TREASURER:
Today’s National Accounts show that in the September quarter the economy grew by 0.3 per cent and for the year by 3.0 per cent.
Domestic demand continued to grow at a solid pace, driven by household consumption. Although household consumption has moderated somewhat off the levels earlier in the year. Household consumption rose 1.1 per cent to be 5.4 per cent higher through the year. And household consumption is supported by very strong consumer confidence, good employment growth and the lowest unemployment in 27 years.
The September National Accounts show that dwelling investment declined, with new dwelling investment down and alterations and additions down. Taken together with the building approvals data which we have been seeing over the quarter, this shows that the housing market is slowing - or I should say the increase in the housing market is slowing - something that I have been pointing to for a long time now and something that the Government would in fact welcome, because we believe that in the last 12 months to 18 months the level of increase in housing prices was very strong and would not, should not, continue at that level for a long period of time.
Business investment rose and company profits were very strong. Although they came off 0.2 per cent on the last quarter, the last quarter had the profit share of the economy at all time records. And the profit share of the Australian economy is at 26.8 per cent, a near record, ever recorded.
A large part of the detraction in growth was from net exports we saw in the Balance of Payments figures, which were released two days ago.
There is a very interesting story in relation to the terms of trade. The terms of trade are now 10.8 per cent higher. The terms of trade have risen 10.8 per cent through the year and our terms of trade are now at their highest level since 1974, in 30 years.
Now a big part of this story is the emergence of China, because China is keeping world manufacturing prices low and at the same time increasing demand for base metals and energy. And the emergence of China is probably the single most important reason for Australia’s terms of trade turning back in our favour.
The strengthening terms of trade also mean that Australia’s exports, particularly our mining exports, should increase over future quarters. As you see in these National Accounts export volumes have detracted from growth, but the terms of trade have moved very significantly in our direction. So what that is telling you is that the prices should increase demand for our exports and that as the investment comes on stream in relation to the mining industry, in future quarters we should see those export volumes increase.
So we would expect those terms of trade to be working very much in Australia’s favour over forthcoming quarters.
Although this is a slower quarter than many expected at 0.3 per cent with annual growth at 3.0 per cent, the prospects are quite good for the Australian economy. Our inflation is low, again the inflation indicators in these National Accounts are below the target range that we have of 2-3 per cent. Our unemployment is at 27 year lows and our wage outcomes are moderate.
So the prospects for the Australian economy in future quarters are still bright even though in relation to this quarter economic growth was somewhat slower than in previous quarters.
JOURNALIST:
Mr Costello other than the Australian dollar and the drought, do you believe there is anything else that has been holding back exports recently given the strong global economy?
TREASURER:
The most significant difficulty in relation to exports is the Australian dollar. The Australian dollar since its float has averaged at around 70 to the US dollar. This week it has been up around 77 – 78, that is 10 per cent above its long term average. And that has been the most difficult thing for our exporters. And I have acknowledged that on numbers of occasions, that the level of the currency is making things harder for our exporters. Go back to 2000-2001, the Australian dollar was at 47 cents and I used to describe it as a super competitive exchange rate. And back in those days of course we were running trade surpluses. And so you can see the effect that the currency has.
I do believe however there is probably another issue in here, that because prices for commodities were low around 2000-2001 - the US economy was in recession, the global economy was weak - there probably wasn’t as much investment in the mining industry or perhaps it was delayed. And I think as the world economy has come back the advantage of that is it has pushed the terms of trade our way and it has made many of these mining investments much more competitive. And I think they are coming, they are certainly coming, but it will take some time before the investments are completed so that particularly the mining companies can take the advantage of that, of those very strong prices that they can currently get.
Now you have got, for example, I think the fourth LNG train is just finished up on the North West Shelf, you have got increased investments being built by BHP, you have got Comalco with its projects up at Gladstone – all of this investment has been going on and when it is completed I think there will be strong world demand for the products.
JOURNALIST:
Treasurer, is this the slow down that we had to have?
TREASURER:
No, this is a slow period in a 3 per cent growth economy. Much of the rest of the world would consider this actually very fast.
JOURNALIST:
But in a sense there’s a welcome slowing in housing activity and consumption growth?
TREASURER:
I’ve been saying, I think for 18 months or two years, that the Government would welcome a slowing of the increases in house prices. So I welcome that.
As I said in the Parliament yesterday, I think the evidence whether you look at auction clearances, whether you look at house prices, whether you look building approvals, whether you look at credit figures, there is evidence now that there is a slowing in the housing market which I welcome.
In relation to consumption, consumption is still growing at 5.4 per cent, that is still quite strong. It is less than it was at 6, so I welcome that, but it is still quite strong. Would you be surprised by that? No. Consumer confidence is as strong as it has ever been, unemployment is at 27 year lows, and interest rates are low, so you would expect consumption to be strong.
What I think we would like to see is we would like to see the export story come back. The biggest detraction from growth in these figures is the export story, which we saw with the Balance of Payments. The Balance of Payments were an export story principally, they were not an import story, they were an export story, that exports were down 3.2 per cent.
Now if you have got a strong world economy, prices moving in our direction but exports were down, why? Well, part of it was that rural commodities turned down in the quarter, coming off record wheat harvests. The other part of it is that a lot of the mineral production is yet to kick in.
JOURNALIST:
Treasurer, can I ask you a question about WMC Resources. Would the Government feel comfortable with a company like Xstrata acquiring WMC, given the strategic significance of WMC’s Olympic Dam project.
TREASURER:
Well Xstrata would require Foreign Investment Review Board approval to acquire WMC. To my knowledge, no application has been lodged. But if it were, that would be treated commercially-in-confidence.
JOURNALIST:
There’s also an issue in relation to WMC about whether a Chinese company would be allowed to buy that company, given the issue of uranium exports. Do you think that would be a problem for a Chinese company to make a bid for WMC?
TREASURER:
Well, I’m not aware that a Chinese company has.
JOURNALIST:
No, it hasn’t, but there has been rumours that there might some companies interested.
TREASURER:
Well, I can’t comment on rumours, I’m afraid. Sorry.
JOURNALIST:
Mr Costello, what did today’s National Accounts figures mean for homeowners concerned about the prospect of interest rate rises?
TREASURER:
Well I think today’s figures show that the economy is growing, but not overheating. That there is continuing growth. Some of the hot spots that we have identified over the last 12 months are cooling a little bit as we welcomed in relation to housing. So I think people can be quite confident in relation to these figures, that the economy is growing and it is growing in a consistent and sustainable way.
JOURNALIST:
Treasurer, what do you make of the departure of Ziggy Switkowski from Telstra?
TREASURER:
Well, Dr Switkowski has been, I think, a good Chief Executive for Telstra. It is a difficult job having two masters - private investors and a majority Government shareholder. He has seen the company through a very difficult time – the tech wreck, the downturn in relation to telecommunications. He has made his announcement today, I wish him all the best. I think he has been a good managing director of Telstra and I am sure that Dr Switkowski will be in demand in many other places.
JOURNALIST:
Treasurer, when you are talking about household consumption is still quite strong internationally, should Australian households close their wallets for a little bit, for the good of the country? Is it too strong?
TREASURER:
Well it has moderated, consumption is moderated somewhat from what it was. But it is still healthy. Why is it healthy? Well, more people have got jobs than ever before and interest rates are low. If people are in work and interest rates are low and confidence is high, you can imagine that they are going to be confident about spending, and they are.
I do say to people though of course, that it is important that you don’t get yourself into borrowings which are unsustainable. It is very important that you look carefully at your ability to pay the interest bills. Christmas is coming up, I think there’s a tendency sometimes at Christmas to go out and buy presents for people. Just remember that the old bankcard bills come back in February. So, families who are fronting up to Christmas, remember to make it a happy and a sustainable one. It will come back next year.
JOURNALIST:
What are the implications of this slowdown for the Budget?
TREASURER:
Well as I said earlier, the biggest detraction in relation to this is exports and that was the news that we had on Monday. And I think I said on Monday and Tuesday, that on the basis of those figures, I would expect some softening in the National Accounts. Here it is, at 0.3 per cent. I think I even said a couple of weeks ago the same thing.
And this to me was something that obviously was going to work its way into the National Accounts and when we update our mid-year forecasts, we will have a look at those forecasts.
But what you are seeing now is an economy at a 3 per cent clip, rather than an 3 per cent clip. So that’s slower than what it was, but it’s still growing.
JOURNALIST:
Are you saying that you are going to downgrade your forecasts somewhat in the mid-year review?
TREASURER:
No, the forecasts that we will make, we will make at the time of the mid-year review. I am not saying what they are going to be now, but you will take into account in that mid-year review - and this is why we’ve held it back - these National Accounts. This is why we have held it back, so we could have the National Accounts before we put it out.
JOURNALIST:
Do you think 3 per cent is optimistic, looking at what (inaudible)?
TREASURER:
I’ll announce my mid-year forecast at the time of the mid-year review.
JOURNALIST:
You said on Monday that you would prefer the current account deficit lower than it is? Why did you say that and does it pose an economic risk?
TREASURER:
Well I think it would be better if our current account were lower. I do. That is my view. But the current account on Monday was principally an export story. This is a very important point. It wasn’t an import story. Imports had gone up 0.8 per cent - and most of those were capital goods incidentally which actually is good for investment it was mostly an export story, which were down 3.2 per cent.
Now, in particular there was a weakness in relation to agriculture which can be explained partially by climatic conditions, but there were other areas where you could see our exporters were having trouble, manufactured exports in particular on the back of a very high exchange rate. It is a competitive world out there and if you try to sell your goods on a higher Australian dollar it makes it harder for them.
So, I can see in these figures how there will be an improvement particularly in relation to the mining industry because I can see investment coming through and the terms of trade are working for us. But I also wanted to sound this warning, that there is a massive re-alignment of world currencies going on at the moment caused by the fall of the US dollar and that massive re-alignment is making it harder for countries whose currencies are rising, and we are one of them. We are not the only one, but we are one of them.
Now, to be frank with you I do not know how long the decline of the US dollar is going to go on. I would like to see the US dollar bottom and head up because that would give our exporters some alleviation, but given the kind of factors that are influencing the US economy at the moment, that decline could continue and that would make it harder for our exporters.
So, what does mean for policy makers in Australia? Well, obviously the level of the US currency is beyond our reach and we don’t even target our own. But we should take from this a determination to continue with economic reform. We should start off with industrial relations, help those manufacturers and those exporters become as competitive as possible.
The idea that reform is finished is wrong. Reform is continuing. Reform has to be heightened. We are about to enter into a free trade agreement with the region, that will help our exporters, but only help our exporters if we keep the climate competitive for them. You have got to understand this point. It will open up new markets for them but in a free trade zone people are only going to buy your products if you are selling them competitively. You have got to keep the environment competitive for them in that free trade zone. So, we should be pursuing free trade agreements to help our exporters, we should be making sure our domestic economy is as strong as it can and I look for some softening of the major realignment of world currencies which are occurring at the moment.
JOURNALIST:
Do you think China and other Asian countries should now realign their currency?
TREASURER:
My view is this, that if there are a limited number of currencies that the US Dollar can readjust against, the readjustment is going to be much greater against those currencies than if there were a wider number of currencies. Now, I keep the view that I have expressed earlier, that trying to have a freely floating currency in China could be counterproductive if the financial system is not sophisticated enough nor robust enough to handle a floating exchange rate. But it is quite possible that the bands that are set could be wider. Without going to a freely floating exchange rate, the bands within which the currency can move could be expanded.
JOURNALIST:
Are the foreign exchange markets not paying sufficient attention to the pressure on Australia’s current account deficit in terms of setting the $A - $US value?
TREASURER:
Well look, the currency in Australia is, in my view, influenced by two factors at the moment. One is the terms of trade have moved our way and that is an $A story, but secondly by a much bigger story which is the $US is falling and that is the bigger story. And that is what is forcing on the world at the moment a major currency realignment. Now, that is going to help the US with its problems but it could well be helping the US with its problems by pushing some of those problems onto Europe or Japan.
JOURNALIST:
Treasurer, are you encouraged by the household saving ratio heading a little towards the positive?
TREASURER:
Yes it was very interesting that if you look at that household, look, the first thing I should say is that the household savings ratio is not the most scientific measure and the ABS says that it is a long time since they have updated their savings. But there did seem to be quite a significant rise in the June Quarter and we think when we put together other evidence what that shows is that a considerable amount of the increase in Family Tax Benefit was saved. There was all this talk that the Family Tax Benefit would feed into record consumption in the June Quarter. That didn’t occur and there was a bit of a mystery as to where the money went. It now appears from what we have seen in the savings and what we saw on the retail and consumption side that it is quite possible that quite a deal of that went into savings.
JOURNALIST:
Any estimates of how much?
TREASURER:
Quite a deal of it.
JOURNALIST:
Mr Costello in putting together the next Budget, we presume you have quite a lot of spending in that Budget on election promises and so on, will you be seeking more savings?
TREASURER:
Well the Government will deliver its election promises in full, I have made that clear over and over again. As we go into a Budget round, my view is that if there are areas of Government expenditure where taxpayers’ money can be saved, it should be.
JOURNALIST:
Have you been telling your colleagues this?
TREASURER:
Yes. But you don’t want to see that the two are necessarily related. The two are parallel and separate and important (inaudible). One, we deliver our election promises in full. Two, if you can reduce Government expenditures and find the areas where taxpayers money is not being spent properly you ought to do that as well. You don’t say just because we have had an election we will just assume that taxpayers money can be wasted in some other area. Now, I have been through this Budget quite a lot on a number of occasions and it is unlikely that I have missed big areas but I am going to start out on the search party again…
JOURNALIST:
What about Defence?
TREASURER:
…and I think that is what people would like me to do frankly.
JOURNALIST:
What about Defence, do you think there is scope there given that they seem to be in a financial shambles most of the time?
TREASURER:
Well actually we have announced a very big build up overall, so overall there won’t be savings going on but we have to make sure that that money is spent in the most efficient way and if there is any area where it is not being spent efficiently we ought to find it.
JOURNALIST:
Or do you think that (inaudible)?
TREASURER:
Well you always keep an open mind on these things and you look as hard as you can.
JOURNALIST:
Mr Costello, will the Future Fund require any legislation and if so when will you introduce it?
TREASURER:
Yes it will require legislation and since it is not in the next two weeks it must be next year.
JOURNALIST:
Mr Costello would Richard Alston make a good High Commissioner to London do you think?
TREASURER:
Well he is certainly a man who has given great service to his nation. He is somebody who has the trust of the Government in Australia, he is a friend of mine, so I will give him a good character assessment for any job that he may be considered for. None in particular, but any job he may be considered for. Thank you very much.