Monday, 1 June 2009

Welcome to my 11th economic note. I’ve sensed a real hunger for information out in the community, and I’m really pleased people are finding the note a useful way to keep up to speed with what’s happening at home and abroad. The only way we can get through this global recession is by pulling together. And to do that, we all need to be engaged in the big conversation about our economy, and what we want it to look like as global conditions improve.

International News

Last week we received further news of the impact the global recession is having on both developed and developing economies.

So far, virtually every OECD country that has reported its GDP outcome for the March quarter has reported a contraction, as can be seen in this OECD table. This week’s Fact of the Week also comes from the OECD. It estimates that total GDP across OECD countries fell by 2.1 per cent in the March quarter, the largest fall since OECD records began in 1960.

We also learnt last week that in the first three months of the year, Malaysia contracted by 4.4 per cent, the Philippines contracted by 2.3 per cent, and Thailand contracted by 1.9 per cent.

Unlike Malaysia and Thailand, the Philippines went into the March quarter having recorded positive growth in the last three months of 2008. This Financial Times article by Roel Landingin on the Philippines’ first quarter GDP result refers to comments by economist Nikhilesh Bhattacharyya. He argues that earlier forecasts of resilient growth lulled government planners into complacency, and that as a result, “policymakers took their foot off the stimulus accelerator”. He states “unemployment and poverty are most likely rising at a rapid pace and government spending needs to rapidly expand to reduce the output gap.”

Public Finances

The global recession is having an enormous impact on public finances around the world. Our nearest neighbour across the Tasman provides a clear example. The New Zealand 2009-10 Budget, brought down last week, revealed that government net debt would rise to a peak of around 36 per cent of GDP in 2016-17. Other countries are also facing increases in general government net debt. Net debt as a share of GDP is expected to rise to 74.9 per cent in the Euro area, 83.0 per cent in the UK, 83.4 per cent in the US, and 136.3 per cent in Japan.

Here in Australia, falling tax revenues due to the global recession and the unwinding of the mining boom have also made it necessary to borrow. Government net debt is forecast to peak at 13.8 per cent of GDP in 2013-14, before falling again. The Government is taking responsible decisions to ensure our net debt remains the lowest of any Major Advanced Economy in the world.

Business Investment

New figures released this past week on business investment and construction confirm what we’ve been saying for some time, that Australia is not immune from the impacts of this global recession. New capital expenditure fell by 8.9 per cent in the March quarter and businesses are beginning to scale back their investment plans for the coming year. This result was not surprising in the face of the worst global economic conditions in 75 years, and the unwinding of the global commodity boom that had driven business investment to record levels.

However the result does underscore the importance of the action the Government is taking to provide incentives for businesses to invest through the Small Business and General Business Tax Break. This investment allowance was increased and expanded in the Budget to provide additional assistance to small businesses to invest in building their future capacity.

Construction Work

We also received construction work figures last week showing that total construction work done declined by 3.7 per cent in the March quarter. The figures also show that public investment is helping to fill some of the gap from declining private demand, with public work done rising 4.4 per cent, while private work done fell 6.2 per cent.

The Government’s nation building investments in our roads, homes, hospitals and schools are working to stimulate the economy and support jobs. This investment will see something like 35,000 building sites spring up around the nation.

Coming Up

In the coming week, we will receive the Euro area’s GDP outcome for the March quarter, and US unemployment data for May.

Here at home, the Reserve Bank Board will hold its monthly meeting next Tuesday. We will also receive very important news on how the Australian economy fared over the first three months of this year with the release of March quarter National Accounts. This result will be really important – not because of technical economic concepts like whether Australia is in a ‘technical recession’, but because it will indicate the sort of impact this global recession is having on Australians.

The Government has taken decisive action to stimulate our economy and cushion Australians from the worst the world can throw at us – targeting first household incomes, then shovel-ready projects, and now larger-scale infrastructure in the Budget. The one thing we know for sure about our first quarter GDP outcome, is that without the Government’s substantial economic stimulus, the result would be much worse.

Wayne Swan
Treasurer of Australia