Thank you for the opportunity to participate in the global Newsmakers series, and in Thomson Reuters' first Australian newsmaker event.
Can I acknowledge the Reuters team; people like Mark Bendeich, Wayne Cole, Christina Pantin, and Dayan Candappa. Plus Rob Taylor and James Grubel – the guys who fly the Reuters flag so well, in Canberra.
Today I want to talk to you about the path ahead for the Australian economy, and where it fits in a global economy that will look very different to the one were accustomed to, pre-crisis. And when I say this, I don't just mean the path ahead over the next 12 months, I'm talking about the next 12 years and beyond.
Our mission is not just to survive the global recession – but to seize the opportunities of global recovery to ensure the next generation of prosperity in Australia is built on firmer foundations than the last. Today I will outline our key priorities for achieving this.
I will also be announcing some reforms to the foreign investment framework to underpin our recovery, help slash red tape, and support businesses to grow in Australia and to employ more Australians.
But before I do, I'll talk a bit about how I see the current economic situation – both here and abroad. I want to touch on those factors that have contributed to us having the fastest growth, the second lowest unemployment and lower debt and deficit than any major advanced economy. International credit ratings agencies have reaffirmed our AAA credit rating – and we're the only major advanced economy not in recession. But at the same time, very big challenges remain.
Global Outlook
Nobody here needs reminding that this past year has been extraordinary. We are still feeling the effects of the worst global recession in 75 years but we have seen some encouraging signs recently. As President Obama put it last week, markets are no longer on the verge of collapse. This is a critical early step toward a recovery in the broader economy.
In our region, we saw Chinese growth of 7.9 per cent in the year to June, supported by their own stimulus package. And in early July, the IMF upgraded its outlook for the world economy in 2010. Despite these encouraging signs, I share President Obama's view that they are "little comfort if you're one of the folks who have lost their job and haven't found another." Remember the IMF still expects the world's advanced economies to contract by a massive 3.8 per cent in 2009. While the pace of their decline is slowing, the US and UK economies continued to contract into the second quarter of this year.
What global growth we are seeing is largely being supported by the extraordinary actions taken by governments right around the world. And as we move into 2010, I expect growth to be increasingly supported by the global rebuilding of inventories, which have been hit so substantially during the global recession. How we achieve sustainable global growth beyond 2010 is the key challenge.
We will continue to face a very difficult global environment for quite some time to come. But it is also an environment of change, and that means opportunity. The global recession is changing the global economic landscape in which Australia operates. These changes will take policy makers some time to fully assess and they will take the business community time to adjust to. Some elements of the financial markets that once existed are likely never to return and the mix of global growth is being fundamentally changed. How we grab the opportunities that this changing environment presents will be the measure of this nation over the decade to come.
I agree with Governor Steven's assessment that "The fact that we have managed to get through the past nine months in reasonable shape ought to give us some quiet confidence in our capacity to meet the current set of crisis‑related issues." But before I turn to these longer term challenges, let me touch on how the global recession is impacting our economy and how we are responding.
Australia in This Global Recession
Governor Stevens also suggested last week that "it is becoming more common for Australians to see the glass as half full than as half empty". The signs are a little more positive here, but we are far from declaring victory over the worst global recession in 75 years. I'm an optimist by nature but, above all, I'm a realist and I certainly won't be popping champagne corks when it is realistic to expect thousands of Australians still stand to lose their jobs to this global downturn, before it's over.
Yet Australia is faring relatively well next to other advanced economies. Our relative success to date is no accident of fortune. We are weathering the storm better than other countries for three reasons.
One, the hard work of Australians and responsible business and union leadership.
Two, the underlying strengths of the Australian economy, including the strength of our fiscal position, which sees us with lower debt and deficits than any major advanced economy. On monetary policy we have more room to move than virtually any other economy, and critically our transmission mechanisms have been far more effective. Our banking system is the best regulated and run of any in the world, having four of only eight AA or higher rated banks among the world's largest 100 banks. Our housing sector does not face the same problems of oversupply and falling prices. And our nation building funds are allowing us to invest in the critical infrastructure we need for the future.
The third reason we are weathering the global storm better than others is early, decisive and powerful economic stimulus.
Let me recap for you briefly the Australian stimulus story. We began by putting in place guarantees for bank deposits and wholesale funding, to maintain confidence in our financial sector and to continue the flow of credit to households and businesses. By mid-July, Australia's banks had raised over $110 billion in long‑term funding under the wholesale guarantee scheme.
We also rolled out our three-stage stimulus strategy that has been praised by international and local analysts for its speed and success. The first phase being timely, temporary and targeted income support for pensioners, low income families, veterans and primary producers. The second phase was investment in shovel-ready infrastructure projects across the country from now until 2011 — upgrading schools, homes and communities as part of the $42 billion Nation Building and Jobs Plan. And this year's Budget represented the third phase of our stimulus strategy — larger and longer-term nation building infrastructure projects – the roads, rail, ports, and broadband we'll need for the future.
These actions saw the Australian economy record the fastest rate of growth of any advanced economy in the March quarter. Consumer sentiment increased by 23.2 per cent over the past two months – the largest two month gain since records began in 1975. At the same time as we saw retail sales tumble all around the world, sales in Australia rose 5.9 per cent from November 2008 to May this year. Lower interest rates and our First Home Owners Boost are supporting the housing sector, with early signs this is translating into a recovery in dwelling investment in the second half of this year. We have also seen motor vehicle sales rebound, supported by the Small and General Business Investment Incentive. These are all very heartening snapshots of what stimulus has made possible.
Challenges Ahead
But there remain considerable challenges as the full effects of the global recession continue to wash through our economy. For one, it has seen the unwinding of the commodities boom. The collapse in global commodity prices is forecast to rip up to $50 billion from our economy in 2009-10 and with it tens of thousands of jobs. Businesses right across our economy are cutting back on investment plans. Though export volumes are recovering, falling export prices and business investment are having a direct impact on employment. That's why, to those who suggest we should wind back stimulus, I say that would be pulling the rug out from under the recovery.
Just as our early stimulus supported households most in need, the Government's second and third phases are filling some of the investment hole caused by the pull back in private investment. We are directing 70 per cent of our stimulus to investments in schools, roads, rail and ports. In doing so, we are showing that we have not lost sight of the longer-term challenges facing this economy.
The Longer Term
We do have a great opportunity to take stock of where we want to go as a nation and how we seize the opportunities presented by the global recovery. If one lesson is clear from the past year it is that tomorrow's prosperity and economic security will turn on the policy choices we make today.
Our job is to maintain the focus on investment in the drivers of productivity at the same time as we pay off the debt that was forced on us by the global recession's impact on revenue.
It means implementing a broad and ambitious agenda that encompasses:
- Reforming tax and welfare, to make it fairer, simpler and more competitive.
- A surge in nation building infrastructure investment, to tackle bottlenecks.
- An Education Revolution, so our kids can have well-paid, high-skill jobs.
- Bold investments in energy efficiency and a CPRS, to cut pollution and create jobs.
- A National Broadband Network, to boost innovation and productivity.
- Fixing the health system, to reduce waste and address the ageing of the population.
- Working through the Council of Australian Governments to cut red tape, boost competitiveness, and create a seamless national economy.
- And, finally, tireless regional and global engagement, to boost exports and wealth in this Asian century.
A Whole New World
I want to spend a bit of time on this last one, because there is an important story to be told about the new, very different global economy we'll confront when this crisis is over, and Australia's role in it.
What will the world economy look like when this crisis is over? For starters, no longer will it be able to rely so heavily on the American consumer as the primary driver of growth. Emerging economies will increasingly generate their own internal demand.
The UN estimates China's urban population will be nearly twice as big by 2050 than it was in 2005, and India's will be nearly three times bigger. The Brookings Institution estimates that by 2025 China will have the world's largest middle class, while India's will be 10 times larger than it is today. This rebalancing of global growth toward our region could make Australia one of the biggest beneficiaries of the recovery, if we are bold enough to grab the opportunities of the Asian century.
But in the post-crisis economy we will no longer see the low cost of capital that typified the period leading up to the crisis. This will have implications for business investment and for growth here and abroad. As the global economy recovers, it is inevitable that global interest rates will rise from their unprecedented lows and Australian rates will rise as well. These adjustments are underway now and that is why the Rudd Government is so determined to implement our long-term reform agenda. That is also why we are working through the G20 to ensure a coordinated global response to these issues.
Through the G20, Australia has been playing a critical role in pursuing reforms for a more stable and sustainable global growth path for the future. We have carved out a more influential role in the G20, playing a critical part in the establishment of a Leaders' Meeting of the G20 in Washington late last year, and helping guide the agenda for reform since then. We have done this because we know, as a small open economy, that our prospects are interlinked with those of the rest of the world.
Australia's Foreign Investment Framework
We also know that we will not prosper without capital to invest and grow our business sector. That's why today I'm announcing important changes to Australia's foreign investment framework.
Foreign investment is an issue we can't afford to divorce from broader discussions about our economy and its prospects for recovery. Australia has historically relied on international finance to open new investment opportunities and to develop our natural endowments. International capital has helped to build the competitiveness of our economy, and it will continue to build our competitiveness in the years to come.
- Growing our economy over the medium to long term
- Creating new jobs and supporting existing jobs
- Boosting innovation and skills development
- Introducing new technologies
- And promoting healthy competition in our industries.
In recent months I have emphasised the Australian Government welcomes and encourages foreign direct investment. This investment comes from all sources. Much of that recent attention has focused on Chinese investment proposals, and we have indeed received and approved many of these, in accordance with our national interest guidelines. But the fact is since this Government took office in late 2007, there has been a surge in approved investment from both traditional and non-traditional sources. And this is a good thing, because as these foreign investment proposals come online, they are playing an important role in our recovery– creating jobs, supporting economic activity and establishing new businesses.
But looking forward, the investment outlook will be less bullish, as a consequence of the slower global economy. We want to ensure Australia's regulatory framework promotes our competitiveness and attractiveness as a destination for international capital. Our mission is to compete globally more effectively – to take a larger slice of a currently smaller pie, as the PM has said.
While very few applications are ever rejected, some screening requirements on foreign investors impose unnecessary compliance costs. The Foreign Acquisitions and Takeovers Act has rarely been touched by previous governments. And fixed foreign investment screening thresholds mean that each year, they capture more and more low value investment applications.
Today, I announce three changes to our foreign investment screening regime.
First, the Rudd Government will simplify and lift the monetary thresholds that apply to screening for private foreign investment in Australian businesses.
Currently, there are multiple thresholds that prescribe when a private business investment must be examined against the national interest. The most common threshold is an acquisition of a substantial interest of 15 per cent or more in a business worth $100 million or more. But offshore takeovers are subject to a monetary threshold of $200 million.
US investment in sensitive sector acquisitions is subject to an indexed $110 million monetary threshold, under our free trade agreement with the USA. And US investment via offshore takeovers is subject to an indexed $219 million monetary threshold.
Next month, the Government will introduce amending regulation to replace those four existing thresholds for private business investment with the highest one. A single threshold of 15 per cent in a business worth $219 million. Private foreign investment in Australian businesses below $219 million will be able to proceed without Government review.
Second, we will ensure the new threshold keeps up with inflation, applying indexation on the 1st of January each year. The special threshold for United States investors in non-sensitive sectors of $953 million (indexed) that currently applies will remain and current screening arrangements for media sector and foreign government investments will remain. This will reduce complexity and increase certainty for foreign investors, and it will streamline the system in relation to low value foreign investment cases.
Third and finally, we will repeal the foreign investment policy that requires private investors to notify the Government when establishing a new business in Australia valued above $10 million. This requirement currently applies to all non-United States investors. We've received many of these types of applications. But not a single new business proposal has been rejected for the past decade or more.
New businesses in Australia boost growth, create jobs, and facilitate access to new technologies, global integration and networking. Recognising these factors, and based on my own experience reviewing new business proposals, the Government has determined that such investments do not generally raise national interest concerns.
Conclusion
In a year characterised by the most significant economic challenges since the 1930's, Australians can say with pride that we have pulled together to withstand the worst the world can throw at us. It's exactly this sort of commitment and determination that we'll need now, to meet the big challenges of a new, post-crisis global economy. We must not forget that the main game is beyond the recovery. Our job isn't near finished. In fact, it's just beginning.
There will be more challenges ahead than we might wish for. But I put to you that our road to recovery is no journey of chance. For us, getting it right means carving out for Australia a bigger share of global prosperity than we enjoyed before the crisis. And that, in turn, means a new generation of prosperity for Australia, built on stronger and more enduring foundations than the last one.
Thank you and I look forward to the discussion.