Welcome to the latest edition of my economic note. Today's note comes after another eventful week for the economy, including this speech by Prime Minister Kevin Rudd setting out the Government's vision for national leadership in the growth and development of our major cities. The PM made it clear that the future planning of our major cities is a core element of our nation's long-term infrastructure reform, and is critical to achieving our goals of lifting productivity, tackling climate change and improving the lives of millions of Australians. Australian Chamber of Commerce and Industry (ACCI) Chief Executive Peter Anderson declared that the "affirmation by the Prime Minister that investment in nation building transport, logistics and human infrastructure are key elements in the Government's plan for managing the recovery is welcomed by industry." He emphasised that "productivity growth means the economy will be stronger, the Commonwealth deficit can be paid off more quickly, living standards can rise without fuelling inflation or job losses, and we can sustain population growth."
This week's Fact of the Week is news that the US economy has grown for the first time in over a year, with GDP rising by 0.9 per cent in the September quarter. The US economy contracted by 2.3 per cent over the year to the September quarter. US President Barack Obama said "this is obviously welcome news and an affirmation that this recession is abating and the steps we've taken have made a difference, but I also know that we've got a long way to go to fully restore our economy and recover from what's been the longest and deepest downturn since the Great Depression." Christina Romer, Chair of Obama's Council of Economic Advisers, commented that "it will take sustained, robust GDP growth to bring the unemployment rate down substantially. Such a decline in unemployment is, of course, what we are all working to achieve."
As discussed in this Reuters article, IMF Managing Director Dominique Strauss-Kahn said on Friday that encouraging figures out of the US on Thursday and some European countries a few months ago "does not mean the crisis is over." His view was that "if we want to avoid, which I think we will avoid, the risk of a double-dip, it's absolutely too early to withdraw the different stimulus which have been put in place".
The IMF last week released its Regional Economic Outlook for the Asia and Pacific region. It stated that "Australia is avoiding a contraction in 2009, thanks to its timely and forceful policy response and strong commodity exports, especially to China." Looking ahead, the IMF said that while global conditions are expected to continue to improve in 2010, the recovery is expected to be a sluggish one. According to their latest forecasts, "output in the large G7 economies is forecast to grow by just 1¼ per cent next year, recouping only half of the loss estimated for 2009."
On Wednesday we received the consumer price index (CPI) figures for the September quarter, which give us an idea of the prices Australians are paying for key items. They showed that annual inflation moderated to 1.3 per cent over the year to the September quarter, down from 5.0 per cent a year ago. This is the lowest annual inflation rate in ten years, and shows the full impacts of the global recession continue to wash through the economy. The CPI increased by 1.0 per cent in the September quarter, almost half of which was due to electricity and other utility prices recording their largest quarterly rise since the series began in 1972. Annual underlying inflation also eased, falling from 3.9 per cent over the year to the June quarter to 3.5 per cent in the September quarter. The easing in inflationary pressures reflects the fact that the Australian economy continues to operate well below its capacity.
Last week's Access Economics Investment Monitor highlighted that private investment activity still remains weak, with just nine new projects added in the September quarter – the lowest on record. It stated that "the outlook for investment spending, while improving, is also not yet firing on all cylinders. Non-residential building projects in particular remain lacklustre".
The NAB Quarterly Business Survey reported a strong surge in business confidence in the September quarter, with business conditions also registering a significant improvement. NAB Chief Economist Alan Oster pointed however to the "remarkable divergence between business confidence and business capital intentions." He explained that "while business has become much more confident, that has not translated into plans to increase capital spending. This divergence has very important growth implications and puts a real note of caution against overly optimistic growth expectations. Thus, while business capital plans have improved from the ‘Armageddon' levels of early 2009, they still imply little to no growth in investment over the next 6-12 months".
The bulk of the Government's fiscal stimulus that is still to be delivered is in critical nation building infrastructure – investment in major highways, rail upgrades, ports, hospitals and schools. This investment will deploy the spare capacity in the economy today to strengthen the recovery, build future capacity and productivity for the long-term, and ensure we have sustainable growth with low inflation into the future.
On Wednesday Martin Ferguson, the Minister for Resources and Energy, and I launched the Australian Centre for Renewable Energy at the North Queensland Renewables Business Roundtable. The Centre will operate as a one-stop shop for renewable energy businesses, and draws together more than half a billion dollars worth of investment for the development, commercialisation and deployment of renewable energy technologies for the future. It was great to hear the constructive way people discussed their future energy options at Wednesday's Roundtable. I'm always deeply impressed with the thriving community and entrepreneurship of North Queensland, and it was heartening to hear renewable energy businesses in the region say that our $4.5 billion Clean Energy Initiative will help them to achieve the growth and jobs potential of their good ideas. Business has been crying out for certainty so it can invest with confidence in low-pollution industries and create the green jobs of the future. As I said in my second reading speech to the Parliament on Wednesday night, the Government is determined to provide that investment certainty through our Renewable Energy Target and our Carbon Pollution Reduction Scheme.
Tomorrow in Canberra I will release the Mid-Year Economic and Fiscal Outlook, which will update our forecasts for the coming years. Because of the efforts of Australians, combined with the actions taken by the Government and the Reserve Bank, our forecasts for growth and unemployment will be better. Unfortunately, the Budget has still taken a big hit from the global recession, and challenges remain in areas like business investment and the terms of trade, and this will be reflected in MYEFO as well. On Tuesday the Reserve Bank Board will meet for its November monetary policy meeting. RBA Governor Glenn Stevens has previously indicated that rates cannot stay at 50-year emergency lows. The fact that fiscal stimulus has already peaked, and is already tapering away, means that fiscal and monetary support will continue to work together throughout the recovery. On Thursday I'll be talking about tax reform at the Economic and Social Outlook Conference organised by the Melbourne Institute and The Australian. At the end of the week I will attend the G20 Finance Ministers' meeting in St Andrews, Scotland, where climate change financing and frameworks to secure stable long-term growth in the economy will be high on the agenda. Another big week and I look forward to updating you on it next Sunday.
Treasurer of Australia
Sunday 1 November 2009