Introduction
I expect that there rarely has been as topical a time for the annual CEDA economic and political conferences as this year's. I think 1998 will be, to say the least, a most interesting year in terms of politics and economics.
It gives me great pleasure to be able to address you today on the topic "The Economic Outlook".
Let me start with a checklist on the economy.
- We have one of the strongest growing economies in the developed world and we continue to expect strong growth, notwithstanding the events in Asia.
- We have one of the lowest inflation rates in the western world. Wednesday's CPI result was again excellent, showing the lowest underlying inflation rate in the 25 year history of the survey.
- We have the lowest mortgage interest rates in 30 years.
- The premium on Australian long-term rates over US long-term rates has fallen from around 260 basis points in March 1996 to less than 40 basis points now.
- The Budget is swinging into surplus - the $10.3 billion deficit inherited will swing into surplus within a single term of Parliament. This is very impressive in both historical and international terms.
- Commonwealth general government net debt, as a share of GDP, will be halved by 2001.
Our economic performance is the envy of most countries. Of course, like others, we are keeping a close eye on Asia - a topic that I will return to in a moment - but there is no doubt that the domestic macroeconomic fundamentals are extremely strong.
Let me continue my checklist, this time on micro-economic reform. This is also, I believe, an impressive record.
- Much-needed reform of Australia's outdated industrial relations system has been undertaken.
- A fully open and competitive telecommunications market has been established and the nation's largest carrier, Telstra, faces the disciplines and opportunities flowing from substantial private ownership.
- The nation's railway system has undergone major reform, with private ownership giving key railways the best outlook they have enjoyed for years.
- We've announced major reforms to the financial system, following the report of the Wallis Inquiry. The OECD recently described these reforms as "a path breaking response to recent and prospective developments in the financial sector."
- We are reforming the corporations law, so that it is less legalistic and better reflects the underlying economic concepts.
And I haven't even mentioned the Government's plans to undertake substantial reform of our tax system, WIK or the Constitutional Convention!
By any standard, the reforms to date and those in prospect are very substantial indeed.
I might add at this point that the Government's efforts to reform and modernise the economy have been opposed bitterly by the Australian Labor Party.
The Labor Party were able to implement some significant reforms in the 1980s and these were supported by the Coalition.
However, the Coalition's efforts in Government to undertake the necessary further reforms have frequently been opposed by the ALP.
- They opposed our industrial relations reforms.
- They opposed the partial sale of Telstra.
- They have voted down the Charter of Budget Honesty Bill.
And it is clear that Labor is continuing to position itself as the "non-reform" party.
What the events in Asia highlight is that reform needs to be continuous. The fact is that if we are to secure lower unemployment and higher living standards, we must as a nation be prepared to engage in reform. When Labor say they believe Australians should reject reform they are saying Australians should not be free to enjoy the opportunities that change offers, that reform provides.
Another area of significant reform - and of direct relevance to my portfolio responsibilities - is superannuation
I am pleased to say that 1996-97 was a super year for super, with assets growing by 20% and contributions rising 12% compared to the previous year.
This strong growth has continued into the current year, with the overall value of superannuation savings surging to $317 billion by the end of the September quarter. Significantly, new contributions from employees are growing at a significantly faster rate than employer contributions - 17% compared to 8%.
These very positive indicators highlight the Government's contribution to creating a favourable climate for growth in private savings.
Last Budget we announced a major new savings incentive, the Savings Rebate, which provides greatest incentive for saving via superannuation.
And we've announced that the superannuation system will be opened up by giving employees greater choice as to which fund receives their compulsory employer contributions.
This is a major reform which will give "everyday" Australians a greater degree of ownership and control over their superannuation, which in future will be for many Australians their biggest asset, even more valuable than the family home.
Let me now turn to the economic outlook.
You will recall that the Mid-year Economic and Fiscal Outlook forecast GDP to grow by 3 per cent in 1997-98 and 3 per cent in 1998-99, with continued strong growth in domestic expenditures helping to counter the influence of a weaker international environment.
That is a view which has fairly broad acceptance. For example, it is consistent with the outlook expressed in the background paper for this conference. It is also similar to the latest consensus of private sector forecasts, namely an increase of 3.6 per cent in 1998 and 3.7 per cent in 1999.
Any discussion of the economic outlook at this time is obviously dominated by assessments of the impact of developments in Asia on the Australian economy.
The Treasurer in his Sydney CEDA speech on Wednesday outlined in some detail Australia's support for IMF programmes in Asia and I am confident that by implementing these programs the countries in the region will return to record stronger and more sustainable economic growth which will in turn be important for the longer term prospects of the Australian economy.
Let me focus on the effects of international developments on Australia.
Firstly, the mid-year forecasts incorporated a significant downward adjustment to the international economic outlook to reflect the consequences of developments in Asia. In doing so, it was recognised that circumstances in Asia were still evolving, and that the full ramifications of these developments would take some time to become apparent. We will obviously be keeping a close eye on developments. For the moment, however, I would caution against overreacting to individual developments in a rapidly changing environment.
The second thing I would mention is that, as important as developments in Asia are, we should not lose sight of the support for overall world activity emanating from expected developments in the United States, in particular, as well as in Continental Europe. The latest consensus forecasts for the US economy which incorporate an Asia impact are not significantly different to those prepared prior to the Asian difficulties.
As I mentioned previously, however, offsetting this adverse impact from international developments is a marked strengthening in domestic demand.
There is no doubt that domestic activity strengthened significantly in 1997, and remains strong. GDP growth was around 1 per cent in each of the two most recent quarters for which we have data. Consumer spending remains strong, with reports of very strong Christmas trading, with some retailers experiencing very strong sales growth. Motor vehicle registrations have reached record levels, and a range of indicators point to ongoing strength in the construction sector.
Employment growth has strengthened, with the increase in employment in the six months to December consistent with the outlook published in the May 1997 Budget and reaffirmed in the December mid-year review. In fact, virtually 140,000 jobs were created in the four months to December. Moreover, there are clear indications that such growth in employment will be sustained, underpinning continued strength in household expenditures.
Consumer confidence is relatively high, with improving perceptions about the unemployment outlook countering negative sentiment about the international environment.
Similarly, the business survey results we have so far show little evidence of an "Asia effect" on current economic activity, with responses highlighting the strong performance of the domestic economy. Understandably, businesses have written down their year-ahead expectations somewhat, but this is consistent with the Government's aggregate growth outlook.
Contributing to this strength in private sector activity have been the series of interest rate cuts through 1996-97, which occurred in an environment of falling inflation expectations and which were accommodated by the repair of the budgetary situation instituted by this Government. Lower real interest rates will still be providing a sizeable stimulus to domestic activity through 1998.
In the year to the December quarter 1997, underlying inflation was only 1.4 per cent, while headline inflation was -0.2 per cent. Over the 1970s and 1980s, Australia's underlying inflation averaged around 9 per cent. It is true that the former Labor government achieved low inflation but only by crunching the economy. This government has achieved a strongly growing economy with record low inflation - something Labor could not achieve in its thirteen years of office.
As the Treasurer noted in his Sydney address, Australia's low inflation record is set to be maintained, with the expectation that over the next 18 months it will remain within the Reserve Bank's medium-term target range.
This good inflation performance has been gradually reflected in consumer inflation expectations. Setting aside some recent volatility, inflation expectations are clearly on an improving trend, a development which can help to maintain low inflation to the extent that lower expectations result in wage claims more in line with productivity improvements.
I would like to mention briefly the government's commitment to taxation reform.
The Government is aiming for a fairer, better, more internationally competitive taxation system, which will provide incentives to work, save and invest.
It should promote investment, exports and jobs, and build Australian prosperity in a way that is fairly shared.
There is a tremendous amount of work occurring on the issue of taxation reform and the government is prepared to lead the way. Again as the Treasurer said on Wednesday, Labor's opposition to tax reform makes the task harder. It also makes it more incumbent on those who recognise the need for reform, as I'm sure many of you today recognise, to lend your support to the reform effort. History shows that reform efforts can be derailed by scaremongering elements and that those supporting reform need to express their support as loudly and frequently as possible.
Conclusion
Let me conclude by saying that, notwithstanding the difficulties being experienced in some of our largest export markets, the outlook for the Australian economy is very positive.
The Government's reforms have helped buttress us from those events and have helped set us up for the future. But the reform process cannot be stopped - we must press on - and taxation reform is clearly the big reform agenda currently before the nation. The government is continuing to implement the necessary reforms and I urge all of you who support such reform to continue to push the case.
Thank you.