Plenary address by Dr Ken Henry AC, Secretary to the Treasury
E&OE
Thank you very much and G'day Paul. I do know Paul. It's a pleasure to be here.
I, like other speakers, want to acknowledge the traditional owners of the land on which we meet and I like other speakers pay my respects to their ancestors and their elders.
It's my task to talk to you about the Australian economy. The Prime Minister has just done a pretty good job of that and that means that I can be a little quicker, a little shorter than I might otherwise have been.
Forecasters have been struggling to keep up with the rapid deterioration in the global and also in the Australian economic outlook and this chart shows that in May of 2008, just over 12 months ago, the IMF was forecasting world growth of about 4% for 2009 but by May of this year when we were putting the budget together the IMF has revised down their forecast to negative world growth of 1.5% in 2009. 12 months ago we were projecting growth in the Australian economy of 3% in the year 2009/10 and today of course we're forecasting that the Australian economy will record negative growth of about one half of one percent in that year. That's a big turn around.
The Prime Minister showed a chart similar to this, this includes Cyprus, which is not an OECD country, but what you can see that in the year to March of this year virtually all developed countries recorded negative growth. As a whole the 30 economies that make up the OECD shrank by more than 4%. Australia is, as the Prime Minister noted, one of the very small number and the only one in the OECD apart from Norway that has recorded positive growth.
Not strong growth, it's true, but positive growth nevertheless. Asian advanced economies, and you'll see some of those sitting out on the left hand side of this chart, they've been especially badly hit by the Global Financial Crisis.
This is mainly because of the collapse in exports as growth has slowed dramatically in the large import markets of the United States and of course China and China is of increasing importance to economies like Singapore, Taiwan, Japan and of course Hong Kong. The Singapore and Taiwan economies are today more than 10% smaller than they were just a year ago. The Japanese economy is almost 9% smaller than it was just a year ago and Hong Kong is almost 8% smaller. In Europe too several countries have been hit very heavily, especially those that like Germany rely on consumers of discretionary durable items, items like high end manufacturing.
In some countries like Korea and Japan the collapse in exports has already fed back into household income and it's already fed back into household consumption. In other countries like the United Kingdom and the United States household consumption has fallen sharply as households have sought to consolidate their balance sheets.
In Australia, by comparison, household consumption, as the Prime Minister noted, has continued to grow at least to date. To a considerable extent that reflects, as the Prime Minister noted, the impact of these stimulus packages and of course it also reflects the complimentary loosening of monetary policy that has occurred in Australia. Of course monetary policy has been loosened in other countries as well without quite the same effect.
Importantly in Australia, unlike many other countries, households that have sought to consolidate their balance sheets have been able to do so without reducing consumption levels. And other households with already strong balance sheets have made use of substantial additional spending power that has come through the fiscal stimulus packages.
And the Prime Minister showed a chart of unemployment rates, this one includes some dots and they're there for a reason. Those dots show the recent troughs in unemployment rates before the Global Financial Crisis and the global economic slow down hit.
Before the crisis hit we in Australia had managed an unemployment rate of about 4%. Today our unemployment rate is about five and three quarter percent. In the budget we have forecast that the unemployment rate will rise, and the Prime Minister showed a chart, will rise to about 8.5% in the first half of 2011 before gradually falling back to more normal levels.
The Global Financial Crisis has hit the United States much harder than other advanced economies. The US unemployment rate has already increased by more than five percentage points to more than nine percent. The Euro area also has an unemployment rate in excess of 9%.
The Prime Minister spoke about contributions to growth in Australia and this chart, although complex is another way of presenting the Prime Minister's message. In the present year, which concludes at the end of this month of course, we estimated in the budget virtually no growth in gross domestic product at all and you can see that in the green bar out on the far right hand side of this chart. Of course the March quarter was stronger than we had expected and it means that we are now thinking that gross domestic product growth in this present year 2008/2009 will be somewhat stronger though it will still be weak relative to trend. So this chart shows the composition of the budget forecasts for 2008/09, 2009/10 and 2010/11 and what the chart shows is that the composition of growth in the economy is changing quite significantly as we move through these three years.
For 2008/09, the present year, weak growth in household consumption and business investment and somewhat stronger growth in public expenditure is being offset by a fall in dwelling investment.
In the next year we're forecasting a large fall in business investment and you can see that pink, or actually I'm told its magenta, bar in the middle of the business investment block that is strongly negative. We also have imports falling and a fall in imports, as the Prime Minister's decomposition showed you, actually makes a positive contribution to domestic output because it means that a greater share of domestic demand will be met by domestic production.
While exports are also forecast to fall significantly there is a very strong growth in public expenditure, you can see in that year, that means that the overall fall in gross domestic product should be limited to about one half of one percent as I indicated earlier. And then for 2011/12 where we're forecasting GDP growth of two and a quarter percent all categories of private domestic demand will be making a positive contribution to growth in the Australian economy and the slight fall off in public expenditure in that year, 2010/11 reflects the withdrawal of some elements of the fiscal stimulus packages.
The Prime Minister spoke about the important contribution that State and Local Government spending is making to Australia's GDP growth and this chart makes that clear.
State and Local investment is forecast to make a strong contribution in the current view but an especially strong contribution in the next year, 2009/10. But because the same level of investment is not then forecast to be maintained in 2010/11 State and Local Government investment will detract something, about half of one percent from GDP growth in that year. So this shows quite clearly the contribution that State and Local investment is making to the fiscalthe combined fiscal stimulus in the Australian economy. And that has an important impact on total investment.
While business investment in Australia is, as an earlier slide showed, going to be hard hit over the next couple of years, the increase in public investment, and that's the yellow line down the bottom of this chart, is forecast to make a very strong contribution to total investment and it will help ensure that total investment in the Australian economy remains up at around historically high levels. There's been considerable interest, as the Prime Minister noted, in the likely impact of the fiscal stimulus packages on aggregate economic activity and the Prime Minister showed charts for the December quarter of last year and the March quarter of this year. This chart goes right out to the June quarter of 2011 and it shows treasury forecasts of the trajectory of the economy with and without the fiscal stimulus packages. And again the magenta line shows how we think the economy would have behaved or would behave without the fiscal stimulus packages and the green line how we think the economy will behave with the fiscal stimulus packages. That dot with the word actual written across it is the actual March quarter outcome which as I noted earlier is stronger than was in our forecast and it may be that there is some upside to our forecasts although really it's too early to tell. The Prime Minister showed you this chart of where unemployment rate would be likely to track with and without the stimulus.
I thought I'd finish with a couple of longer term charts. This is a chart of the terms of trade. The terms of trade is simply the ratio of our average export prices to our average import prices and the terms of trade have had a profound impact on the behaviour of the Australian economy over about the last decade. Because you can see that over that period up until the September quarter of 2008 our terms of trade were growing very strongly.
That injected a lot of additional income into the Australian economy, maybe as much as an additional hundred billion dollars a year of additional income into the Australian economy. Since then the terms of trade have started to fall as our export commodity prices have started to fall and we're forecasting the terms of trade to fall by 13 and a quarter percent next year. That's important but what's also important and another message I'd like you to take from this chart is that even after that's happened and provided there's no further falls in commodity prices, and that becomes increasingly unlikely as global growth resumes, our terms of trade will remain about 40% above their average of the 1990s and that has two significant implications.
Firstly it means that the terms of trade are likely to be supportive of strong income growth in Australia in the next growth cycle. That is once we get through this period of short term macro economic weakness. That's the first point. And the second point is that some of the structural change that all of us have been observing occurring in Australia over the past few years is likely to continue as we emerge from this present period of macro economic weakness.
And the second longer term chart I would like to show relates to the unemployment rate. It will take some time for the forecast increase in unemployment to be unwound. These things do go up much faster than they come down as this chart showed and the trajectory on the downward path is not always smooth, it can be bumpy. Continuing micro economic reforms to further enhance the flexibility of the economy can contribute greatly to the task of a smooth transition back to a lower rate of unemployment. Obviously monetary and fiscal policies settings will also have a key role to play. So let me finish, that's not me. That was interesting, more interesting for me than for you. Let me finish with some questions that this presentation raises. That reminded, in fact why don't I turn to it, you see what this says, CSID is actually a division in my place and it says they are still developing some suggested issues for me to raise.
It reminds me of a story about a speech writer who wasn't getting along very well with his ministerand his minister had a habit of commissioning speeches and then without reading the speeches before hand and getting to a podium as I have just done, opening up the folder and then starting to read the speech and on this particular occasion the speech writer had prepared a folder and when the minister opened the folder the words were written simply you are on your own you'
Well as it happens there are several issues of significance forlet's see how I gofor local governments raised by the Global Financial Crisis and of course by the global recession.
Now among those that you might want to think about today in your discussions are these, these are the things that occur immediately to me.
You've all got balance sheets, how fragile are those balance sheets? How reliable is your access to finance? I know you've been thinking about this. You have an opportunity today to discuss with your colleagues. Are you making appropriate risk assessments with respect to your investments in financial assets? Are there tax reforms that would assist with your financing task? And if there are tax reforms that you think would assist with your financing task then I would encourage you to put those views into the tax review that I'm currently leading. Just send me an email at the treasury.
Rising unemployment never affects a country or even a region in a uniform way. Some of you will be harder hit than others. What your communitywhat can your community do to target emerging unemployment, to get people back into work, to get people into training or to get people into some other activity that preserves their capability and therefore minimises the probability of a short term problem becoming a chronic problem for your region.
Thirdly, if it is true that once we get past this period of macro economic weakness we'll still have relatively high terms of trade, and I do think that's true, what structural adjustments should you be preparing for in your local area.
And fourthly the community infrastructure projects, and there's been quite some mention of those already, will have an impact and are having an impact on the short term economic performance in your regions in getting people into jobs. It's contributing to the short term stimulatory effect. The question is how can you link that short term stimulatory effect with longer term, ongoing economic development in your regions?
I'll leave you with those questions. Thank you very much.
