Monday, 27 April 2009

This note comes to you from Washington DC, where I’ve just finished meetings with my international colleagues in the G-20 and the IMF, which are really important to the Budget I’m handing down in a little over two weeks. The magnitude of the global recession presents the most challenging backdrop to an Australian Budget in living memory.

G-20 Finance Ministers’ Meeting

As we enter the home stretch on the Budget together it’s vital I get the best possible intelligence directly from my international colleagues on the economic outlook. We also discussed how to put into action the measures agreed at the London Summit to strengthen financial regulation and supervision, and shaped the agenda for the next G-20 Leaders’ Summit. I also took part in an IMF ministerial-level dialogue on managing financial risks, which will help prevent future crises.

What happens in meetings like these has a direct impact on how the world recovers, and is critical to ensuring our efforts back home to stimulate economic activity and Australian jobs aren’t in vain. It’s also very important that we maintain the momentum kick-started in London to ensure that the pathway out of this recession takes us to a stronger post-crisis economy.

IMF Forecasts Deeper Global Recession

Last week, the International Monetary Fund (IMF) released its updated World Economic Outlook. It painted a bleak outlook for the global economy, stating that "by any measure, this downturn represents by far the deepest global recession since the Great Depression."

This latest report contains the fifth downgrade in the IMF’s global growth forecasts in just over six months, illustrating just how rapidly the global economy has deteriorated. The IMF now expects a longer and deeper global recession and is forecasting the global economy to contract by 1.3　per cent, and advanced economies by an unprecedented 3.8　per cent this year.

The IMF’s world growth forecasts provide for a striking Fact of the Week, suggesting the global recession will result in lost output of around $5.7 trillion – an amount equivalent to five times the size of our entire economy.

The IMF’s Chief Economist, Olivier Blanchard, spoke about the importance of economic stimulus measures this week after releasing the IMF figures. He noted that "fiscal policies have made a gigantic difference. Our estimate is that if there had been no fiscal stimulus across the world, world growth in 2009 would be somewhere between 1.5 per cent and 2 per cent less than what we’re predicting. Therefore, we would be in the middle of something very close to a depression. So I think we have to understand that the strong policies which have been taken have made a difference. Things are not great. They could have been extremely bad."

Impacts on Australia

As both the Prime Minister and the Reserve Bank Governor acknowledged in speeches last week, the deepening global recession has made it impossible for Australia to avoid going into recession.

There’s no doubting that this year is going to be a difficult one. Like other advanced economies, the IMF expects our own economy will contract over 2009. But the IMF also believes that Australia will weather this global crisis better than virtually any other advanced economy.

That’s partly because of some of the strengths we have going for us, which are not evident elsewhere in the world. Like the strength of our financial system and the fact our banks are amongst the most stable in the world. And a big part of the reason we are much better placed than most other nations is the decisive action taken by the Government to stimulate growth, support jobs and cushion the impact of the global recession on Australians.

As I wrote in the very first economic note, and have said since, with the right policy actions here and abroad, summoning the best aspects of our national character (explored in my Anzac Day speech, which you can read here), there’s no reason we can’t emerge from this global recession stronger and more prosperous than before.

Impacts on Budgets

The global recession is severely eroding government revenues right around the world. The IMF now expects budget deficits in the major advanced economies to reach 10.5 per cent this year.

Just this week we saw Alistair Darling deliver the UK’s Budget. It forecasts their economy will suffer a deep recession and their budget deficit will widen to 12.4 per cent of GDP — almost double the deficit in the previous year. You can read more on the UK’s economic outlook, and how it compares to other economies, in this article by Martin Wolf in the Financial Times.

Inflation

This week we received inflation figures for the March quarter, which confirmed inflationary pressures in our economy had continued to moderate in response to the global recession and its effects on the domestic economy. Annual inflation fell to 2.5 per cent, back within the RBA’s target band of 2 to 3 per cent for the first time since late 2007.

Coming Up

In the coming week, the most important economic news will be the first estimate of US GDP for the March quarter. This will give us a further indication of the severity of the recession in the world’s largest economy. We already learned this past week, that the UK economy contracted by 1.9 per cent in the first three months of the year – its worst outcome in 30 years.

On the domestic front, the National Australia Bank will release its Quarterly Business Survey for the March quarter. The RBA will also be releasing data on commodity prices and on credit to business and households. I’ll write about these in my note next week.

Monday morning I will arrive back in Canberra to continue final preparations for the Budget. This global recession means that we will have to do more, but with far less. I’m sure Australians will understand there’s only room for money to go where it’s really needed. But we are determined this Budget will continue to support jobs and invest in the nation’s economic recovery in the most responsible and sustainable way possible. I look forward to telling you more about those plans.

Wayne Swan
Treasurer of Australia