TOPIC: NATIONAL ACCOUNTS
E&OE - PROOF ONLY
TSO: Minister, great to have you on board with us today and always lovely to speak with you.
WONG: Good to be with you.
TSO: The data that came out of the country day today certainly shows some momentum in the Australian economy at the start of the year, but we know all the negative headlines around Europe really came during the month of April and May, particularly, about talk of a Greek exit and the Spanish banking crisis. How confident are you that these numbers will be sustained?
WONG: This is an extraordinary result as you know. 1.3 per cent for the quarter and 4.3 per cent through the year, which is really substantially higher than market expectations. So, obviously, Australians feel pretty proud of the result that has been achieved. And bear in mind those through-the-year numbers include a period of uncertainty and instability in the global economy, and particularly Europe, towards the end of last year. There’s no doubt we see a lot of uncertainty in Europe. There’s no doubt that that is weighing on confidence globally. But what I would say is that Australia can face that uncertainty, I think, with a great deal of confidence, given these results and given our economic fundamentals.
TSO: And Minister, we saw a 25 basis point rate cut by the Reserve Bank of Australia this week, so I want to pick up on one component in the numbers today which were particularly surprising, and this was household consumption adding point nine per cent to GDP growth in the quarter. Do you think that the lower interest rate that’s now starting to help out – because we must remember we had two rate cuts leading up to this quarterly number – do you think that’s starting to provide a bit of a push for households in Australia?
WONG: Certainly one of the reasons the Government has been so focussed on the fiscal strategy and bringing the budget back to surplus and increasing the surplus over the forward estimate, over the budget period, has been to ensure that we do give monetary policy room to move. As you know, the Reserve Bank sets interest rates, does so independently, but we want to make sure fiscal policy settings give them room to move and we saw rate cuts prior to the Budget, and we’ve seen a rate cut since the Budget. The household figures you mention are very, very good and surprisingly what we see is not only consumption increasing and back to actually a bit above the long-run average, but we also see the household savings rate increasing so that’s a pretty good story for Australia, when you’ve got both healthy consumption but also a healthy savings rate.
TSO: Minister, I want to pick up on a point you mention there about having room to move on fiscal policy because this is one of the concerns that the market has: your determination to get back to a budget surplus. Many fear that this could be just too contractionary now for the Australian economy as we still face all these headwinds from the likes of China and Europe. Our estimates are that you’ll have to cut spending by about 2.5 per cent of GDP to try and get to that target. Should you still be sticking to this surplus target when there are so many headwinds facing Australia?
WONG: We’ve just seen a quarterly result of 1.3 per cent, so I think that might be a slightly pessimistic assessment of where we’re at. What I would say is one of the things we are seeking to achieve – and I think the fact that the Reserve Bank has moved demonstrates that this is the right strategy – is a better balance between the role of fiscal policy in more normal circumstances and the role of monetary policy. And that fiscal policy should look to the medium term rather than do the shorter term fine tuning of demand which really is an issue for monetary policy. Obviously fiscal policy in the global financial crisis in Australia, as in every other advanced economy, had to really be very expansionary given what was occurring. But we’re not in that world now and really what this Budget is is not just a focus on a surplus year, it’s a focus on a better balance between the two arms of macroeconomic policy.
SHOBER: Ms Wong, you’ve pointed out the strength of consumer spending in Australia. I’m just wondering though, just how sustainable is that strength because it is certainly also a function of housing prices or home prices. How much downside do you see there?
WONG: We have had a much more conservative profile in terms of the trend in housing prices. Obviously the GFC hit that sector in terms of people’s confidence and we have seen some levelling off in terms of the housing sector. But as I said, we’re seeing household consumption returning to more normal levels. We’re also seeing high savings and I think we’ve got a pretty good set of numbers at the moment in Australia. Obviously, we understand the uncertainties in the global economy, but there’s a lot to be confident about given the fundamentals we’ve got – low unemployment, we’ve got contained inflation, we’ve got interest rates coming down, we’ve got a fiscal strategy which brings the budget back to surplus and we’ve got good growth so, as a Minister for Finance it’s obviously pretty pleasing.
MAISONNEUVE: Minister, I’d like to zoom in just for a second on China and seeing, given the proximity of Australia and China in terms of trade and economic growth, would you mind commenting on recent trends in terms of trade between Australia and China.
WONG: As you correctly point out, our economy is very closely linked with what’s occurring in our region, particularly China and in that’s in fact one of the strengths of where Australia’s positioned because that region of the world is the region which is very responsible for global growth. In terms of our Budget, perhaps this is the way to understand it, we have factored in a reduction in the terms of trade, so we don’t anticipate prices to remain at the levels they previously have been. So, we’ve assumed that. We’ve also assumed the sort of growth figures in China that the Chinese authorities have postulated, so I think that’s obviously a slightly moderated view for 2012-13 and 2013-14 than we saw earlier. We think our assumptions are reasonably around the mark. I should actually add here as well, in relation to Europe, our Budget assumes a more conservative position in relation to Europe than the IMF and the OECD, so we’ve factored in in terms of our Budget I think three quarters of a percent of contraction.
TSO: Minister, I’m wondering if you’re doing any planning for the likelihood or the possibility, rather, of a Greek exit, because it was only in mid-May that the boss of ANZ in Australia warned about a funding freeze again for many of the Australian banks. They haven’t passed on all of the interest rate cuts that we saw and some have been margin skimming. Is there planning that the Australian Government could do?
WONG: We think our banks are in a pretty reasonable condition, actually, in a very strong condition. Our financial system came through the global financial crisis very well. Since that time, we’ve seen funding profiles lengthened, we’ve seen improved liquidity and we are of the view that our financial system is very strong. In terms of the Greek economy, well there’s always a lot postulated about that. The best thing we can do as a national Government is to continue to make sure we keep the economy strong – do the right thing in terms of fiscal policy, continue to invest in the drivers of productivity and continue to make sure that we have the workforce that’s flexible enough and capable in terms of its skills of making sure that there’s the capacity in the economy to service the trading relationship that we anticipate in decades to come.
TSO: Really appreciate you stopping by our Sydney studios today. Finance Minister of Australia, Senator Penny Wong.