, I think it is important as we go forward to acknowledge that we are simply dealing here with one quarter's figures and it's somewhat of a mistake to extrapolate that out to the whole year. What we've had is a situation where growth in the first half of the year was somewhat stronger than we had expected. It was certainly above trend and what we've seen in this quarter has been a pretty savage reduction in our terms of trade which in turn has impacted on nominal growth, which in turn impacts on government revenues. Why the Government has been so insistent on our fiscal strategy should be clear to all right now. It gives us, not only the capacity to rebalance from public to private, but also to rebalance from, if you like, mining to non-mining, by giving the Reserve Bank greater flexibility to adjust rates and hence to stimulate those sections of the economy that are softer than others.

So at the moment standing here we could say that if you've got a $300,000 mortgage and you took it out at the end of 2007, you're now $5,000 a year better off than you were then, given where rates are now - that's $100 a week. Now we're beginning to see in some of these figures the tentative signs of a recovery in housing and that is one of the sectors that we do need to see pick up as we go forward.

JOURNALIST:

Treasurer, you said that through the year the economy was at trend growth, the first half of the year was above trend and the second half of the year has been below trend…

TREASURER:

We haven't got to the second half of the year yet.

JOURNALIST:

The last two quarters has been below trend…

TREASURER:

That's not the second half of the year. We're in the September quarter now and we've got 3 to go. I've seen that calculation done so I'm not disputing what you're saying to me, you're looking at a calculation that recuts the data over the past 6 months as I understand it. Look, you can sit down and do those sorts of calculations, I don't think they're all that indicative of what we have to do, which is to make a forecast for the year ahead. There's no doubt that in September we had a very, very savage reduction in commodity prices which has in turn impacted upon nominal growth in particular. When you look at real GDP growth we're growing around trend and that's a good thing but there's a price impact and an income impact flowing from the reduction in commodity prices. As we go through the rest of the year we'll have to keep a close eye on what's happening with commodity prices and what impact it has on all of those things. The good news for Australia is that the real economy is growing around trend despite the savage impact of those events over the past quarter. As you would be aware, commodity prices are up a bit and there's a debate about where global growth is going. I've said on many occasions that global growth at 3 per cent, or just above, doesn't really cut the mustard in terms of what we need for the world to grow over time, we've done very well in those circumstances of weak global growth. We'll just have to see what happens in the rest of the world. So I'd caution against taking this quarter's growth and annualising it and I'd also caution about taking the previous quarter's growth and this growth and annualising it.

JOURNALIST:

Are you just as confident now of achieving a surplus as you were during the Budget in May?

TREASURER:

Well I gave the update to the Budget in May here in the mid-year update where we wrote down revenues in the mid-year update a few weeks ago by $22 billion, which was a pretty substantial hit to the bottom line. I reaffirmed our commitment to come to surplus in 2012-13. There's no doubt that some of the data here indicates that that task is harder but I'm not going to engage in hypothetical discussions about what if commodity prices go here or there, what if the global economy goes up or down, I'm just not going to engage in those sort of hypothetical questions.

JOURNALIST:

Are you still heading for a surplus?

TREASURER:

I just answered that question.

JOURNALIST:

(inaudible)

TREASURER:

I said we're committed to a surplus in 2012-13 and that's what I said at the mid-year update. I've also said today that revenues are impacted by some of the data that's before us today yet again, making the revenue side of the equation somewhat harder. But I said I'm not going to, and I didn't in the mid-year update, I'm not going to deal with hypothetical questions which are dependent upon what happens in the global economy over the next little while, what happens with the fiscal cliff and so on.

JOURNALIST:

Economic growth per person has fallen to zero, could that explain why you referred to how people feel, why people don't feel as if, as you say, we've got strong economic growth?

TREASURER:

The fact is the world changed during the Global Financial Crisis and we've had very challenging conditions over the past 5 years and in that we have done very well, relative to the rest of the world. But we still live in a world impacted by the aftershocks of the Global Financial Crisis. What are some of those? Firstly, a cautious consumer and a prudent borrower and a higher savings rate. That has been a consequence of these events that have occurred internationally. So as we stand here today and we look at the consumption number for the year, at about trend I think it's about 3.3. People prior to the Global Financial Crisis got used to consumption at, you know, two times trend, sometimes three times trend. People were borrowing a lot more, putting more on their credit cards, doing all these sorts of things which had impacts across various sectors. We're not going back to that world and it's a different world. The remarkable thing about Australia is that given the aftershocks that are still flowing through the global economy is how well we have done relative to other developed economies but there are sectors of our community which are impacted by these changes such as elements of retail, not just by the higher dollar, also by a radical transformation of technology in terms of our business models. We can see that in the public debate. We can see it in terms of people who are anticipating a retirement at a certain age with a certain amount of money but what this has done on global equity markets has had an impact on them. So it is a different world and of course people in that world, here, when we consume so much of our global media in a European way or an American way, get a message that things are pretty volatile in the global economy. The reaction to that then flows through to our real economy.

The fortunate thing for us is that we've got an unemployment rate with a 5 in front of it, most of the other developed economies have got almost double digit levels of unemployment. So we've done well but the Government absolutely understands that not everybody's on easy street and not every sector of the economy is happy about some of these events because some of these are structural changes flowing through as a consequence of the Global Financial Crisis. What we've got to do is get the settings right because the great thing about Australia is where we are, which is the right part of the world at exactly the right time and what this Government is very much about is what we do for the next five years building - on the strengths that we've created over the last five and that's what we're doing.

JOURNALIST:

In your role as Deputy Leader do you support the idea of ending the practice of binding votes in the Labor caucus?

TREASURER:

I've been pretty heavily focused on budget matters and the national economy in the last 24 hours…

JOURNALIST:

Some of your colleagues have been very…

TREASURER:

I'm coming to that. Let me finish, I'm happy to answer your question. So I've been very much focused on an interest rate cut yesterday and the National Accounts but as I've said briefly in all of my interviews, party reform is an important thing for the Labor Party to be engaged in, making our party more representative of the community that we represent. I said on television early this morning when it comes to values and to courage, I've been very proud of the achievements of this Government, particularly during the Global Financial Crisis and particularly with the way in which we secured the passage of carbon pricing that we've been very true to the traditions and the values of the Labor Party. But there will always be reform to take place in the party organisation and that is an important topic for debate and I'm happy to engage in it when I'm not otherwise engaged.

JOURNALIST:

But on the issue of the binding votes?

TREASURER:

I'm not buying into individual party reforms. What my focus is on today, and is on just about every waking minute and has been the last five years, is what we do to make our economy prosperous in the face of global economic turbulence and fairer.

JOURNALIST:

In the last two months, in October and November, the Reserve Bank's commodity price index shows commodity prices have fallen so looks like there could be another fall in terms of trade in the current quarter. Do you hold out hope that the resilience in the Chinese economy will bring some stability to commodity prices over the remainder of the year?

TREASURER:

Well, I've always been more optimistic about the Chinese economy than much of the public commentary, as you know, David. I don't believe the Chinese economy was as weak as some portrayed it but certainly, whatever the cause, there was a big crash in our commodity prices which have come back a bit but they're still not back to anything like the levels they were and that does have an enduring impact on nominal GDP and on revenues. Look, I really think that to a certain extent we're not just in the hands of what is going on in China in the next few months, it's a combination of what's going to happen in the US with the fiscal cliff, how that's resolved, what impact that has on global confidence. I've already made any number of speeches about the potential impact of that if it goes wrong in the US. I have a belief that the Chinese economy is stronger than much of the analysis has portrayed it as. It was a very good piece which you may have read over the weekend in Project Syndicate by Steven Roche that I recommend to you which is quite counter to a lot of the other analysis that's around on the Chinese economy.

JOURNALIST:

What's your message to the banks on interest rates?

TREASURER:

My message today is do the right thing by your customers and the fact is that the NAB shouldn't take their customers for a ride and I congratulate the group ING for doing the right thing by their customers in giving them the Christmas present they deserve.

JOURNALIST:

Treasurer, you speak about and the Prime Minister speaks a lot about Labor values and we have households doing a lot of saving already, (inaudible) slower growth over the past 2 quarters and a risk to the economy. Quite apart from the revenues being under pressure do you think a Labor Government should be looking at abandoning the surplus to target parts of the economy?

TREASURER:

I've already answered that question in three or four different ways so I haven't got anymore.

JOURNALIST:

Can I ask you a definitional question, Treasurer. Half of this growth is made up for by a growth in inventory…

TREASURER:

I was anticipating that question…

JOURNALIST:

Is that, do you think, a good thing, which it could be, or is it a bad thing because it's unintended?

TREASURER:

I don't think that's the way you can genuinely look at the figures, Peter. The fact is that growth here is broadly based consumption across the year and is around trend. Business investment is still very strong. There's a contribution from net exports and there's a debate about inventories as to what they really mean. There can be a good side, there are swings, and there can be a downside - there are swings and roundabouts. For example, and this is the last question, many mining projects which are coming on line frequently stockpile as part and parcel of starting their production and if that were the case and that would be a good thing because it's already got markets lined up and it's going to lead to increased exports. Stockpile however could be there for other reasons. The truth is this has been volatile, I think inventories detracted from growth in the last set of figures, they've added to growth in this one. Swings and roundabouts, too early to reach a definitive conclusion about your question.

Thanks very much.

(Ends)