Welcome to the latest edition of my economic note after a big week of news on the economy, with both the Reserve Bank and the International Monetary Fund putting out major publications. The Australian Bureau of Statistics also gave us important indicators on the pulse of the economy, releasing retail trade and jobs numbers. I also encourage you to check out a major economic speech I gave on Tuesday.
On Friday, the RBA's latest quarterly Statement on Monetary Policy provided a comprehensive update on how it sees our economy. The RBA said that the Australian economy continues to exhibit considerable resilience in the face of a very difficult international environment. Consistent with this, they upgraded their forecasts for Australian GDP growth to ½ a per cent in 2009‑10 and 2½ per cent in 2010‑11.
The RBA identifies a number of factors that have contributed to the comparatively good performance of the Australian economy: the strong state of our financial system, the effects of lower interest rates, the Government's fiscal stimulus and the strong recovery in China which is boosting the prices and demand for our exports.
This is all heartening news but we're not getting carried away. The pace of recovery is still expected to be modest. By way of comparison, a normal rate of GDP growth for Australia is around 3 per cent a year. This means that the RBA is expecting 3 consecutive years of below normal growth — 2008‑09, 2009‑10 and 2010‑11.
The International Monetary Fund released its latest annual assessment of the Australian economy this week. The IMF has also upgraded its forecasts for Australia's GDP, expecting a contraction of 0.5 per cent in 2009, followed by growth of 1.5 per cent in 2010 and 2.8 per cent in 2011. These forecasts would see Australia grow faster than any of the world's major advanced economies. Most importantly, the IMF gave us another big tick for our stimulus, noting "[t]he authorities' timely and significant macro policy response cushioned the domestic impact of the global financial crisis."
This week, the Australian Bureau of Statistics gave us a good read on the state of retail trade. Even though retail turnover fell in June, it was after several months of increases. Retail turnover has increased by 5.2 per cent since November, before the first stimulus payments were made to households.
In contrast, in most other advanced economies, retail turnover has fallen over the same period. The US is down 1.6 per cent, Canada is down 2.2 per cent, the euro zone is down 2.3 per cent and Japan is down 2.5 per cent. Once we adjust the numbers for the effect of price changes, retail turnover increased by 2.0 per cent in the June quarter. This number will feed into the estimate of June quarter GDP growth and it is the strongest increase in almost two years. Our stimulus is working.
Labour force data released on Thursday also gave us some welcome news on the jobs front. The data showed that employment increased by 32,200 persons in July and that the unemployment rate held steady at 5.8 per cent. Most economists expected the unemployment rate to rise, so it was an encouraging outcome given the difficult circumstances.
The labour force data also showed employment has hardly increased over the past year and many full time jobs have been replaced by part time jobs. It is better that people are able to work fewer hours than to lose their jobs entirely, but it can still require a difficult adjustment. And new entrants to the labour market are probably finding things particularly tough in the current environment. The Fact of the Week is that female employment increased by 0.9 per cent in the year to July while male employment fell by 0.8 per cent, a pattern that we often see when the economy slows.
High unemployment is devastating both to the economy and to the people directly affected. Because of continuing difficulties in the global economy, the unemployment rate is expected to rise further, but the stimulus is playing a role in keeping the unemployment rate lower than it would otherwise be.
It is definitely the case in Australia that private investment is very weak at the moment. This emphasises the importance of the substantial investment in infrastructure that the Government is undertaking as part of its stimulus packages. Not only does this boost economic activity now, while the economy is weak, but it also provides a stronger basis for sustainable growth into the future.
It is also important that we take reasonable steps to encourage private investment where we can. On Tuesday, in my speech for the Thomson Reuters Newsmaker Series, I emphasised the importance of building a stronger foundation for future growth, and announced important changes to our foreign investment arrangements. These changes aim to make sure our regulatory framework promotes Australia's competitiveness and attractiveness as a destination for international capital – to make sure we get a bigger slice of the global economic pie. These changes also improve the focus of our ‘national interest' test, so the Government can get out of the way of lower value business transactions. This is absolutely vital to support Australian jobs and create new ones into the future.
Next week, Parliament will be sitting again, so I'll be back for another dose of Canberra's chilly weather. On the domestic front, we will be getting news on housing finance, consumer and business expectations, and wages growth. On the international front, we have inflation data from China, the US and the euro zone, UK employment data, and Hong Kong GDP.We stack up very well against these other economies, partly because we could implement our stimulus packages as quickly as we did. They have been vital in cushioning us from the worst effects of the global recession. And even though full recovery is likely to be a slow process and will involve hardship for many people, things would have been worse if we had been slower to act or more timid in our response to the dramatic deterioration in the world economy.
Treasurer of Australia
Sunday 9 August 2009