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.
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.
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.
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.
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.
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.
Treasurer of Australia
Sunday 19 July 2009