Tuesday, June 25, 2013

Recession. Gillard talks as if such talk is treason

She's wrong. We need it

The prime minister thinks reporting of the economy has been unreasonable.

She has told the Committee for the Economic Development of Australia the economy is “growing, stable and strong”, an assurance that will be welcomed a Reserve Bank so worried about the transitions underway it has cut its cash rate seven times in the past eighteen months.

Its cash rate is now lower than it was during the global financial crisis, and the Bank is holding open the possibility of cutting it again.

Julia Gillard herself acknowledged in her speech “some complex transitions underway”.

Something will have to replace mining investment as an economic driver as the boom winds back. Ms Gillard pointed to housing investment and bigger export volumes. Who knows, they might rise to the challenge and take up the slack. But it does not mean things are stable.

She said she wouldn’t mention the ‘r’ word, and got stuck into those who had.

As she put it: “Low expectations can themselves become an economic problem.”

But there is a place for pessimistic economic forecasters, including those being produced by her government’s former advisor Professor Ross Garnaut.

Without them we might fail to foresee the next economic crisis, just as we (mostly) failed to see the global financial crisis. Without them we might keep the budget too tight and interest rates too high...

The prime minister has called “a well founded positive sentiment based on facts”. The Reserve Bank bases its assessments on facts. That assessment is not yet positive, even if the prime minister’s is.

In Monday's National Times

Four years ago the Rudd-Gillard government prepared us for the worst.

It forecast a 100 per cent chance of a recession.

Wayne Swan’s 2009 budget overview intoned: “A recession in Australia has become inevitable, with unavoidable consequences for Australian jobs.”

As it turned out, Australia avoided a recession, in part because of that budget. The warning helped. It built support for the programs needed to keep Australia afloat.

Four years on there’s talk of a recession again. This time its a 25 per cent chance.

But the prime minister speaks as if it’s treason.

“Confidence matters,” she told the Committee for the Economic Development of Australia Monday. “The biggest mistake we could make would be to talk ourselves into unnecessary economic weakness.”

Amid (presumably humorous) talk of taking journalists to the Australian Communications and Media Authority she said tossing around the “R” word (she wouldn’t use it) threatened jobs and growth.

There’s another way of looking at it. It is that open discussion of early warnings can bring about the changes needed to sustain growth, as happened in 2009. It is to be hoped that whoever is power after the next election encourages rather than shuts down such discussion.

Late Monday the shadow treasurer Joe Hockey promised he would. He told the same conference it would be “the height of hubris” to dismiss out of hand dire warnings from respected observers.

One of them is the former Labor advisor Professor Ross Garnaut.

Hockey promised to “listen and prepare”.

If lower interest rates, the lower dollar and the automatic blowing out of the budget weren't enough to stave off recession he would be prepared to do more, like Labor did in 2009 - although he said he would avoid pink batts.

In today's Canberra Times, Sydney Morning Herald 

24 June 2013

Welcome to Parliament House.

Thank you for coming here to build on CEDA’s stewardship of detailed and serious discussion about the state of the Australian economy and its future.

Your presence here this week is not only very important, it is very timely, so I’m particularly pleased to join you first up today.

Three weeks ago the National Accounts for the March quarter of this year were released.

They were solid – they showed our economy is growing and stable and strong – they were good news.

The National Accounts reflected the economy’s underlying stability and strength and our status as a leading nation – yes, in a mixed world environment and yes, with some complex transitions underway.

Solid growth at 2.5 per cent for the year.

Household savings at over 10 per cent.

New business investment still around fifty-year highs as a share of GDP, at 17.5 per cent.

Productivity growth now above trend at 2 per cent.

Net exports making their strongest contribution to growth in four years.

If I can speak candidly, the subsequent discussion has been marked by some strikingly misguided commentary.

I’m not talking here about criticism of the Government’s economic policies – not at all – I’m referring to glaring misstatements about the economy itself.

If “irrational exuberance” has an opposite it’s probably “unreasonable pessimism” and we’ve witnessed that in some quarters these past three weeks.

I want to address that in some detail this morning but first I want to be clear on why I think it’s worth doing.

Simply put, your presence here in Parliament House this week presents you with a special opportunity to bring to the national economic debate the “correction we have to have”.

You can bring to the national public discussion an understanding of the facts, an interrogation of the policy demands that the facts impose on us, an understanding that the benefits of long-term reform are felt precisely over that long-term, and crucially you can present a well-founded confidence in the Australian economy.

I know you will have rigorous and vigorous policy debate and I absolutely welcome critical discussion of the Government’s policy approach.

But I know you want to hear opinion based on facts.

So that’s what I’m asking you to do while you are here – get all the facts on the table, discuss the real policy challenges, and then challenge the negative economic sentiment that is around in some quarters.

Where have the pessimists gone wrong?

First, some reporting has neglected important specific facts about the quarterly figures.

Two particular features would have given Australians some interesting insights on where the economy is headed.

New dwelling investment over the year rose by 10.2 per cent – the strongest annual growth in ten years, further evidence that the non-resource sectors of the economy picking up.

Non-rural commodity export volumes were up 13.2 per cent over the year.

This ramp up largely drove the rise in export volumes – and it is a sign that the production phase of the mining boom we have spoken about for some time is now starting to come through.

These are important signs that the transitions we planned for in the Budget are now underway – yet they went barely remarked.

Second, the most irresponsible pessimists have tossed around the “r” word.

Something not so much sinister as silly, a claim I’m frankly somewhat reluctant to repeat, even in order to contradict it, lest I give it weight.

But consider this.

For the third time in just five years, one leading firm of economists predicted a 20 per cent chance that the Australian economy will actually shrink for two quarters in a row.

Another then quoted a 25 per cent chance that growth would halt completely.

Now as Jessica Irvine has pointed out in a column for News Ltd publications, even these sensationally pessimistic statements were still forecasting the most likely outcome is growth.

Or to put it another way, even these outlying forecasts are themselves statements that the glass is actually three quarters or four fifths full.

Yet the effect on confidence can only be negative and on all the facts, is clearly not justified.

One national daily reported on its front page that our economy had shrunk if you excluded net exports.

You might as well say Shakespeare hardly earned a penny in his life, except from the theatre.

And the assault on confidence in Western Australia was particularly sharp.

This arose from the national accounts reporting that final state demand their fell by 3.9 per cent in the March quarter.

Bear in mind, state demand excludes not only net exports but interstate trade.

You might as well say the economy is shrinking in your house when you exclude the money you earn at your office.

The Secretary of Treasury, Dr Parkinson, and his deputy Dr Gruen responded to this unambiguously in Senate hearings ten days ago. As Dr Gruen put it:

The idea that in the face of the largest investment boom we have ever seen, you ignore exports and focus on the piece of the economy that is demand by Western Australia ... belongs in the comic books.

As Prime Minister, I am concerned that left unchecked, this kind of distorted coverage could continue to spread.

Australians woke last Wednesday morning to widespread news reports that markets expected the labour force figures for that day to show 10,000 jobs lost in May.

By lunchtime the ABS figures showed a small increase in jobs.

I don’t know if the Australian Communications and Media Authority would welcome a request for 11,100 corrections to be put to air but if anyone here wants to make that submission feel free to cite me in support.

We all acknowledge that forecasting is difficult – at any time.

But the continued pessimism is not being matched by the continued performance of our key economic indicators and low expectations can themselves become an economic problem.

Now, as I have said, many serious commentators have taken issue with the unreasonable pessimists.

Many of you here share their frustration.

Michael Pascoe in his Fairfax column was the most scathing but also I thought the most amusing, reporting on what he called “squawking”. This led, in his words, to squawk like:

“The national accounts suggest the economy would have contracted without a 1 percentage point boost from falling imports and rising exports…”

Michael went on to say:

It would have contracted if a meteor took out Melbourne and would have expanded if kangaroos started defecating gold.

Yes he is pretty good, isn’t he!

Now you came this morning for a discussion about the economic development of Australia, not an episode of Media Watch.

So it’s important that we be very clear about why it matters to get the public discussion right.

Dr Parkinson’s summary overall, in that same Senate hearing?

Trashing confidence for whatever reason is not in the national interest.

This is the first fundamental point. Confidence matters.

Not hope or optimism, but a well-founded positive sentiment based on the facts, recognising that our economy is growing and stable and strong.

In November 2008, in the wake of the collapse of Lehman Brothers, Reserve Bank Governor Glenn Stevens, warned about the need to go about business with a “quiet confidence” in our prospects.

His words:

Given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness.

Still true.

Any irrational threat to economic confidence is a threat to jobs and growth.

The second reason to get the discussion right is that as economic decision-makers, we must be able to separate the signal from the noise.

We need to pick the real transitions as they are coming.

Growth in Asia, enduring for decades to come.

The peak of the mining investment boom.

The digital disruption and the clean energy future.

The pick-up in broader sources of growth beyond resources.

Critical for the economy right now – new sources of growth, sustaining economic diversity with a strong dollar.

Perhaps there’s no better example of the failure to separate signal from noise than the pessimists who say that the dollar rising is bad news and then say the dollar falling is bad news.

Last week a retail industry leader who’s spent years advocating for direct relief from the strong dollar and low-price imports did widespread media complaining that the falling dollar was bad for consumer confidence.

This actually happened.

I am sure the recent movements in the dollar will not go unremarked here, so I will say just a few things on that front.

The Australian dollar has been at historically high level for some time now and as you all know this has moderated in recent weeks.

Our high dollar reflects our strong fundamentals – solid growth, low unemployment, low debt, AAA credit ratings – but also the challenges that many other developed economies have faced in the aftermath of the GFC, the worst economic conditions in over 80 years.

More simply, the high value of the Australian dollar has been a combination of our strength and global weakness.

Our strength remains, and the good news is that the signs from America are becoming more positive for their growth.

Improvements in the US economy should be welcome – these support the global recovery and growth in the world’s largest economy provides significant opportunities for Australian exporters.

While the high dollar has provided benefits for consumers, it has meant significant challenges for some of our exporters.

As the Treasurer has said, a sustained depreciation of the Australian dollar in those circumstances would be a very good thing, to stimulate further growth in the non-mining sector – while the firms that have adjusted to the historically high dollar stand to benefit from its fall.

As a Government we recognise we need to be ready to seize the opportunities that the future will bring.

We need to make the right investments and deliver the right reforms.

Your theme this week, of “Australia adjusting”, neatly captures the elements of agency and change that are in play.

Your agenda demonstrates that CEDA, at least, is able to identify the real economic signals and to work up the agenda points for a serious discussion about what is to be done.

Productivity and structural reform: where Labor’s “five pillars” of skills and education, infrastructure, innovation, tax and regulatory reform are so vital – and form a discussion which connects to so many other key areas.

Education: as you put it, ensuring Australia’s future prosperity – nothing matters more and this week is vital for this reform.

Energy policy: a historic challenge to decouple economic growth from emissions growth.

International competitiveness: where the dollar’s recent easing hasn’t eased the demand that we plan for jobs and growth and do so through sustained economic diversity.

Innovation: where the jobs of the future depend so heavily on the ideas and the infrastructure of the future.

Health reform and funding models: the structural reforms already made to Commonwealth-State relations and the structural savings we’ve delivered in Commonwealth spending have begun a process which must continue to sustain public finances.

The big one, the Asian Century, a century of growth and change, of Asian middle-class demand for high value Australian services and goods.

Education and tourism, agriculture and advanced manufacturing, financial services, health services, digital media.

These are the real issues, the big picture, the things that matter. You are absolutely right to be discussing them here this week.

2013 is a big year for Australia.

Economic choices and political choices are before us all.

Choices with consequences, choices with purpose, choices which should be informed, informed by the facts.

The facts are these.

Labor – returning the Budget to balance faster than most of the developed world.

Our net debt – one-third Canada’s, one-fifth Germany’s and one-eighth the size of the United States.

Equivalent to a person with a $100 000 income each year having a $12 000 mortgage.

Our nation’s best ever credit rating. Interest rates are low. Inflation is contained.

The average tax to GDP ratio under Labor, well below the previous Coalition Government.

Since Labor came to power, the Australian economy has grown by 14 per cent.

And the bottom line of all bottom lines: under Labor, our nation has created more than 950,000 jobs.

You have a big program before you and I’m looking forward to our conversation because there is so much to discuss.

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