Today's economic note follows the second anniversary of the collapse of Lehman Brothers this past Wednesday. The collapse of this US investment bank on 15 September 2008 sent shock waves through financial markets across every time zone. What followed was a negative spiral of financial market instability, reduced confidence and lower economic activity that would go on to become the worst global recession in 75 years. In a speech to the Global Access Partners Economic Summit on Thursday, I talked about the great optimism I have for the future of our economy and our country, knowing what we've been able to achieve together these past two years and that our economy is on the cusp of something really special. We dealt with the global recession more successfully than comparable economies around the world thanks to decisive fiscal policy and monetary policy action and the efforts of employers and employees around the country. It is that success which provides a really solid foundation for a reinvigorated policy agenda, which will maximise the opportunities of the Asian Century by lifting productivity and making our capital-hungry economy stronger, broader and more competitive.
The global financial crisis had a devastating impact on jobs around the world, and two years on many developed economies continue to face painfully high unemployment. Euro area unemployment peaked at 10.0 per cent in March 2010 and hasn't fallen since; US unemployment is only 0.5 of a percentage point below its October 2009 peak of 10.1 per cent; and the unemployment rate across OECD economies as a whole is a stubbornly high 8.5 per cent. It's a very different story here in Australia, where unemployment has now fallen to 5.1 per cent after peaking at 5.8 per cent in the middle of 2009. In the last year alone we've created nearly 350,000 jobs – over three-quarters of which have been full-time positions.
A joint IMF-International Labour Organization conference in Oslo on Monday brought together global leaders from government, business, trade unions and academia to discuss the jobs crisis that continues to envelop many developed countries. IMF Managing Director Dominique Strauss-Kahn told the conference that "the labour market is in dire straits. The Great Recession has left behind a wasteland of unemployment, and this devastation threatens the livelihood, security and dignity of millions of people across the world." He emphasised that "unemployment leads to a loss of earnings that is both substantial and long lasting, especially among younger people", and that many countries face the daunting prospect of "a lost generation, disconnected from the labour market, with a progressive loss of skills and motivation." We've avoided this destruction because of the decisive decisions we took at the end of 2008 and during the first half of 2009, and our economy is now in a strong position going forward.
Here at home, strong jobs numbers continue to support solid consumer confidence. While last week's Westpac-Melbourne Institute Survey of Consumer Sentiment found that consumer confidence fell by 5.0 per cent in September, it still remains well above its ten-year average. Commenting on the reversal of the 5.4 per cent gain in August, Westpac Chief Economist Bill Evans said "it appears that the August reading may have overstated confidence" and "as such, the September level of the index is probably a more reasonable indication of the level of consumer confidence."
We also received the results of the NAB Monthly Business Survey last week, which found that business confidence rebounded strongly in August and business conditions remained stable. NAB Chief Economist Alan Oster commented that "we are now at the conjunction of vastly higher bulk commodity prices, significant increases in resources sector investment activity and a vanishing fiscal stimulus in the building construction sector." An NAB economic note examined the changing environment facing the construction sector as our stimulus measures continue to wind down and new minerals engineering projects start up. It noted that "the engineering construction pipeline for the minerals sector is now considerably larger than that for all other engineering work in Australia, and is likely to support high levels of construction activity for some years."
On Thursday RBA Assistant Governor Philip Lowe gave a speech on the risk and returns presented by the development of Asia. He started his speech by saying that "the medium-term prospects for the Australian economy look to be more positive than they did some years back", with this the result of both "policy choices that have been made within Australia" and "the development of the economies in Asia." He talked about the continuing urbanisation and industrialisation of countries like China and India, and how the strong growth in demand for raw materials like iron ore, coal and natural gas has led to a large increase in their price over the past decade. These higher prices "have raised the return to capital in the Australian resources sector, and the result has been a very large increase in investment."
His speech also made the interesting point that "as Australia's medium-term prospects have improved, the risks facing the economy have also changed and these risks need to be managed." Mr Lowe said there is very little we can do about external risks, "but what we can do is to have the right policy framework in place so that we can respond when things inevitably turn out differently to what we expect." He identified strong productivity growth as one of the best ways to manage risk, saying "regardless of how things develop in the countries to our north, increasing productivity in Australia remains the key to sustained increases in our living standards." We're determined to progress reforms that build productivity and further strengthen the economy, and position us to take maximum advantage of the opportunities presented by the Asian region's continued economic expansion.
We know that a vital part of securing long-term productivity growth is ensuring Australians have access to high-speed broadband. It's estimated that innovation from information and communications technology is the single biggest driver of business productivity, driving nearly 80 per cent of productivity gains in service businesses and 85 per cent in manufacturing businesses. When we came to government in 2007, Australia's broadband speed lagged behind 26 other OECD countries and we had the third most expensive internet in the world. Governments around the world had already recognised the importance of high-speed broadband and many had already rolled theirs out or were in the process of doing so – countries like South Korea, Japan, Singapore, China, Germany, France, the Netherlands, Sweden, New Zealand and the USA.
So on coming to government, we undertook a rigorous and detailed assessment of the private sector's capacity to build the National Broadband Network. We commissioned an independent Expert Panel – with some of the most eminent names in telecommunications, business and investment – to advise the Government on proposals from the private sector to build the Network. The Expert Panel unambiguously concluded that none of the private sector proposals offered value for money. We then took the only responsible course of action and announced that we'd build the National Broadband Network, and commissioned McKinsey and KPMG to undertake an implementation study on its operating arrangements and network design. After very detailed financial analysis, including granular revenue and cost modelling, they confirmed that NBN Co had a strong and viable business case and would be able to deliver affordable prices for consumers. They prepared a 534 page National Broadband Network Implementation Study, which we released in full on 6 May 2010. I think these facts shed some light on some of the unsubstantiated claims that have been made in the public debate this past week.
The NBN is now being rolled out throughout Australia, with substantial progress already made in just the first 12 months. When complete, 93 per cent of premises will be connected to a network capable of offering turbo-charged speeds up to 1000 megabits per second – 1000 times faster than what many people receive today.
Tuesday was a really exciting day as the second Gillard Government was sworn in at Government House. Looking around the room at all the ministers and parliamentary secretaries, I saw a whole lot of people dedicated to building on our economic successes to do even more for job creation and job security in our community. Whether it be Bill Shorten and David Bradbury in my Treasury portfolio, Penny Wong in Finance, or any of the economic ministers – this is a ministry dedicated to building consensus behind our plan to strengthen and broaden the economy. The Australian people expect big things from us on this front and I know we won't let them down.
Treasurer of Australia
Sunday 19 September 2010