As we confront the reality of a global economic recession, we must as a nation reaffirm the great strengths that we have, as well as recognise the great challenges that we face.
Australia's strengths are formidable. Australia's economic strengths are formidable. Just as the Australian character in handling adversity is formidable.
In 2008, the Australian economy had stronger growth than any of the G7 economies and most recent figures suggest that Australia had the fifth highest growth rate of the 30 OECD members. Our unemployment rate is lower than all but one of the G7 and is the fourth lowest out of the 30 members of the OECD.
Our budget deficit to GDP ratio is the lowest compared to any of the G7 and among the lowest of the OECD. Our public net debt to GDP ratio is nearly one tenth that of the public net debt to GDP ratio of the OECD economies. Our banks' exposure to sub-prime mortgages represents less than 1 per cent of total mortgage assets. Our regulators are independent, strong and competent. Our consumers, notwithstanding the crisis, remain among the most confident in the OECD.
And our nation has taken early, decisive action to support the economy ahead of the curve. That is in large part why so far we have fared well against the rest of the developed world.
As of the end of 2008, seventeen OECD economies had already entered recession; the US, Japan, Germany, the UK, Italy, Spain, the Netherlands, Singapore, Hong Kong, Sweden, Denmark, Finland, Hungary, Portugal, Turkey, Ireland and New Zealand.
Additionally, a further ten OECD economies have generated at least one quarter of negative economic growth; France, Canada, Korea, Norway, Austria, Belgium, Luxemborg, the Czech Republic, the Slovak Republic and Mexico
Given that 17 of the world's advanced economies are in recession and 27 have had at least one negative quarter of economic growth, it becomes harder and harder for Australia to single-handedly resist the global economic tide but we will continue to give it all that we have got.
Australia has only been one of four OECD economies not to be recession or to have a quarter of negative growth as a result of the crisis. Australia will need to draw on all these strengths to meet the unprecedented challenges we face as a nation. This is the first truly synchronised global economic downturn involving developed and developing economies since the war.
The impact is seen daily on global financial markets, in the real global economy and in rising global unemployment. The reality is an open economy like Australia cannot escape the impact of a global economic recession because there are no silver bullets.
But the Government can help to cushion the impact of the crisis on Australia. Through early action - being ahead of the curve. Through decisive action - because this is not the time for half measures. Through strong national leadership - because this is not the time to wait and see. And through strong national partnership with Australia's business leadership. Because the truth is we are all in this together.
It is therefore by acknowledging our strengths, by identifying the challenges we face and by prosecuting a clear strategy to steer us through, that we can see Australia through this current crisis.
Some say we should just be talking about confidence but words without actions are hollow. Comforting words without a coherent strategy to underpin them are hollow. Talking about confidence without investing in the economy to build confidence is in fact a dead letter.
The reason the Government is confident that we will steer Australia through this crisis is because of the concrete actions we have taken - which build on the great underlying strengths the national economy enjoys.These are the strong foundations on which we seek to build - foundations which underpin a rational basis for confidence, optimism and hope for the future.
Despite the challenges, despite the twists and turns that we will encounter; despite the setbacks that we will inevitably confront along the way, I have every confidence that not only will we come through this crisis but in doing so, we will build a stronger, tougher, more resilient Australia than ever before.
The global economic recession began in the United States, spread to Europe and then to Asia - and now impacts on all economies, including Australia. The distinctive feature of the current Global Financial Crisis, as George Soros himself has noted, is that it has emerged from inside “the system itself.” The crisis has its roots in a long period of global imbalances, lax regulation and easy credit - all turbo-charged by greed out of control.
The last decade has seen the growth of global imbalances on an historic scale. Current account positions of major economies have rapidly diverged in recent years. Excess saving in surplus economies has been recycled into deficit countries, creating a massive wave of liquidity which helped to push real interest rates to record lows.
These conditions gave rise to unprecedented growth of debt and credit in some developed countries - particularly in the United States. This also fostered a climate where investors were focussed increasingly on speculative gains, rather than long term productive investment.
The largest explosion of debt was in the financial sector. Financial sector debt grew from 22 per cent of GDP in 1981 to 115 per cent of GDP in 2007 - a growth rate nearly ten times as fast as the growth of debt of non-financial corporations. And the balance sheets of many of the world's largest banks more than doubled in five years.
At the same time there was unprecedented growth in financial sector innovation. Banks developed the ‘originate and distribute' model - under which loans were passed on to securitisation companies that repackaged them into residential mortgage-backed securities and on-sold them into the global financial system.
Securitised credit increased five-fold from just over $500 billion in 1997 to nearly $2.5 trillion in 2007. As the economist Joseph Stiglitz has remarked, “many of America's big banks moved out of the ‘lending' business and into the ‘moving business'. They focused on buying assets and repackaging them, and selling them, while establishing a record of incompetence in assessing risk and screening for creditworthiness.” Unquote.
Other exotic financial instruments emerged in an attempt to spread the risk from the banks originating these loans - therefore spreading the contagion across the financial system. Credit default swaps, effectively insurance policies taken out on a debt, grew from less than one trillion to more than $60 trillion, the equivalent for around 100 per cent of global GDP.
And the core problem which emerged over the last decade, and which remains with us today, in the form of toxic assets, was this unprecedented explosion in credit and debt, which was left unconstrained by any national or effective international regulatory regime governing financial markets.
This was capitalism out of control.
This explosion of easy credit, combined with rapid financial innovation and the lack of regulatory constraints, led to financial collapse. The epicentre of the collapse was the “sub-prime” mortgage market - and the reckless loans written during the boom to uncreditworthy borrowers.
As interest rates began to rise, and property markets started to decline, many of these sub-prime borrowers were unable to meet their repayments. As sub-prime default rates rose, it became impossible to know the real value of securitised assets and the loans that they had been packaged into.
These became so called “toxic assets” - which became lodged on the balance sheets - not just of the originating financial institution but through the bank intermediation market - almost the entire financial system.
Official and semi-official estimates of potential losses on toxic sub-prime and related credit assets range from between $2.2 and $3.6 trillion.
These toxic assets sitting on bank balance sheets in the United States and in Europe have become a poison in the bloodstream of the global financial system. Right now, toxic assets represent one of the greatest challenges to global economic recovery. This contraction in lending because of this problem is denying much needed credit to the global economy.
As President Obama said last week “there will be no real recovery unless we clean up the credit crisis” ... “the flow of credit is the lifeblood of our economy.”
Australian banks have very little exposure to toxic assets. That is one of the reasons why they are among the best performing banks in the world today. But Australian banks, Australian businesses and the Australian real economy are also impacted by the global credit crunch that toxic assets in the major global banks have caused. And that makes the consequences for Australia very real indeed.
If the flow of global credit is restricted to Australia because of the impact of toxic assets on the major global banks' balance sheets, then economic growth is choked off and unemployment rises. Then Australian families have a harder time getting credit to purchase goods and services and so demand falls. And Australian businesses have a harder time getting credit to buy equipment, expand their operations, and grow their business, and so investment falls.
That is why the challenge of dealing decisively with toxic assets in the major global banks is so important both to the global economy and to the Australian economy. Furthermore, if toxic assets in the major global banks are not dealt with, the ability of those banks to lend to provide also, normal flows of credit around the world is undermined - and with what scarce global credit remains, it is then repatriated to try and repair the balance sheet in the home jurisdiction. That in turn means that the normal supplies of foreign credit to Australian banks, businesses and consumers is reduced.
To put this into statistical context for Australia, foreign banks' lending represents up to thirty per cent of the debt provided to the $252 billion commercial property sector in this country, which in turn employs some 150,000 Australians.
The consequences of toxic assets on the global economy are also stark.
The International Monetary Fund has estimated that without action to address bank balance sheets, global credit growth in 2009 could fall by an annualised 6.1 per cent - or a combined fall of at least US$3.9 trillion.
On the basis of historical ratios between credit and growth, a credit decline of this magnitude would be associated with a fall in economic activity of around US$2.1 trillion on an annualised basis or 3.5 per cent of global GDP - significantly explaining the IMF's pessimistic growth forecast for 2009.
This very directly affects global recovery, global growth, and jobs around the world, including here in Australia.
That's why governments in the US and Europe acting decisively to toxic assets is so critical to global economy recovery.
Since coming to office, the Australian Government has been confronted with a global economic crisis which began in US banks, spread to Europe, Japan and China and now affects economies right across the world, including Australia.
What started as a crisis brought about by unrestrained greed in under-regulated financial markets is now impacting the real economy, real jobs and families across the world, including Australia.
In responding to the global economic crisis, the Government has taken decisive policy action to cushion Australia from the full impact of the crisis. The Government has done this through a five part economic and fiscal policy framework.
One: acting to maintain the stability of domestic financial markets because private credit flows are essential for economic recovery.
Two: injecting economic stimulus through a nation building plan to support growth and jobs in the short term and in a manner which allows the Government to continue to prosecute a long-term strategy of economic reform to build long term productivity growth.
Three: providing additional support for those who lose their jobs, through no fault of their own, to maintain existing skills or to retrain with new skills in preparation for when the economy recovers.
Four: implementing a medium term economic and fiscal policy strategy which maintains borrowing and spending discipline.
Five: engaging with other governments to help shape critical global decisions and to shape those decisions on the core problems which have caused the global economic recession - namely, restoring global private credit markets to restore private credit flows to the real economy.
Australia's banks remain strong. The Chairman of the Australian Prudential Regulatory Authority advised the Government yesterday that:
“Though the environment has become more difficult, APRA remains confident that the fundamental strength of the Australian banking system will continue to assert itself...The Australian banking system remains sound and well capitalised...”
To maintain stability in the financial sector, on 12 October 2008 the Government took the unprecedented step to guarantee all Australian deposits and the term funding of Australian banks.
Before the guarantee, the confidence of Australian depositors was beginning to be undermined by developments in the global banking system. We acted to restore that confidence and for the first time in Australia's history, the Government acted to explicitly guarantee all deposits.
Furthermore, before the guarantee, Australian banks had increasing difficulty raising funds offshore.
By September last year, raisings had fallen to $1.7 billion, down from $13 billion, a month earlier in that year. In October there were no raisings at all.
The Guarantee had an immediate effect on inter-bank lending by Australia's banks.
Australian banks have now raised more than $75 billion under the guarantee the Government provided - funds critical to ensuring access to the funds needed to lend to Australian businesses and households to support growth and jobs.
The second arm of the Government's strategy has been to pursue an active policy of macro-economic stimulus to support economic growth and jobs - again until such time as the private economy recovers on the back of the recovery in turn of private credit markets.
This has meant a coordinated approach to monetary and fiscal policy.
Interest rates have been cut by 400 basis points since September to stimulate demand.
The Government has reinforced this with strong fiscal policy.
In May last year the Government used the budget to build a strong $21.7 billion surplus as a buffer for tough times.
Those tough times came sooner than many predicted.
Drawing on this surplus, the Government took initial action in October through its first stimulus package, when it became clear that the world economy was slowing rapidly. We judged that the risk of not acting quickly was greater than the risk of acting early.
The Economic Security Strategy of last October provided an immediate boost to demand while helping families, pensioners, and first home buyers.
This was evident through data showing that retail trade has subsequently risen by 3.8 per cent in December 2008 - a remarkable figure given the state of the global economy and the depths of consumer confidence globally.
The Economic Security Strategy has also helped employment. As Deutsche Bank Chief Economist Tony Meer has said, in response to the January Labour Force figures:
“Retailers [were] ... bolstered by the cash-bonus-inspired strength in sales, they have responded in January by retaining higher than usual post-Christmas staff levels”.
And the Economic Security Strategy has had a significant impact also on the housing market.
Housing Finance data from the ABS shows that in November 2008 the number of first-home buyers increased by 21.3 per cent - pushing their share of new loans to 25.4 per cent - the highest since December 2001.
Since October, the Government in December and in February this year, made further stimulus announcements totalling some $47 billion to support the economy and jobs for the year ahead and to build for our long term future.
In December we announced a $4.7 billion plan for infrastructure - roads, rail, ports and other critical infrastructure.
In February the Government announced the $42 billion Nation Building and Jobs Plan.
This plan is expected to support up to 90,000 jobs over each of the next two years. The plan is expected to boost GDP by around one half of one per cent in 2008-09 and by around three quarters of per cent to one per cent in 2009-10.
I would like to publicly acknowledge the business community for their constructive contributions to the development of elements of the package.
ACCI played an important role in promoting the temporary business investment allowance, which we announced first in December and then expanded to 30 per cent in February.
ACCI recognised early that, and I quote them, “investment allowances have been an important feature of efforts to support economic growth which in turn will assist job retention”.
Around 70 per cent of expenditure under the Nation Building and Jobs Plan is focused on initiatives to build prosperity for the future.
This includes the largest school modernisation program in Australia's history, investment in building public housing and improvements in energy efficiency across Australia. The key is this: to invest in infrastructure, build for the future, but to provide stimulus for jobs in the economy in the here and now. That is what it is all about.
Supporting those who lose their jobs: while we have taken decisive action to try to limit job losses, we have also taken action to help those who lose their jobs through no fault of their own.
In October, the Economic Security Strategy included $187 million to create 56,000 new training places for the 2008-09 Productivity Places Program.
In February, the Government added a further 10,000 training places specifically for those made redundant.
The Government has also announced $145.6 million further to provide a pathway for out of trade apprentices and trainees to stay connected to the workforce and to maintain their training. This program will benefit up to 58,000 out of trade apprentices and trainees.
More recently, the Government announced nearly $300 million in additional investment in employment services and $75 million to assist newly retrenched workers accessing training.
These targeted investments will ensure any Australian worker made redundant will now receive immediate and personalised assistance to help them back into the workforce.
Fiscal strategy: the Government's approach to fiscal stimulus and temporary borrowing has been broadly supported by industry, unions and international economic agencies and most economic commentators.
ACCI Director Greg Evans has noted: “Such is the scope of our current economic difficulties that this package ...
- referring to the Government's stimulus package -
“... is absolutely essential. The size of the package ... is appropriate [and] we recognise and accept that a temporary deficit is required to fund the program.”
The BCA has said: “The Budget will almost certainly move into deficit at some point over the coming two years. The BCA considers this appropriate for the economic times.”
The regulators have also supported the Government's policy of acting early to support economic growth and jobs, rather than waiting for the global recession to hit.
As the Governor of the Reserve Bank has said “...the longer you wait, the more ammunition you will end up having to use.”
So let us be clear. The International Monetary Fund, the Reserve Bank of Australia, the Business Council of Australia, the Australian Chamber of Commerce and Industry, the Australian Industry Group, the Council of Small Business Organisations, the Housing Industry Association, the Australian Property Council and the Australian Federation of Construction Contractors, have all supported the Government's Economic Stimulus Strategy.
The Government has also been clear cut that the actions we take today must be also part of a medium term fiscal framework. The Government's consistent policy has been to keep the budget in balance over the economic cycle. The Government's plan to return the budget to surplus is a straightforward plan. Our economy, once our economy recovers, we'll cut spending to ensure the budget gets back to surplus. But if the Government pulls out too early, you delay the recovery, lose more jobs and make it harder to get back to surplus.
Our policy is that when the Australian economy recovers to above trend, the Government will take action to return the budget to surplus.
By first, allowing the level of tax receipts to recover naturally as the economy improves, while maintaining the Government's commitment to keep taxation as a share of GDP below the 2007-08 level on average.
And second, holding real growth in spending to two per cent a year until the budget returns to surplus. Of course, the current collapse in government revenues caused by the global economic crisis, and the need temporarily to stimulate the economy, will have a temporary impact on Government borrowing.
The Government will use future surpluses to repay temporary borrowings.
The critical point is this: temporary and targeted economic stimulus, supported by temporary budget deficits and a temporary increase in Government borrowings represents the only responsible course of action to make up for the collapse in private sector activity in the Australian economy that has been caused by the global economic crisis.If the Government instead had decided to sit on its hands, the impact on the Australian economy, businesses and jobs would be much, much worse. That is a simple fact.
This is an unassailable fact which any honest person contributing to the public policy debate in Australia much accepts.
Engagement with other governments.
The fifth element of Government's economic policy framework is international - based on the Government's recognition that whatever actions Australia takes domestically to cushion us from the impact of the global economic recession are fundamentally shaped by the actions of other governments (individually and collectively) - both to stabilise their financial institutions and to stimulate global growth until private credit markets recover.
This brings us back to the core economic challenge of how major global banks and the governments responsible for regulating those banks, deal now with the core problem of toxic assets on those banks' balance sheets.
There can be no long term economic recovery until we get global private credit flowing again.
This is the core problem in the United States and in Europe where toxic assets continue to impede the restoration of private credit flows.
Because of the size of the European and US banking systems, it also matters for the rest of the world. And therefore it matters for Australia as well.
That is why the challenge of toxic assets must be addressed at the forthcoming G20 summit in London on the 2nd of April. Sick and unhealthy assets have the capacity to affect healthy assets and banks - it's like a virus which, if left untreated, can easily spread.
We now know the cause of the virus. It is now up to the G20 (and those governments within the G20 responsible for regulating impaired banks within their jurisdiction) to now treat the virus.
This is a difficult challenge.
We at present are working hard with other G20 members to find an effective global framework for dealing with this core problem.
Just as we are working with other governments on coordinated fiscal stimulus and on strengthening the regulatory framework for the financial system for the future.
The Obama Administration recently announced its Financial Stability Plan and other governments have announced their plans to restore the health of their banking systems.
It is essential that design and implementation of these plans is done not in isolation by each country, but in cooperation with each country.
Proper coordination is important for global confidence at a time when confidence in markets and the economy is so poor.
Cooperation is also important to share technical expertise on challenging questions like valuing assets and dealing with financial entities that operate in multiple jurisdictions.
Cooperation is important for emerging economies - who cannot deal with these problems on their own. Cooperation is vital because we must avoid financial nationalism - policy actions which encourage banks to reduce their overseas lending.
And cooperation is important to ensure that we do not engage in a race for finite global capital. Absent cooperation, as governments take unprecedented steps to secure their financial systems, the scope for financial protectionism is large.
Financial protectionism (intentional or otherwise) has every danger of becoming the new Smoot Hawley tariff of the 21st Century.
Smoot Hawley was introduced as a protectionist measure in the United States in the 1930s against the physical trade in goods.
Far worse, in the current century, given the dimensions of global financial interdependence, would be any new form of protectionism which goes to the very arteries of the global economy.
While Australian banks are not affected by toxic assets, several countries, including Australia, are working towards principles to guide affected governments in their response to toxic assets in their banks.
The core elements of these principles include the following:
First, all weak and all systemically significant financial institutions should be subject to stress testing. The public and governments need to know with confidence that the assets on bank balance sheets are sound.
Second, all non-viable banks must be closed. Keeping insolvent banks alive is itself systemically damaging.
Third, all toxic assets on bank balance sheets must be neutralised. This can be achieved by creating a publicly owned asset management company as the Republican Administration did in the United States in the 1980s to deal with the savings and loan crisis; or publicly-funded insurance mechanisms; or other effective mechanisms deploying public and private capital to ring-fence and then remove toxic assets.
This needs to be done quickly and comprehensively, and may require compulsion.
Fourth, the price of bad assets should be derived from a transparent and simple formula. A simple rule - transparent, easily understood, and one which can be implemented quickly.
Fifth, it is essential that the private sector and governments and international financial institutions work closely together on delivering this outcome.
Sixth, a critical element must be to recapitalise banks - so they have the capital they need to then lend and to reopen the arteries of credit.
Finally, once adequately capitalised, banks must formally agree to maintain regulated levels of lending in return for Government support through sovereign guarantees on deposits and/or interbank lending. This set of principles must apply to all globally, systemically significant banks with toxic asset problems today.
Given the differences in domestic institutional structures, it is up to individual national governments to decide on the precise model through which they would apply any agreed framework of international principles such as the one I have just outlined.
But it is essential that action is rapid, comprehensive and global.
The G20 Summit on the 2nd of April will provide an opportunity for concrete cooperation in the common interest of individual countries and the global economic good.
I repeat - dealing effectively with toxic assets and the balance sheets of globally significant banks is fundamental to the recovery of private credit markets and therefore, to medium to long term economic recovery - across the global economy and for the Australian economy.
That is why it is core business for us all.
To conclude, there is little doubt that 2009 will be a tough year for the global economy.
It will be a tough year for Australia.
The Government remains determined to take whatever other action is necessary to help steer Australia through the current crisis.
Further temporary interventions may be necessary in credit markets. Further stimulus may be necessary through investment in long-term economic infrastructure. Further measures will be necessary to support those who lose their jobs, apprenticeships and traineeships through no fault of their own, where once again Government will have a responsibility to provide appropriate support until the economy recovers.
Just as we must never lose sight of the fact that the real long term recovery path lies in coordinated international action, both at the London Summit and beyond.
The carnage in the stock market in the United States overnight is a further reminder that notwithstanding the actions we take here in Australia, in a global recession we are always subject to global events.
That is why Australia must act at home to stimulate the economy but also act abroad to contribute to the global policy response.
Now is not the time to sit back and watch this crisis unfold on CNN.
Now is the time for Australia to engage in the global response.
Australia won't solve this crisis alone - but nor can the global crisis be solved without the contribution of Australia and other nations who represent important parts of the global financial system.
Our first national priority must always be supporting Australian jobs and the Australian economy - but pursuing a global response is a critical part of that national priority.
In the year ahead, despite the challenges we face, because of the strength of our strategy and the calibre of our people, I maintain absolute confidence in our economy's capacity to come through this crisis.
Let us remind ourselves afresh of the great strengths that we possess.
The strengths of our institution. The strength of so much of our business leadership. The strength of our community, which possesses a resilience which in times past has seen us through times of great adversity. And a resilience which we will must now draw upon for the future as well.
The truth is we are all in this together: government, business, unions, the wider community.
Just as Australia is in this with the rest of the world.
But together, guided by a clear-headed strategy and enabled by the resolve of our people, we will see Australia through this crisis together - a stronger, more resilient and more productive nation than ever before.