JOSH FRYDENBERG:
Today's National Accounts have been released against the backdrop of devastating floods at home and violent conflicts abroad. Our deepest condolences go to the families who have lost loved ones in the floods and many others who have seen extensive damage to their homes and their businesses. Our prayers, too, are with 44 million brave Ukrainians who are defending their nation against the unjust and unprovoked invasion by Russia. We are all invested in this fight because what is at stake is far more than the sovereignty of one nation. But what is at stake is the future of the liberal international rules‑based order.
To different extents, and in different ways, both the floods and the developments in Ukraine will impact the Australian economy. However, today's National Accounts again demonstrate the enormous strength and the resilience of our economy, even in the face of the biggest economic shock since the Great Depression.
In the December quarter, the Australian economy grew by 3.4 per cent. The growth of 3.4 per cent in the December quarter is the equal‑strongest growth rate in 46 years. This took calendar growth for 2021 to 4.7 per cent. Australia's economy is now 3.4 per cent larger than it was at the start of the pandemic. Australia's economy has outperformed all major advanced economies, including the United States, the United Kingdom, Japan, Canada, Germany, Italy and France. Australians and Australia are world beaters. We have one of the highest vaccination rates in the world, one of the lowest mortality rates in the world, and now unquestionably one of the strongest economic recoveries in the world. This is no accident. This is not the result of good luck but the hard work of 26 million Australians and an economic plan that is working.
There are now more Australians in work than at the start of the pandemic with our labour market also outperforming all major advanced economies in the world. In stark contrast in the United States, United Kingdom, Japan, Germany and Italy, employment is still well below pre‑pandemic levels. In today's National Accounts we saw consumption growth rebound strongly by 6.3 per cent as our two largest states, New South Wales and Victoria, emerged out of lockdown. Consumption was up in 12 out of the 17 categories with significant increases in transport, hospitality, and retail. This was underpinned by the creation of a record 375,000 jobs in the December quarter as the unemployment rate fell from 5.2 per cent in October to 4.2 per cent in December, a 13‑year low.
Consumption was also strongly supported by a fall in the savings ratio to 13.6 per cent from 19.8 per cent in the previous quarter. Household balance sheets remain particularly strong, with more than $250 billion having been accumulated since the start of the pandemic began.
The wages bill of the economy, otherwise known as compensation of employees, grew by 2 per cent for the quarter and is up by 5.3 per cent through the year. This has been driven by both strong employment, but also an increase in the average earnings in the quarter, reflecting a tighter labour market as employers competed for employees.
The National Accounts measure of earnings is a broader measure of the remuneration of workers and was up by 3.4 per cent through the year.
Off the back of a bumper harvest in wheat, in barley, and canola, farm GDP was up 11.1 per cent in the quarter and is now up by more than 20 per cent through the year. This saw higher inventories which contributed also to growth.
Local supply chains did have a negative impact on the quarter, and that was reflected in dwelling investment, business investment and in net exports. However, the construction pipeline remains strong, so too does investment intentions with the latest Capex survey indicating more than 12 per cent growth this financial year.
Despite the uncertainties in the global outlook and the ongoing impacts of the pandemic, the Australian economy is in a very strong position. I want to repeat that. Despite the ongoing uncertainties in the global outlook and the ongoing impacts of COVID‑19, the Australian economy is in a very strong position. Omicron has not derailed our economy. Omicron has not derailed our recovery.
Spending data for the first two months of this year is up 4 per cent on the equivalent period last year. Business confidence rebounded in January across all states, and job ads are now more than 30 per cent higher than pre‑pandemic levels. The unemployment rate is forecast to have a 3 in front of it for the first time in nearly 50 years and Australia has avoided the labour market scarring that was experienced after the 1980's and the 1990's recessions.
As recent events at home and abroad demonstrate, the Australian economy will continue to be tested. But today's National Accounts show that if we stick to our economic plan, Australians can be very confident and optimistic about their economic future. I would like to now just go to a few slides before taking some questions.
Slide 1 shows real GDP growth for the quarter at 3.4 per cent and 4.2 per cent through the year. The second chart shows what has happened across the different states. And as you can see, as New South Wales and Victoria came out of lockdown, we saw a particularly strong result. So you understand, in the December quarter for the first 10 days of the December quarter New South Wales was still in lockdown and Victoria was still in lockdown for the first 21 days of the December quarter. So, we did see particularly strong results in New South Wales, but also in Victoria and the ACT as well was strong.
The next chart shows that this was a consumption‑led story. And in particular where you will see in the next chart the particular categories, 6.3 per cent up is one of the strongest numbers we've seen in many years. In the various consumption categories, as you can see, transport was nearly up 50 per cent, clothing and footwear 40 per cent, retail, cafés, restaurants up around 25 per cent. This is discretionary spending as people are coming out of lockdown.
Farm GDP off the back of that strong harvest has been very, very strong, up 11.1 per cent in a quarter and up more than 20 per cent through the year. Compensation of employees, this is the wages bill for the economy taking into account bonuses and other payments that employees receive, up by 2 per cent in the quarter and 5.3 per cent through the year. You can see through the compensation of employees, which also takes into account the job switching which I referred to earlier, which is happening as people are moving between jobs and receiving higher payments, that is reflected in that number.
The household savings ratio has come down from those record highs. 13.6 per cent is still around three times what it would have otherwise been in a normal pre‑pandemic scenario, and, again, will continue to come down as conditions normalise.
This is arguably the most important slide for Australians to understand. It shows our performance relative to other major economies compared to what is, pre‑pandemic, to what we've seen over the last couple of years. Australia has outperformed the United States, France, Canada. And these other economies ‑ Japan, the United Kingdom, Italy and Germany are all smaller as a result of the pandemic. It very much tells the international story about how hard Omicron has hit, and COVID has hit, and delta has hit, but, importantly, how Australia has come back so well.
This is another important chart that shows our labour market outcomes. We have around 260,000 more Australians in work today than at the start of the pandemic. In the United States 2.6 million fewer people have been in work than at the start of the pandemic. And as you can see, their employment in labour markets have not recovered in many of these countries, certainly nothing like Australia. In fact, it has gone backwards in a number of these numbers.
Next slide. Just to give you a sense of where we are in terms of vaccination rates, and this is for the entire population who have received a double dose, Australia is in the top 10 in the OECD. In terms of mortality rates, Australia coming in in fifth. Again, this is based to total deaths per million, so it takes into account population size. You can see in comparison to other countries what Australia's result has been on both fatality rates and vaccination rates. Very strong performance. That concludes. Are there any questions.
JOURNALIST:
Treasurer, could you give any more detail on how the rains, or the floods, and the conflict in Ukraine are going to impact the economy. In your view.
JOSH FRYDENBERG:
Look, firstly these are evolving situations. That's the first thing to say. With respect to the floods, what will determine the impact on the broader economy will obviously be what happens to critical supply chains and critical infrastructure. Back in 2011 with the Queensland floods we actually saw a contraction in the March quarter back then from growth, but what we also saw in those floods, which we have not seen to the same extent here, was major disruptions to ports, major disruptions to mines, and we have not seen that type of damage to the same extent this time. There is obviously going to be a big clean‑up. Back in 2011 the Insurance Council said there was more than $2 billion worth of claims and then there was estimated to be more than $4 billion of economic impacts across the agriculture, the mining, the tourism sectors and the like. Every disaster is different, so I wouldn't want to put a figure on it, but I do know that already 47,000 insurance claims have been lodged and that is a 50 per cent increase on yesterday. And that was 100 per cent increase on the day before. They have largely been around Queensland, so there will be more coming through New South Wales. We have been in touch as a Government with both the insurance companies as well as with banks to work very obviously closely with their customers to ensure that these people in their hour of need will be looked after. So, it is unclear as to what will be the precise economic impact, but there will clearly be a very big clean‑up cost from the floods.
With respect to Ukraine and developments there, Australia has very limited direct economic exposure to Russia and the Ukraine. Our total trade is less than 0.2 per cent. Our total trade with Ukraine and Russia is less than 0.2 per cent of our total trade overall and we have very limited financial system exposure. I learnt actually, interestingly, in the last 24 hours, that the Russian Government actually holds about $8 billion in Australian bonds. But, again, not as big as exposure as they would have to other countries. So, we have limited exposure either in trade or in our financial systems. But where we are going to see an impact here at home is the inflationary impacts of higher petrol prices. Now, in the last two weeks we have seen the oil price increase above $100 a barrel for the first time since 2014‑15; Brent is now at $105. We have seen wheat prices increase by more than 15 per cent and we have seen European gas prices increase by around 70 per cent. Very significant impacts. Now, to Australia higher petrol prices does flow through to inflation and obviously affects many Australian families and businesses. So, the expectation will be that this will impact the price of petrol. Other commodities like wheat, we are a big exporter of wheat, it may have some impacts on supply chains more broadly. But our exposure economically is significantly less than of course any major European country like Germany and others who rely so heavily on Russian energy exports.
The other thing that it could affect is just the global economic outlook and the growth forecast, and the IMF have already signalled that their projection of 4.4 per cent economic growth for the year could be revised as a result of the (inaudible).
So, I would say there will be a clean‑up bill, there is obviously payments that are going out, 145,000 claims for example, with the disaster recovery payment with respect to the floods. Higher petrol prices as a result of those global tensions, would be the main areas where I could see the Australian economy being impacted. But, again, today's numbers do underline the overall strength of our economy and our ability to withstand these shocks.
JOURNALIST:
Treasurer, as you say the effect of the primary [indistinct] the micro not the macro, and its inflation I’ve been thinking about, it’s housing prices, it’s rents, it’s petrol as you say. Is there anything that you can do about the cost of living?
JOSH FRYDENBERG:
Well, firstly we are helping to provide more money into people's pockets with the tax cuts that we’ve rolled out, and that's around $30 billion in just the last few years, and that has contributed to a significant boost to the household disposable income. We have made changes around childcare which is particularly important as a cost of living expense for families. And then, of course, electricity prices are down by about 8 per cent in the last two years. That's a very different experience to what we are seeing in other countries. Last night I spoke to my British counterpart, and they have seen a dramatic spike in their energy costs. We are always looking for opportunities to reduce those pressures on families, but we are a price‑taker when it comes to petrol because so much of our petrol is imported. And we have got a couple of refineries here, but we are importing that key commodity. So, we will continue to look for opportunities, Chris, but we have been able to put more money into people's pockets through tax cuts, we have been able to reduce the cost of childcare, we have been able to reduce the costs of electricity.
JOURNALIST:
Treasurer, just on a related subject matter, it’s all very well talking about how the Australian economy is in relative bonny health compared to other economies, but when it comes to people's real wages, they are still effectively negative or stagnant and will be so for, until 2024, I think. What are you being told as to the rate of unemployment? At what point will the rate of unemployment actually see wages increasing? Because it seems that Steven Kennedy and his crew don't have much of an idea.
JOSH FRYDENBERG:
Well, as you know we upgraded in MYEFO and we will again revise the numbers at Budget for some of those major indicators like the WPI and what we expect wages to do, as well as inflation. The inflation rate is at 3.5 per cent today. Underlying inflation, so when you take out the cyclical factors, is at 2.6 per cent. It's less than what it is, significantly less, than what it is in other economies. In the United States it's at 40‑year highs, it's up 7 per cent. The best way to get higher wages growth is to get a tighter labour market, and you were referring to that. So the expectation is the unemployment rate continues to come down, you will see more and more employers compete for labour. Now, one of the numbers I wanted to highlight today was what we are seeing in terms of average earnings and what we are seeing in the compensation of employees. And that wages bill for the economy has grown quite significantly, over 5 per cent through the year. And that is a result of bonuses being paid, higher wages being paid as workers move across the economy. So, I expect that wages will go up. Inflation, as you know, is a function of a number of factors. Some are beyond our control like global supply chain constraints which, again, have been reflected in the numbers today. Whether it's around timber, whether it's around vehicles, whether it's around other imports that we take from overseas, as well as obviously petrol prices as well. Because petrol makes up about 3 per cent of the overall CPI basket, so it's not an insignificant number. But our focus is on tightening that labour market, Andrew, getting more employers competing for labour and therefore pushing wages up that way.
JOURNALIST:
Treasurer, you are in the middle of framing the Budget.
JOSH FRYDENBERG:
Yes, I am.
JOURNALIST:
Has the international uncertainty affected your considerations in that? And can you give us just some broad thoughts about how you are preparing this Budget and what are your priorities? What goals do you have for this Budget?
JOSH FRYDENBERG:
Well, the first thing to say is, despite the very strong economic recovery that we've seen and the resilience, the recovery is not yet locked in. COVID is still with us, and as you say, the international events underline those down‑side risks. So, we are turning off those emergency payments and we did that when with the COVID disaster payments. I said no to state governments and, you know, the Prime Minister and I worked through those issues. We said no to the state governments who were asking for extra economic support payments because we had to draw the line. And we were drawing the line very clearly as the economy was recovering. We are working to a very clear fiscal strategy which has been to drive unemployment down, and now we are on the verge of full employment. An amazing goal to now have in sight. We have an unemployment rate that the RBA is forecasting to have a 3 in front of it four years in. So, we will continue to invest in those areas and the Budget which help create jobs. So, there will be very significant infrastructure investment in the Budget. There will be very significant investment in our regions because they are going to be key to our economic growth going forward. The digital economy remains a major focus for us, as well as Australia's manufacturing sectors. And we've set out what our clear priorities are with respect to manufacturing.
The job is not yet done on skilling our workforce. As you know, we have 220,000 trade apprentices today, the highest number on record since 1963. JobTrainer has been important, plus the 50 per cent wage subsidy that we provided to apprentices through this pandemic. So, we will be investing more in skills. We will also be looking at how do we incentivize investment. It's been counter‑intuitive that during a pandemic actual business investment has risen and machinery and equipment investment has risen very substantially. Why? Because we have put in place those immediate expensing provisions, together with loss carry‑back provisions to generate more investment by companies who back themselves. So, we will be looking at opportunities to boost investment. And, of course, energy investments will again be a focus for this year's Budget. We have invested significantly in that transition we are seeing across the energy space, which is trying to simultaneously reduce our carbon footprint, boost the economy, and reduce the price of electricity as well as increase its reliability off the grid. So, we will be doing that.
So, there will be lots of different components that will be focusing on the economic growth and job creation story. And, of course, as you know in recent Budgets, we have focused very much so on guaranteeing those essential services. A record spend on aged care we saw in last year's Budget of $17.7 billion. We saw an estimates variation which were very significant with the NDIS in MYEFO, and we will continue to invest heavily in health and education and protecting the community from COVID. And so that will be ‑ that's going to be the focus of our Budget. The other thing I will say, and is premised in your question, about the international environment of national security. When we came to Government, investment in defence was at its lowest level since 1938 ‑ it was only 1.5 per cent of GDP. We've now taken that above 2 per cent. We have outlined a very significant defence project pipeline and we will continue to build on that pipeline. We will continue to invest heavily in national security. I think that's one of the key features of our response at the last ‑ ever since we've come to Government, and we will continue to build on that in the Budget.
JOURNALIST:
And tax for low-income earners?
JOSH FRYDENBERG:
Well, as you know, the LMITO was put in recent Budgets, was never a permanent feature of the Budget, but at the same time it's paid at the end of the financial year as people put in their tax returns. So, people haven't yet to get their LMITO that I put in last year's Budget. But low-and middle-income taxpayers have benefitted very greatly not just from the LMITO but also from the structural reforms that we have undertaken. And as you know, Michelle, stage 3 of our tax cuts have yet to take full effect and that will be very significant as well.
JOURNALIST:
Treasurer, in 'Lazarus Rising', John Howard wrote that: "The Reserve Bank has ignored the implicit understanding between it and the Government to keep out of crossfire during the election campaign." Of course, they increased interest rates in the '87 campaign; Phil Lowe waited three days after Scott Morrison won the 2019 election to announce a change in policy. Do you have an implicit understanding that the Reserve Bank stays out of the election crossfire, given 3.5 per cent inflation, unemployment at 4.2, one of the strongest economies in the world. It might be the time to lift interest rates.
JOSH FRYDENBERG:
But as you would have seen in yesterday's statement from the RBA, Shane, they were very clear about what they are looking for as the key proof points before they move on interest rates. I can't read the mind of the Reserve Bank Governor or indeed of his independent board. What I do know is they are looking for inflation to be sustained in that band of 2 to 3 per cent, and this is the first time we've had it in that band since 2014‑15. They are also looking for stronger wages growth, and you've seen that. And he did highlight yesterday that the global outlook is a downside risk for the economy as well with events in Ukraine. So they will make their decisions based on the economic facts as they are. But you can see where the market is going. The market is looking at interest rates into the future and pricing in potential rises. What it does underline for us is how important it is to get our economic settings right and to ensure that Australia's economy is continued to be managed well. Now, our political opponents set a very clear test for us at the start of the pandemic. They said we will be judged in terms our management of this recession by the developments in the unemployment rate and in the jobs market more generally.
JOURNALIST:
I think you dodged the question -
JOSH FRYDENBERG:
And the unemployment rate is now at 4.2 per cent, whereas it was 5.7 per cent.
JOURNALIST:
Would you look dimly on the Reserve Bank if they increased interest rates once we hit election season, as Shane was asking about?
JOSH FRYDENBERG:
Well, Andrew, I'm sure you are a double act there. But what I can say is I have great confidence in the Reserve Bank to make deliberations based on the best economic advice available to it, and they are independent, and I'm not going to pre‑empt whatever they may or may not decide.
JOURNALIST:
Just back to the Budget, are you able to give any indication on what would be included for WA, and will you be visiting the state before you hand down the Budget later this month?
JOSH FRYDENBERG:
Well, I hope to be visiting the state certainly before the election campaign begins, but I am going to be pretty busy on the Budget here in Canberra. I was recently in other states - Tasmania and Queensland, and South Australia and obviously travelling through Victoria and New South Wales as well; but I couldn't go to Western Australia. I'm sure the Prime Minister is looking forward to visiting Western Australia when he gets through COVID and we all wish him well ‑ I spoke to him just before I came out here today and he's in good spirits and he's talking to key departmental heads and the like as we manage these pretty distressing situations at home and abroad. So, I expect he will visit soon into WA. As for me, I'm going to be focusing on delivering the Budget but after which I hope to get to WA.
JOURNALIST:
Treasurer, just on what you said before with Russia holding 8 billion, was it, in Treasury bonds?
JOSH FRYDENBERG:
Eight billion.
JOURNALIST:
Eight billion. What implications does that have of the current kind of sanctions that are placed on Russia? Can you explain how that mechanism works?
JOSH FRYDENBERG:
Yes. It's an important question because as you would have seen in the joint statement out of the White House in recent days, between the European countries and the Americans, they said they were looking at ways in which the Russian Central Bank could be constrained in dealing with those foreign reserves which now number more than $600 billion as a way to avoiding what is happening to the Russian economy. Now, this came up in a discussion I had with Janet Yellen just a few days ago. Australia is going to restrict the ability of Australians and Australian institutions to deal with the Russian Central Bank. And in particular that constrains their ability to deal with their foreign reserves, whether they be the $8 billion of Australian bonds or otherwise. Other countries are doing the same. I spoke to my Canadian counterpart about the same issue, so Australians and Australian commercial entities will not be dealing with the Russian Central Bank.
JOURNALIST:
When will you be paying interest. That's the question on the bonds.
JOSH FRYDENBERG:
Sorry?
JOURNALIST:
Will you be paying interest ‑ the AOFM ‑ be paying interest on bonds? Yes.
JOSH FRYDENBERG:
Yes.
JOURNALIST:
To the Russian Central Bank.
JOSH FRYDENBERG:
The AOFM have made that clear, they will continue to ‑ they won’t be defaulting on our bonds ‑
JOURNALIST:
Will you continue to pay ‑
JOSH FRYDENBERG:
They won't be defaulting ‑ we won't be defaulting on bonds.
JOURNALIST:
‑ to the Russian Central Bank.
JOSH FRYDENBERG:
But what the Russians, as you know, Peter, are trying to do, is they are trying to reduce to sell their foreign reserves to transfer that into domestic currency and therefore to strengthen their domestic economy. So it's quite interesting what the Russians have done in recent days. What the Russians have done, for example, is they have said to all the Russian companies for them to sell their foreign reserves, their foreign currencies and transfer that into roubles. They have increased what is called their policy rate or their equivalent of their cash rate to 20 per cent. That's a doubling ‑ or more than doubling of what they have been. They have closed their stock market; the stock market which had fallen by more than a third and their currency has fallen by more than a third. Their stock market is not working, and they have refused to pay coupons on their bonds.
JOURNALIST:
Well, that's what I'm asking, and you will keep doing it.
JOSH FRYDENBERG:
We are not defaulting on our bonds as, you know, expect. But the key point is that that's really a very minor matter. The key issue here is whether or not they can sell and dispose of the Australian bonds with Australian entities, and we are saying no to that. And that builds on ‑ that builds on the sanctions that we have put on more than 350 individuals and commercial entities, and that also builds on the other actions that they are calling for, for example SWIFT, and having the Russians removed from SWIFT. Sorry, you had a question.
JOURNALIST:
Treasurer, in formulating the Budget you are thinking about the next sort of 15 months through to, you know, 2023. In that context in thinking about Ukraine are you sort of thinking about what needs to be in place or how the conflict in Eastern Europe could evolve further? Particularly in light of President Vladimir Putin's alarming commentary around empire and going back to Soviet days?
JOSH FRYDENBERG:
Yes, I'm really concerned about that. I'm really concerned about what Russia's broader intentions are, because other countries are looking at developments with respect to the Ukraine and saying, "who's next." Now, the Prime Minister tonight will be speaking, as I understand it, to the Polish Prime Minister, tomorrow night he will be speaking to the German Chancellor Olaf Scholz. And, again, these are the type of discussions that we are having with our American, Canadian, British and European counterparts is what is the future of Europe looking like with a very aggressive Russia at the helm. And have you also heard from our government our concerns about how China has responded to these actions by Russia. And what it's also going to bring into question here is supply chain resilience. And as I said, Australia has limited exposure to Russian exports but that's not the case for Germany. Germany has, you know, more than 50 per cent or around 50 per cent of its supplies coming from Russia. So, their ability to move has been constrained. And so even though a number of Russian banks have been taken off SWIFT, not all Russian banks have been taken off SWIFT, particularly those that settle some of those energy transactions. So, I think ‑ and then you've seen from the German leader comments about Nord Stream 2 and what that would actually mean. So, I think like‑minded countries like Australia, Canada, the United States, Britain, European nations, Japan are going to be, again, focusing very closely on these supply side ‑ supply chain resilience in the face of increased geopolitical risk. And that is something that Australia is looking at.
JOURNALIST:
Treasurer, can I just get an understanding from you about the Government's position on the Ukrainian people who are trying to flee; we’ve heard much about the moving of those people to the top of the pile. In the process, though, there's another group of people who are waiting on visas and awaiting a path to Australia from Afghanistan. Has your government now forgotten about them?
JOSH FRYDENBERG:
Absolutely not. And Alex Hawke has been making statements about what we are doing to bring even more people from those conflict zones to Australia. But we had made the announcement yesterday about a $35 billion contribution to the humanitarian response, and as the Prime Minister made clear that's an initial contribution. We will continue to monitor the situation very closely, but that is a significant contribution and does compare very well with what some other countries are doing. And we have obviously made announcements about Australians ‑ or announcements about Ukrainians who are in Australia and their visa situation being able to stay longer. And, of course, we are very concerned by the humanitarian impacts of this crisis and what it does mean and, you know, we will be making further announcements in due course. But Australia has always been a very welcoming place for migrants from all around the world, and there are some 40,000 Ukrainian Australians, or Australian‑Ukrainians here who are very important members of our community. We are in close contact with them, and we are there to help when comes to the humanitarian fallout.
JOURNALIST:
Can I just clarify, sorry. Just in terms of the many people waiting for a visa in Afghanistan right now, are they now down the pile?
JOSH FRYDENBERG:
We are not looking to put them down the pile. What we are looking to do is to work simultaneously on bringing people from conflict zones like Afghanistan, as well as responding to what is a very severe humanitarian challenge in the Ukraine and neighbouring Poland. Thank you very much.