Today's economic note comes to you during the business end of the season with the Budget just a little over four weeks away. I've spent most of this week and this weekend bunkered down in meetings working on the Budget which will be all about converting our economic success during the global recession into enduring gains for the economy and for working people. Recent data gives us a good running report card on the progress of the recovery and gives us confidence in our strategy to withdraw stimulus gradually. The stimulus measures provided vital support to businesses during the global recession, as highlighted by Treasury's liaison with the business community which I'll also discuss in today's note.
Labour force figures out on Thursday showed the unemployment rate remained unchanged at 5.3 per cent in March. The number of full-time employed rose for the seventh straight month - up 30,100 persons - and was only partially offset by a 10,600 fall in the number of part-time employed. While this increase in employment gives us further cause for confidence, there is no room for complacency, with 619,100 Australians still looking for work.
Australia's unemployment rate remains lower than that of every major advanced economy except Japan. At the start of the global crisis in September 2008, Australia and New Zealand had identical unemployment rates at 4.3 per cent. Today our unemployment rate stands at 5.3 per cent while New Zealand's latest unemployment result was 7.3 per cent - its worst result in a decade.
Australia's unemployment rate is currently 1.0 percentage point higher than its pre-crisis level. In contrast, unemployment across the major advanced economies is up 2.2 percentage points, and unemployment in the US is a massive 3.5 percentage points higher. Our unemployment rate is almost half that seen in the Euro area, which hit 10.0 per cent in February, and the current rate in the US of 9.7 per cent.
Australia has been able to achieve what no other major advanced economy could during the crisis - creating jobs during the worst global recession in 75 years. While our economy has added 187,000 jobs since the crisis began, the Euro area has lost 3.6 million jobs and the US economy has lost 6.5 million jobs.
Stimulus is a big part of the reason why Australia has outperformed the rest of the developed world. As a Treasury paper released yesterday shows, it also provided critical support for businesses during the crisis. Key themes from Treasury's Business Liaison Program reports that Treasury's discussions with 29 organisations in five cities during February 2010 found that "public infrastructure and education spending has been core to maintaining activity in the construction sector". It goes on to say that "many organisations … relied on the Building the Education Revolution (BER) program to support activity during that period of weakness", and that this program not only "supported employment in the construction sector" but was also "effective at supporting places for apprentices."
We understand that even though Australia has come through the global crisis well, many businesses are still doing it tough. The Business Liaison Program found that "on the whole, trading conditions and business confidence have improved in recent months, with a sense of optimism about the outlook for the domestic economy. However, particularly in the retail sector, the mood was more cautious with concerns about the near-term outlook flowing from the unwind of stimulus." It also found that "the First Home Owners Boost (FHOB) supported activity, but developers are now seeing demand moderate with the wind-back of the FHOB."
On Tuesday the Reserve Bank Board took the decision to raise official interest rates by 0.25 percentage points to 4.25 per cent back to the levels last seen in 2002. This decision is a painful reminder that as the economy recovers, the RBA will continue to move rates from their emergency levels during the global recession to more normal settings. This was reiterated by RBA Governor Glenn Stevens, who said in announcing the decision that "the Board has been lessening the degree of monetary stimulus that was put in place when the outlook appeared to be much weaker." This approach compliments the Government's own approach of lessening fiscal stimulus, with the scheduled withdrawal of stimulus set to detract from growth over this year.
While any rate rise is tough on families, most families I speak to understand that rates are rising from emergency levels because the economy is recovering and much higher unemployment has been avoided. For a family with a $300,000 mortgage, this increase will add an extra $50 to monthly mortgage repayments. But official interest rates still remain 3.0 percentage points - the equivalent of 12 individual rate movements - below their peak in August 2008 of 7.25 per cent. This means that even after this latest rate rise, a family on a $300,000 mortgage will still be paying around $500 a month less in repayments than they were before the global crisis hit - or around $6,000 less per year.
It's also worth remembering that there are a range of different mortgage rates available, with the best standard variable rate from a credit union or building society now a hefty 1.14 percentage points below the average of the major banks. And even among the major banks we are starting to see more differentiation and competitive pressure with NAB's standard variable rate currently 0.27 percentage points cheaper than Westpac's.
Reports released by the OECD and World Bank last week point to a continued, but uneven, recovery in the world economy. The OECD's Interim Economic Assessment says that while economic activity strengthened in most of the major OECD economies in the last quarter of 2009, growth is set to slow in the first half of 2010 as support from the inventory cycle begins to fade and some stimulus measures come to an end. The OECD warns that "despite some encouraging signs on activity, the fragility of the recovery, a frail labour market and possible headwinds coming from financial markets underscore the need for caution in the removal of policy support." They advise that fiscal consolidation "should start in 2011, or earlier where needed, and progress gradually so as not to undermine the incipient recovery." The World Bank's East Asia and Pacific Economic Update also emphasises the need for caution in the withdrawal of fiscal stimulus given the still fragile nature of the global recovery.
Here in Australia, stimulus is being withdrawn faster than in most other advanced economies, and one year ahead of the OECD's recommended timetable. The cash stimulus payments are now out of the system, and our First Home Owners Boost and Small Business and General Business Tax Break have both ended. Overall, the withdrawal of fiscal stimulus is expected to subtract around 1 percentage point from GDP growth over 2010, making room for the recovery in private activity. This means that Australia is withdrawing stimulus substantially faster than the IMF and OECD have recommended for advanced economies.
This week I'll start talking to my G20 counterparts in preparation for our meeting in Washington DC in a couple of weeks' time. This will be an important opportunity to continue our work on the 'Framework for Strong, Sustainable and Balanced Growth' that was agreed to by G20 Leaders at the Pittsburgh Summit in September of last year, which I attended with Prime Minister Rudd. G20 Finance Ministers will also continue our work on financial regulation and international financial institution reform. While the global economy has recovered somewhat since the G20 first committed to these reforms, it's important we maintain momentum in tackling these challenges if we're to ensure we don't repeat the devastating events of the past year and a half.
Treasurer of Australia
Sunday 11 April 2010