7 September 2015

Interview with Steve Sedgwick, CNBC

Joe, really nice to meet you. Look, after all the excitement in Brisbane last year, I’ve got to say the Turkish Presidency feels like a bit of a letdown. You see, you’ve got all those lofty goals - the two trillion dollars, the two per cent extra growth, millions of extra jobs, it looks like we’ve gone backwards a bit, doesn’t it?

TREASURER:

Well I’m not sure that there is a backward step in relation to the two per cent growth target. I think all the finance ministers are very committed to it. Some have moved further, in the case of Australia we’ve moved further than our initial goal. Other countries have moved back a bit. But overall, when we hear from the IMF and the OECD at the leaders meeting at [inaudible], then we’ll know whether there has been a proper accounting process for the goal. I mean, I am absolutely sure that the only solution for the global economy at the moment is for people to earn growth through structural reform.

STEVE SEDGWICK:

Yeah, but the problem is we’ve already heard from the IMF coming in to this meeting. They’re afraid of developed powers, whether it be the UK, whether it be the US, putting up rates. They would suggest that from those kind of comments, that they don’t think we’re getting anywhere near the kind of growth that we need.

TREASURER:

Well there’s two different issues. One is, how is the world economy going now, and the second issue is, what we set down as a goal in Brisbane, and that is to increase global growth by two per cent over five years, as a result of further structural change. Now, there have been setbacks and there will be occasional setbacks, but the structural reforms coming out of Brisbane will be enduring.

STEVE SEDGWICK:

Yeah, but it just seems like we’re relying too much on monetary policy – we don’t want Yellen to [inaudible], we don’t want Glenn Stevens to do anything strange, we don’t want Mark Carney to do anything, we want Draghi to give us more money. The structural reforms just don’t seem to be coming through in force to take the pressure off the central bankers.

TREASURER:

Well, I don’t think any government is asking central bankers to do more heavy lifting. There seems to be some in the markets who have positions in those markets. So quite frankly, from a government perspective, and I think it is the view of almost all governments, monetary policy is a temporary solution. It’s a temporary solution to the growth needs of the world. The only way we are going to get sustained growth is through structural reform. That structural reform covers everything from freer trade, right through to workplace relations reform, but also importantly, providing stability in relation to banking reform. You’re never going to take away volatility by having public policy volatility. You’ve got to have public policy certainty and stability at a time when the rest of the world is quite volatile.

STEVE SEDGWICK:

And is that where the big crisis is, coming to this meeting, people concerned about the public policy opacity from the Chinese?

TREASURER:

Well, I think there is a general misread of the performance of the Chinese economy and the determination of Beijing to make sure that its economy continues to grow and grow relatively strongly. There’s been, in my view, a massive overreaction to volatility on the Chinese market, which is still 35 per cent higher than it was a year ago. Now, you would ask yourself, in any sane situation, if the Chinese economy’s been coming off a bit, why has the Chinese stock market grown by 35 to 40 per cent? Now these are the basics and the fundamentals that investors need to look at. And they’re the basics and fundamentals that the people reporting in China need to look at.

STEVE SEDGWICK:

Sure, but the Chinese government themselves, they were the ones who pushed the button on a whole host of actions, a whole host of seemingly panicky action, because of the stock market. It was just the stock market, not the economy. Why did they do that? Why have they got the Japanese, why have they got the Americans, so worried about it?

TREASURER:

Well, I think in relation to the Chinese stock market, it is a very small part of their economy, unlike the United States or Europe or Australia, where the stock market represents a much larger part of the economy. Secondly, they’re learning how to be more engaged in capitalist markets. We sort of expect, or there is a general expectation, that China will move from having been a closed economy to a fully open, transparent economy in just a few years. And that’s a ridiculous expectation by western countries, having noted, that China has come a very long way in a short period of time. They continue to deregulate their currency, they continue to deregulate their economy, but also importantly, they are learning how to manage volatility in their own economy, something that they haven’t been familiar with.

STEVE SEDGWICK:

Joe, you’re talking about the stock market but it is also about the economy. You can see that. You see that in Western Australia, you see what it’s doing to your federal Budget, you see what it’s doing to your exports as well. It’s really taking a toll on Australia as well. It’s not just about the stock market, is it? This is a real economic slowdown. There is a danger of an overshoot on the downside, compared with expectations.

TREASURER:

Well, this is again the danger of misinformation. Last month I just got a report, we had record iron ore go through the Port Hedland port, our biggest ever. Now, our volumes of iron ore exports to China are the highest level ever. And they’re going to continue to grow in volume. Prices have come down, yes, that’s quite true. But they seem to have stabilised around $50 US Dollars. In particular, when you look at China, you’re starting to see their own monetary policy working, we’re getting good information that property markets in certain cities are starting to pick up again in China. But when you see the volatility in Chinese equity markets, Chinese investors are going to look for other opportunities around the world. They’re most familiar with real estate. They’ll start to move more into real estate in major capital cities like Toronto, Vancouver, Sydney, Melbourne…

STEVE SEDGWICK:

They’re already there Joe.

TREASURER:

Well I suspect they’re going to keep coming. And in our case, when they come they can only buy new properties, which means there is a construction boom as well in the property market, which has helped to offset some of the loss of jobs in mining and resource construction.

STEVE SEDGWICK:

Surely, that’s only going to exacerbate the Sydney property bubble that we’ve already got though?

TREASURER:

Well, that’s why that if it goes into new real estate rather than existing real estate, it’s creating jobs. It is about managing the transitions in all of our economies, the Chinese economy is transitioning from an export oriented big manufacturing economy and they’re trying to drive domestic consumption. I understand that, but they’re doing it at the best speed they can. And in relation to other countries around the world, I think we’ve just got to be a bit mature and assess the fundamentals, rather than just react to the rhetoric.

STEVE SEDGWICK:

And you don’t have any concerns, that others do have, and I’m hearing it not just in the market, I’m hearing it from policy makers as well - concerns about deflation, concerns about the Chinese getting themselves out of this mess by exporting deflation globally?

TREASURER:

If you’ve got the United States now at full employment, you’re going to start to see some wage growth in the United States. You’ll start to see the empowerment of the great American consumer. That’s good for the world. I mean, there’s so much liquidity around in the world at the moment. I’m not worried about deflation. In the longer term there is a threat of inflation. But that’s in the longer term. At the moment we’ve just got to carefully manage the transition, and not be spooked by what is going to be a predictable set of events. The fact that sooner or later the US Federal Reserve is going to increase interest rates, it’s the most widely flagged change in policy I have ever seen, and sooner or later, you’re going to start to see central banks around the world increase interest rates. The test of the markets will be whether they see that as a good thing, as they should because it indicates the world economy is coming back, or whether they’re just going to continue to look for good news or pessimism, which is what they seem to want.

STEVE SEDGWICK:

Yeah, let’s talk briefly about that US rate hike as well. As you say, the most widely flagged rate hike in the history of rate hikes, and yet the market is having such wobbles about it, such tantrums, such a panic about it. Does that [inaudible] a greater concern, the lack of confidence globally that they can worry so much about something that’s been so well flagged?

TREASURER:

Well I think the challenge is, when you have so much liquidity around the world, people are looking for yield, and it’s been comforting to go into the equities markets, they’re familiar with that investment, and they’ve got yield out of the equities markets. Now that they’re going to have to start to look more broadly for yield - and there is going to be an element of risk in that, but having said that, I’m still more confident and positive about the world economy, and particularly about the engine room for growth coming out of Asia. We have an $8 trillion shortfall in infrastructure in Asia over the next ten years. From an Australian perspective, that’s more iron ore, that’s more coal, that’s uranium, that’s more gas, and then with the emergence of the massive middle class in Asia, they want our beef, they want our wheat, they want our education, our healthcare, our financial services. I see great opportunities.

STEVE SEDGWICK:

What about short term for Australia? Chris Bowen said you’re in a parallel universe, I think, in terms of your expectations for the Australian economy, highlighting deficits and debt levels as well. I mean, how do you respond to that?

TREASURER:

Well, the deficits are coming down and we’re on a credible trajectory back to surplus. If we moved any faster it would hurt the Australian economy. But bear in mind, I mean, when Chris Bowen was Treasurer iron ore prices were $130 a tonne. I can only wish - now they’re $50 a tonne. I don’t control that. But what we do influence is the transition in the economy. 70 per cent of the Australian economy is services but it’s only 17 per cent of our exports. In the last 12 months we’ve seen an increase in the services sector by 7.3 per cent. A great story. We are going to further benefit massively from the fall in the Australian dollar. We’ve been dealing with an Australian dollar that was originally, a few years ago at parity with the US, now it’s around 70 cents. It gives our exporters a chance that they haven’t had for years.

STEVE SEDGWICK:

Well the exporters aren’t responding. The latest GDP data, 0.2 of one per cent, really disappointing to you, really disappointing to everyone in the country…

TREASURER:

But in fact, mining exports came off, but you’ve seen services exports increase. Services is 80 per cent of the jobs in Australia, 70 per cent of the economy. So now, we have a huge opportunity. We can see it in tourism numbers, a million Chinese are coming this year to Australia, and they’re actually higher yield than they were 12 months ago, or two years ago. You’re starting to see an increase in education exports, and our manufacturers that have been burdened by a high Australian dollar for so long are now starting to see great export opportunities. Free trade agreements with China, Korea and Japan are game changers for the Australian economy.

STEVE SEDGWICK:

And just one more, on monetary policy as well, you don’t think the Australian economy needs a bit more support from the RBA, from Glenn Stevens. As the IMF has been talking about more support needed from our bank, more support needed from Draghi, don’t raise rates in the US and be careful of the Chinese slowdown. But Australia doesn’t need more monetary support?

TREASURER:

Well, in Australia you’ve got to understand that the transmission rate from an action by the Reserve Bank to the market is much faster than most other economies in the world. So there’s already quite a bit of liquidity in the Australian marketplace. A moment ago you were talking about higher property prices, reducing interest rates isn’t going to help there. But I would say to you, what we’ve got to do is continue to get the confidence up. Our tax cuts for small business are delivering confidence for small business. We’ve also got the biggest infrastructure roll out in Australian history, by a considerable margin, which is really going to start kicking in. There are 73 registered cranes in Sydney’s CBD alone, the business district, 163 in the kilometre around it. So we have momentum in the Australian economy. It’s patchy in parts, I accept that, but this massive transition from mining and resources construction to a broader based growth in Australia is well underway, and we’re managing it carefully.

STEVE SEDGWICK:

Joe, nice to see you, thanks very much.