Today's economic note comes to you after a busy weekend. I've just got back from a press conference welcoming a couple of pieces of fantastic non-economic news, with the search team trawling the ocean off south-east Queensland locating the wreck of the Australian hospital ship Centaur, and the way now being cleared for Mary MacKillop to become Australia's first saint. I also discussed the outcomes of the UN Climate Change Conference in Copenhagen.
Prime Minister Kevin Rudd described the Copenhagen Accord as "a significant global agreement on climate change action", as "it is the first global agreement on climate change action between rich countries and poor countries." For the first time, rich countries and poor countries agreed that we should keep our temperature increases within 2 degrees Celsius, and reached agreement on actions to reduce greenhouse gas emissions, international mechanisms to verify actions taken, and the finance necessary to support the mitigation and adaptation efforts of the most vulnerable countries in the world. US President Barack Obama said this was "a meaningful and unprecedented breakthrough", as "for the first time in history all major economies have come together to accept their responsibility to take action to confront the threat of climate change."
The Prime Minister made it clear that "much more work is still to be done, and we'll be putting our shoulder to the wheel to make sure that work is done." President Obama said that "going forward, we're going to have to build on the momentum that we've established here in Copenhagen to ensure that international action to significantly reduce emissions is sustained and sufficient over time. We've come a long way, but we have much further to go."
Wednesday's National Accounts showed that the Australian economy continued to grow in the September quarter against a backdrop of still challenging global conditions. The Fact of the Week is that GDP rose by 0.2 per cent in the September quarter, to be 0.5 per cent higher through the year. Once again the Government's fiscal stimulus was vital in preventing the economy going backwards, with Treasury estimating that our stimulus measures added 0.4 percentage points to GDP growth in the quarter. That means that without our fiscal stimulus, the Australian economy would have contracted not only in the December quarter of last year, but also in the March, June and September quarters of this year – shrinking in total by 2 per cent over the past year. Instead, thanks to stimulus, the September quarter National Accounts mark the beginning of Australia's 19th consecutive year of economic expansion – a feat matched by no other advanced economy over this current period.
While economic conditions are improving, the National Account figures provide a cautionary reminder that there's still some way to go before economic growth becomes self-sustaining. Private business investment fell by 2.5 per cent in the quarter, subtracting 0.5 percentage points from growth. This fall would have been even bigger if not for the increase in private school construction associated with our Building the Education Revolution program, with Treasury estimates indicating non-residential building investment would have fallen by 8.8 per cent instead of 6 per cent without this impact.
The Government's stimulus measures are helping to offset the weakness in private investment, keeping our economy growing against the odds. Public investment rose by 6.2 per cent in the quarter, contributing 0.3 percentage points to growth. Much of this increase came from our infrastructure stimulus, which is not only filling a temporary hole in private investment but also putting in place long-term improvements to our economic capacity. Household consumption spending rose by 0.7 per cent, contributing 0.4 percentage points to growth. This increase was underpinned by solid levels of consumer confidence, the continued resilience of the labour market, and the continuing effects of our cash stimulus payments earlier in the year. Dwelling investment rose for the first time in a year by 5.9 per cent, reflecting the effects of historically low interest rates and support from our First Home Owners Boost and Energy Efficient Homes Package. Treasury estimates that this package alone accounted for more than half of the 7.6 per cent increase in spending on the alterations and additions part of dwelling investment, contributing 0.1 of a percentage point to growth.
The National Account figures give us more reasons to be confident about the future, but they are definitely no cause for complacency. Over the past year we've seen the biggest fall in export prices on record (-19.5 per cent), the second biggest fall in business profits on record (-16.3 per cent), the weakest growth in wages and salaries since the early 1990s recession (0.3 per cent), and the biggest fall in nominal GDP in at least 50 years (-2.5 per cent).
The gradual phased withdrawal of stimulus remains appropriate as the global recession continues to wash through the Australian economy. The impact of stimulus on growth peaked in the June quarter and is already tapering away. But it is still performing a very important role in Australia's economic recovery – giving businesses the confidence to keep trading, keep producing, and to keep staff in jobs during the global downturn. People I talk to in the community – small business owners, tradies, mums and dads – point to the confidence and certainty that comes from knowing there is a pipeline of work available. That pipeline of work can make all the difference when it comes to employers making decisions about whether to keep staff or put more on, and workers having the confidence to buy those goods and services they want, and not just those they need.
Just as fiscal and monetary stimulus have been working hand in hand to support the economy and jobs during the worst of the downturn, both are gradually being phased down as the economy strengthens. The minutes of the Reserve Bank Board's last monetary policy meeting, which came out on Tuesday, highlight that as the economic outlook has begun to improve, monetary policy has been adjusted from its 50-year emergency lows.
As the year winds up, I think it's worth reflecting on the scenario we faced 12 months ago. This time last year, the global financial system was literally melting down, confidence was shattered and global trade was in free fall, advanced economies were falling like dominoes into recession, the Reserve Bank had just cut rates by 300 basis points in the space of four months, and our first cash stimulus payments were rolling out. We were confronting the end of Australia's long period of uninterrupted economic growth, and up to a million Australians out of work. But now, 12 months down the track, a combination of economic stimulus and community effort has seen Australia fight off the worst global downturn in 75 years. We've avoided a recession – and some of the destruction that goes with it – and are now half-way through our 19th consecutive year of growth. When the Government came to office, Australia and the US had virtually the same unemployment rates. Two years on, Australia's unemployment rate now stands at 5.7 per cent while the US unemployment rate has hit double digits at 10 per cent.
It should remain a source of pride to all Australians that we have achieved what virtually no other country could over the past year. Employers and employees deserve credit for doing the right thing by each other, and the nation, by cutting hours instead of cutting jobs and preventing an even bigger increase in unemployment. I'd also like to acknowledge the dedicated efforts of the talented Treasury staff over the past year and a bit. Their work has helped save many Australians and their families from the indignity and hardship of unemployment, and helped prevent the social carnage and community dislocation that usually accompanies recession. I know they will continue to make a stellar contribution going forward, as the Government focuses on ensuring the national unity and effort that got us through the crisis in 2009 is converted into long-term improvements to our economy in 2010.
Treasurer of Australia
Sunday 20 December 2009