Today's economic note comes to you from New York, where I'm just about to board a plane for the long trip back to Australia. In addition to meeting with my fellow G20 Finance Ministers in Pittsburgh, I also met directly with the policy makers who've been in the front lines during the global recession: my direct US counterpart, Treasury Secretary Timothy Geithner, US Federal Reserve Chairman Ben Bernanke, and IMF Managing Director Dominique Strauss-Kahn. What I've been picking up from these meetings is certainly more optimism than in the past, but overwhelmingly a great sense of caution and the strong sentiment that now is no time for complacency.
In their Leaders' Statement at the conclusion of the Pittsburgh Summit, G20 Leaders agreed "to make sure our regulatory system for banks and other financial firms reins in the excesses that led to the crisis." They stated that there can be no return to 'banking as usual' in the wake of the reckless behaviour and lack of responsibility that led to the crisis. Leaders committed to work together to ensure that financial institutions have stricter rules for risk-taking, have governance that aligns pay packets with long-term performance, and have greater transparency in their operations.
G20 Leaders also agreed "to launch a framework that lays out the policies and the way we act together to generate strong, sustainable and balanced global growth." Leaders acknowledged the need to shift from public to private sources of demand, to establish a pattern of growth across countries that is more sustainable and balanced, and to reduce development imbalances. The new 'Framework for Strong, Sustainable and Balanced Growth' will be underpinned by the core values of propriety, integrity and transparency. US President Barack Obama commented that "we cannot tolerate the same old boom and bust economy of the past. We can't grow complacent. We can't wait for a crisis to cooperate. That's why our new framework will allow each of us to assess the others' policies, to build consensus on reform, and to ensure that global demand supports growth for all."
G20 Leaders also recognised the continuing importance of economic stimulus. They committed to "avoid any premature withdrawal of stimulus", noting that "in the short-run, we must continue to implement our stimulus programs to support economic activity until recovery clearly has taken hold." Leaders also referred to the need "to develop a transparent and credible process for withdrawing our extraordinary fiscal, monetary and financial sector support, to be implemented when recovery becomes fully secured." They noted that "credible exit strategies should be designed and communicated clearly to anchor expectations and reinforce confidence." Here in Australia, the Government has clearly indicated that our economic stimulus package had its maximum impact on growth in the June quarter, and has been carefully designed to start phasing out from the December quarter – which starts in less than a week.
Finally, G20 Leaders committed "to reform the global architecture to meet the needs of the 21st century." They stated that "critical players need to be at the table", and designated the G20 as the premier forum for international economic cooperation. Prime Minister Kevin Rudd described this as "an historic day for Australia, because for the first time ever Australia has secured a permanent place at the top table of global economic decision making."
The Reserve Bank last week released its Financial Stability Review – a half-yearly report on the state of the financial system. The RBA noted that the Australian financial system has displayed impressive resilience throughout the crisis, with the Government's bank guarantee playing "an important part in ensuring that Australian banks and other ADIs maintained access to funding during the most intense phase of the crisis, and that the system was therefore able to continue lending." Looking ahead, the report warned that conditions in global financial markets would remain challenging for some time, and underlined the importance of work on financial regulations being done by international forums such as the G20.
This week's Fact of the Week comes from the Australian Bureau of Agricultural and Resource Economics' (ABARE) Australian Commodities report. It forecasts that earnings from Australia's commodity exports will fall by 19.6 per cent in 2009-10. This expected fall largely reflects a forecast decline in earnings from mineral resources. Earnings from energy exports are expected to fall by 36.2 per cent in 2009-10, driven by lower coal prices, while earnings from metals and other minerals exports are forecast to fall by 11.6 per cent, driven by lower iron ore prices. This forecast fall in export earnings translates into a big hit to national income, and is a further illustration of how the effects of the global recession continue to wash through our economy.
Last week's Financial Accounts showed household financial wealth increased by 9.2 per cent in the June quarter, thanks to strong gains in the Australian share market. However, even with this positive result, the value of equity assets held by households still remains 42 per cent lower than its peak in September 2007.
In the coming week, we will receive retail trade and building approvals data for August, the RBA's commodity price index for September, and the US' latest unemployment numbers.Just a year ago, policy makers and financial markets were in a state of deepest shock. Now, the financial markets appear to be stabilising, but the economic danger certainly has not. In particular there is still a massive global employment challenge ahead of us and Australia is not immune from that. To the extent there are signs of recovery, the profile of that recovery is not clear and there remain real risks that recovery could stall. While those risks remain, and memories of turmoil are so fresh, it would be foolish and irresponsible to drop our guard. So we are determined to keep in place the policies that have protected Australia so well from the worst impacts of the crisis. And we must stick to the plan that is working so well – including the built-in wind-down of stimulus and the medium-term path back to surplus.
Treasurer of Australia
Sunday 27 September 2009