TREASURER:
The Australian economy grew by 1.1 per cent in the March quarter of this year. That growth rate is faster than any of the major industrialised economies of the world. And the National Accounts which were released today show that in nearly every respect indicators were strong, consumption was strong, investment was good, profits were good, incomes grew and exports made a major contribution to growth. Perhaps the only area which detracted significantly from growth was the detraction in inventories, and what that means is that for many businesses they didnt have the production to meet their sales, they will have to rebuild inventories in this and successive quarters, which means that that will contribute to growth in the quarters which are yet to come.
After a disappointing December quarter the Australian economy roared back in the March quarter with a 1.1 per cent growth rate. Household consumption which grew 2.2 per cent was the strongest quarterly growth since September of 1994. And there was exceptionally strong growth in consumption of services, the strongest in 25 years. It may well be that some of that consumption is reflecting income tax cuts which are flowing through to the household sector and now finding its way into consumption. Dwelling investment looks like it has stabilised. As I said in relation to the December quarter, the biggest contribution to the December quarter was the fall in housing construction, a transitional affect of the new tax system. Housing construction was incredibly strong prior to June of 2000, the fall was very steep in the September and the December quarters. As I said when we were commenting on the December quarters, if you abstracted housing from the December quarter the economy was still growing at 4 per cent.
Whats happened in this March quarter is that consumption has bottomed, ah, housing construction has bottomed. It didnt really add very much to growth but it certainly bottomed and it wasnt subtracting from growth as it was in the December quarter. Now, I think in this quarter, the June quarter, but more especially in the September quarter, construction is going to come back and is going to start contributing to growth again.
Investment in new plant and machinery rose in the March quarter. Net exports rose very strongly and made a contribution of 0.8 per cent to growth. As I said when commenting on the balance of payments, our current account deficit is now 2.8 per cent of GDP, which is the best that weve been at for 20 years. Inflationary pressures remain low, with the National Accounts measure of inflation below 1 per cent in the March quarter and that of course was pushed up by some of the factors that I noted in relation to the Consumer Price Index - food, fruit and vegetables very, very strong price rises as a result of floods in New South Wales and Queensland, and meat prices very high, no doubt in part reflecting foot and mouth disease, and the increase in cattle and meat prices. Wages were strong, corporate profits rose 7.8 per cent in the quarter and profits are around historical highs of about 25 per cent of GDP.
So, it was a strong March quarter. I think the prospects in relation to future quarters should be supported by construction which should return to contributing to growth in future quarters. We are going to have to obviously have a rebuilding in relation to inventory. Consumption has been quite good, if you look at the retail sales in April. Interest rates are low and First Home Owners Scheme I think is going to support activity. So, all in all the economy showed considerable strength in the March quarter and it means that the Government is very well on track to achieving its Budget forecasts for growth, both in this year and in following years.
JOURNALIST:
The biggest quarterly change Treasurer was in the general Government consumption spending. You didnt mention that in your opening remarks or in the press release. But I was just wondering where do you think that consumption spending might have been, and how important its been in getting the economy back on track?
TREASURER:
Well, the Government consumption spending is notoriously lumpy. We dont actually think its as lumpy as it appears in the National Accounts. And certainly we dont have any evidence from our point of view as to how the ebbs flows go. What I regard that general government consumption rise as being is partly a reflection of the fact that there was a fall in the previous quarter, and I think you should actually moderate it out both ways. I dont think it was as low as was recorded in the National Accounts in December, but having recorded such a low result in the December quarter you are getting a correction and a pick-up in relation to the March quarter.
JOURNALIST:
Treasurer, is it time to revise up future quarters of growth from what you had in the Budget?
TREASURER:
Well, I think I say in the press release here that todays release indicates the Budget forecast of 2 per cent growth will be readily achieved. You wouldnt have to get much in the June quarter to achieve that and if you achieve that that provides you for a higher base in relation to 2001-2002. But, look, this is a very strong result. And it augurs well for the economy and it augurs well for future growth prospects.
As I say, as you look through these National Accounts, it is strong in all areas, it is strong in consumption, it is strong in exports, youve got investment coming back. The only area of weakness in these Accounts is in relation to stocks and inventories. And thats, as I said on radio yesterday, it is almost like putting growth in the bank, you run down your inventory then you know that in successive quarters its got to be run back up again to cope with sales. So, these figures bounce around a bit, you know, the truth of the matter is that we probably have a false precision in relation to all of these figures, you know, to say it is 1.1 rather than 1 or 1 is probably a false precision, and you could probably say the same in relation to the December quarter, we probably have false precision. And the truth may lie a little between the both of the quarters. But the truth of the matter is that these are very good National Accounts, and all Australians I think will welcome these. It shows that our economy roared back in the March quarter, growing faster than any of the economies of the industrialised world, the major economies of the industrialised world in March, and with very good prospects for the future.
JOURNALIST:
Treasurer, do these figures show that the worse days of the GST are now behind you and the Government?
TREASURER:
Look, when we reformed the tax system on 1 July of 2000 it was the biggest change to Australias tax system ever. In fact probably the biggest legislative change in Australias history. There is no doubt about that. In terms of the reform, in terms of the way we changed income tax, company tax, capital gains tax, wholesale sales tax, Financial Institutions Duty, stamp duties, in relation to all of those things. And you couldnt do that without having adjustments. You just couldnt do that without having adjustments. It has taken, particularly small business, and I want to say to the small business of Australia, the overwhelming proportion of whom have coped very well with those changes, we know they were big changes. And I want to say to particularly the small business of Australia that they deserve credit for the way in which they have coped with those changes. And in relation to each of those quarterly returns the experience is people getting more familiar with them. The first one was huge, the second one was a little bit less, the third one which we had in April was a little bit less, people are now adjusting to the system. And the worst possible thing you could do now would be to change it all on them. Just as they are adjusting to the system tell them well throw that out and well have a new one thats the rollback policy. Anybody who thinks about it for a moment will realise what a silly idea that is.
But in relation to its effect on the economy, you dont change a tax system without affecting peoples behaviour. The first thing that we noticed in relation to changing of the tax system was it brought a whole lot of construction forward. Go back into April and May of last year, you couldnt get a builder because there was so much work going. And then when the tax system changed you came off this incredibly high base into an incredibly big slowdown. Now the slowdowns bottomed and now it will come back up. The transitional factor works through, the transitional factor influenced the December quarter, I said that at the time. A lot of you had a lot of fun in relation to the outcome in that December quarter, and no doubt now youll, sort of, have as much fun in relation to outcome for the March quarter.
JOURNALIST:
Treasurer, (inaudible) what explanation do you have (inaudible) in the December quarter was that the world economy was slowing. Do you still stand by that explanation given that you have got strong net export growth this time and the world economy is going no faster or slower that it was projected then or are you saying that that explanation (inaudible) you would have to change that explanation?
TREASURER:
No, the world economy is slowing. I think the US growth in the March quarter is something like 0.2 or 0.3, ours is 1.1. We would have stronger growth if the US economy were stronger and if the world were stronger. But two factors have given us some insulation against a slowing world economy. The first is we took taxes off our exports. That gave Australian exporters the opportunity to export tax free, something they had never been able to do before. The second is you had an exchange rate adjustment and what that allowed our exporters to do, in relation to a weaker world economy, was to keep their exports up. Now, if the world was stronger youd have had that much more growth again, youd have had that much more growth again. But those two factors, one of which we quite deliberately planned, and one of which is a function of a floating exchange rate, gave Australia a lot of insulation, a lot of insulation, in relation to that.
JOURNALIST:
But Treasurer, if world growth hadnt slowed, our exchange rate wouldnt have fallen by so much?
TREASURER:
Yes. Thats one of the reasons why you have a floating exchange rate, so that it can adjust to those sort of international developments. It gives you insulation. Now if you had been operating a peg with the US dollar throughout that period as the world economy slowed your exchange rate would have been going up and you would have been getting a double banger effect on your exports. What we had was we had a floating exchange rate, the world slowed, the exchange rate adjusted, exporters were able to cope much better. Its one of the reasons why you run a floating exchange rate. Now we took a lot of criticism, not the least from the people here, about the floating exchange rate during that period and you blasted it all through the newspapers, but, I think as I said at the time a floating exchange rate is not always rational, not on a day to day basis. But I believe its the best policy, and thats an illustration of why.
JOURNALIST:
Treasurer, in political terms is this the break the Government has been looking for?
TREASURER:
Look, this is a strong quarter and, you know, the press has been very negative over the last three months. I think you would all agree with that. The, youve had negative headlines, day in day out, and if you have enough negative headlines you can affect sentiment. Now, the good news is it didnt affect sentiment enough to stop the economy growing at 1.1 per cent, but imagine when you give the positive coverage to this quarter, that you no doubt will, the boom that that will have on sentiment and, you know, because, you have plastered negative headlines all across the newspapers after the December quarter so I am expecting that youll be plastering very positive ones all across the front pages after this quarter, imagine the effect that that will have on sentiment and that will be good for the economy. And, you know, leave aside the Government isnt that good for all Australians, you know, with the possibility of the Labor Party, I think all Australians will welcome these figures today...
JOURNALIST:
On the issue...
TREASURER:
...and theyre good figures.
JOURNALIST:
On the issue of sentiment, Treasurer, is this an argument for going earlier to the polls, or what would your advice be on that?
TREASURER:
I dont give advice on that issue, I take advice.
JOURNALIST:
Treasurer, given these figures, have we reached the bottom of the easing cycle in terms of rates?
TREASURER:
Look, our official rates are 5 per cent today. Theyre higher than the United States, but these growth figures are stronger than the United States. Theyre higher than Europe but our growth is higher than Europe, theyre higher than Japan but our growth is higher than Japan. I dont make any predictions in relation to the future course of interest rates. But I do make this point, that our interest rates by Australian standards are very low, in nominal terms and in real terms. And aside from a period back during the Asian financial crisis, when I think they were at four and three quarter, our interest rates today and our home mortgage interest rates are lower than at any period since the 1960s. You have got a 6.8 per cent home mortgage interest rate. When the Government was elected it was ten and a half, and I can remember the days of seventeen, these are very low interest rates.
JOURNALIST:
Treasurer, on Mal Brough, quickly if I may, are you satisfied by his explanation that the fact that he didnt say he was a minister on this document promoting this training scheme which gave money to the Liberal Party, is, means he is innocent of any wrong doing?
TREASURER:
What ever his explanation was, and I have been looking at the National Accounts this morning, I agree with it. I totally agree with it.
JOURNALIST:
Treasurer, what does it mean for jobs? I mean will you be able to now make your unemployment prediction that was in the Budget a bit more optimistic, it was pretty pessimistic?
TREASURER:
Well, look employment, wages are actually showing quite strong growth in these National Accounts and in net terms in April the number of jobs increased 40,000. Now, I know you say it is very weak but the employment rate today is below 7.0, when the Government was elected I think it was 8.6. There have 820,000 new jobs created. I just think that over the last sort of quarter, whats actually been happening and sentiment as reflected in news organisations have grown apart. Unemployment today, while still too high and fractionally above what it was earlier this year, is still at decade lows in Australia. The current account is at 20 year lows, the Budget is in its fifth consecutive surplus, interest rates today are at levels, which aside from 1998, are as low as they were back in the 1960s. Now, and the Australian economy in the March quarter grew faster than the United States, or Japan, or France, or Britain, or Germany. So, you know I know, I know sentiment has, has been very negative but I think when you actually look at the underlying facts theres a lot of good things have been happening in the economy.
JOURNALIST:
Treasurer is that why (inaudible)...there is still a lot of fiscal stimulus in the pipeline, are you concerned about how you manage that and whether that could create problems going ahead or even lead to further, lead to interest rate rises because of the, because of that stimulus coming into the system?
TREASURER:
We have some fiscal stimulus in the Budget. Weve got a $300 bonus to pensioners which is going out this month, we brought forward the claiming of input tax credits for business from Budget night, on 1 July we cut company tax, we cut Financial Institutions Duty, we cut stamp duties on shares, these are the benefits of ongoing tax reform. And so there is an amount of fiscal stimulus coming through by way of tax cuts over the course of this year. But I think that will be consistent with the kind of growth that were forecasting. We are forecasting growth to step up to three and a quarter, its still below full capacity for the economy. If you take the view as I do that full capacity for the economy is probably nearer to four than nearer to three, I dont see any risk that will be pushing the economy above its capacity. More importantly, I dont see any risk that inflation is starting to break out, you know, leaving aside the food issues, youve still got inflation which is down towards the bottom of the band. And our official rates are higher than they are in Europe, Japan and America.
JOURNALIST:
Mr Costello you said some strong things last week about the One.Tel executives and the Prime Minister has flagged an amendment to get back bonuses from people in this sort of situation. Are you confident that legislation can be drafted within the corporations law, that the limits can be set, and so on, and when would you expect that to be introduced? And secondly, you mentioned a couple of One.Tel players, but what do you think the responsibilities of Mr Packer and Mr Murdoch were, and are, in this company? Do they, should they take some more action?
TREASURER:
As I understand the law, if a payment is made to a related party at a time when the company is insolvent or if it becomes insolvent as a consequence of that payment you can go back four years. Thats the law as I understand it. The only thing you have to prove is that the company was insolvent at the time the payment was made, or became insolvent because of it, the payment being made. So well, look, ask the draftsman to have a look at that issue...
JOURNALIST:
(inaudible)
TREASURER:
...should, should you, you know, what is the test of insolvency, you know, should you tighten that particular test. There is a relation back, there is a four year relation back from the threshold is insolvent. Well ask the draftsman to have a look at that. As I said on the radio yesterday, and I dont know, it may well be that One.Tel was insolvent when the payment was made and if that was the case, I dont know, but if that was the case then the existing law would allow those bonuses to be clawed back.
JOURNALIST:
(inaudible)
TREASURER:
So thats what well be looking at. How long will it take, well I imagine it will take a couple of weeks or something. The draftsman will look at it, brief the authorities, make some recommendations, the Cabinet will discuss it. I said, in relation to the second question, I said on radio yesterday that if the employees were at risk of not being paid, I thought that the directors should first of all make good, and I also said if they were at risk of not being paid some of the shareholders might actually consider making the situation good as well. Now, all I know about the situation is what I read about in the newspapers. I read in the newspapers today that the employees entitlements will be made good, that there wont be a short-fall.
JOURNALIST:
Should Mr Packer and Mr Murdoch have kept a better eye on what was going on though, given that they have enormous resources to do so, to monitor whats happening in businesses with which theyre associated?
TREASURER:
They, they, what I would say is this. Like any company director they have the duties of company directors and that obligation is put in place by the law and we would expect them to observe directors duties like anybody else. You, I know your next question Michelle, because it nearly slipped out as I was answering that last one, did they observe their directors duties? The answer is how would I know? These are matters of law, it depends on what they were informed, what inquiries they made, and I cant stand up at press conferences and give legal opinions on, and it would be wrong of me to do so, on directors duties. All I can tell you is the corporations law puts certain duties onto directors and from my point of view, and from the Governments point of view, they apply to all directors. How so ever appointed and whichever company they may be part of.
JOURNALIST:
Treasurer, petrol prices in Sydney are over a dollar. How soon will we see the Governments petrol inquiry?
TREASURER:
Well, I think the Government is considering terms of reference at the moment, Im not sure when it will be done.
Sorry, Mr Cleary, I cant go without, Mr Cleary, last question.
JOURNALIST:
Treasurer, as someone from a newspaper which didnt actually run any recession headlines...
TREASURER:
I know, can I say I want to clear, I want to clear the Fairfax tabloid. I honestly want to clear the Fairfax tabloid. It was the Fairfax broadsheets that had a lot of fun. Actually, mostly led by the broadsheets south of here, I want to say, but no doubt theyll be considering their position.
JOURNALIST:
Anyway, having said that, can I, you said that...
TREASURER:
I did actually go back and have a look, and I, you know, I want to say rumours of the irresponsibility of the Fairfax tabloids have been greatly overstated on this occasion.
JOURNALIST:
In the last six months. Can I ask, you have said that exports were strong, I think you are really referring to net exports...
TREASURER:
Yes, I am.
JOURNALIST:
...(inaudible) the impact of weaker imports, but, I mean the exports in these Accounts was quite weak. There is only 1.1 per cent contribution. Doesnt that really indicate that the export boom is coming to an end and that that is really the impact of the slower US, world economy that is really starting to make things a lot tougher for exporters.
TREASURER:
What contributes to growth, and I think it contributes 0.8 per cent to growth, is net exports. That is, unlike the treadmill we have been on a long time, we havent been importing more than weve been selling. In fact in the March quarter, no, we sold more than we imported. Our exports were strong and I have talked about some of the reasons for that, our imports were weaker. One of the reasons why theyre weaker could well be the exchange rate effect and that is good for import replacement industries. Now you might say, oh, one of the reasons why imports are weak is people werent buying as much, but consumption is actually quite strong. Overall consumption was quite strong, it actually grew. So it may well be that some of that consumption was going into import replacements, and if so that is a good thing. The good thing about that is it made it more competitive for Australian, for Australian suppliers and I wouldnt, I wouldnt consider that a bad thing.
JOURNALIST:
Exports as well were 0.5 growth, it was one of the weakest quarters we have had in some time?
TREASURER:
Well export volumes were up, and I made this point, it is not exactly the best time for Australian exporters in terms of world growth. With the world turning down as it is, particularly the US economy turning down, yes that has been a difficulty for exporters but isnt that a good story for Australian exporters that in the midst of a world down-turn led by a significant US down-turn, when everybody elses exports are falling ours were going up. Now I have talked about some of the reasons why that, that is the case, but I think you have got to hand it to the Australian exporters. I think they have done a pretty good job over the course of the March quarter, I hope it continues. I think, in particular, the fact that they are now getting full input tax credits on everything they sell overseas. Rural Australia is now starting to feel a bit better in relation to exports and meat prices is back up, thats putting a lot more money back into rural Australia than has been the case. The wool price has been okay, seasons have been bad but hopefully grains will be good and, you know, the great thing about exports is not only how it helps everybody, but it really helps rural Australia. And a competitive environment on exports for rural Australia I think is a wonderful thing.
So have a good day. Thank you very much.