Monday, 20 July 2009
Welcome to my economic note after what has been another eventful week. In
particular, economic developments overseas last week sparked fresh debate
about the prospects of recovery, both in the global economy and in our own
economy. So I’d like to spend today’s economic note discussing these
prospects, as well as the major challenges our economy still faces.
Positive News from Abroad
There’s been some positive news from overseas, especially from
China which last week announced that its economy grew by 7.9 per
cent in the year to June. This was more than most economists were
expecting, and quite a bit more than the previous figure of 6.1 per
cent growth in the year to March.
It’s clearly good news that there are signs of renewed strength
in China. I think most Australians appreciate how important Chinese
growth is to Australia’s prospects, particularly after the mining
boom in recent years which supercharged our economy and delivered a
huge boost to government revenues. So it’s definitely encouraging to
see signs that China’s economic stimulus is having a positive
impact. Like the Rudd Government’s economic stimulus measures – of
which around 70 per cent is directed towards nation building
projects – China’s stimulus measures are also largely aimed at
important nation building projects that will deliver significant
economic benefits.
It was also encouraging to see the IMF upgrade its global growth
forecast, as well as some more positive reports from important
policy-makers and businesses in the US.
Major Challenges Ahead
But while these signs of recovery are certainly encouraging, it’s
very important that we are also realistic about the challenges that
still lie ahead for our economy. Both the Prime Minister and I have
been upfront and open in warning that the global recession still has
quite a way to run.
Advanced economies in particular are still in the middle of a
savage global recession, and are expected to shrink by 3.8 per cent
in 2009, according to the IMF. This is a huge economic contraction
which is hitting jobs and businesses in many of our biggest trading
partners. For example, in the US, around 500,000 jobs are being lost
each month. Also, European economies still have some major problems
which will take some years to tackle, while the Japanese economy has
shrunk by a massive 8 per cent in the past year.
Implications for Australia
So what does all this mean for Australia’s economy? First it
means that Australia still faces some serious economic challenges in
the period ahead. In particular, our terms of trade – the price we
are paid for our exports compared to the price we pay for our
imports – has tumbled from the very high levels we enjoyed at the
height of the mining boom. In fact
data published by the ABS last week showed export prices fell by
20.6 per cent in the June quarter. This was the largest quarterly
decrease in the 35 year history of the series, and was driven by a
36.8 per cent fall in the prices received for coal, coke and
briquettes. The fall in our terms of trade alone is expected to cut
our national income by 3 per cent this financial year. To put that
number in perspective, it’s double the amount that the Commonwealth
spent on defence last financial year.
Business investment is also expected to fall 18.5 per cent in
this financial year, although this outlook would definitely be much
worse without the Government’s 50 per cent Investment Allowance. Of
course, for many Australians the practical reality of these
challenges is, quite simply, more pressure on jobs in our community.
These are just two of the challenges we face during this global
recession. So it’s clearly a tough and complex time for the
Australian economy, and far too early to be declaring victory over
the global recession.
Australia’s Response
But it’s also true that we should be proud of the way our
community has pulled together in the face of this global recession.
We should be proud that we have the strongest performing economy in
the OECD, with lower debt and lower deficits than any major advanced
economy. And we should be proud that Australia is one of a small
handful of advanced economies to avoid recession thus far.
As I move around the country I’m more and more convinced that
it’s the resilience and optimism of the Australian people –
supported by economic stimulus – that has kept our economy ticking
over.
Economic Stimulus
I’m also convinced that suggestions of an early withdrawal from
stimulus are both premature and very risky. As I noted above, the
world’s major advanced economies are still in the midst of a savage
global recession. And as I noted in last week’s economic note, what
Australian businesses – both big and small – tell me is that
stimulus means they still have customers coming through their doors.
To withdraw or dilute this vital support for Australian businesses
and jobs now would be utterly irresponsible.
As I said in a major
speech last week at the Australian National University, until we
see how the global recession unfolds, it’s far too early to be
making pronouncements about the future path of the Australian
economy, or to be moving away from the policy settings that have
served us well so far.
Yes, there are some encouraging signs at home, as economic
stimulus kicks in, as well as from abroad, particularly from China.
But the Government will not let these early encouraging signs be an
excuse to drop our guard. We will remain vigilant and we will
continue to deliver our three stage economic stimulus plan to
cushion Australia from the worst impacts of the global recession.
Wayne Swan
Treasurer of Australia