APEC, US economy, Asian economy, Australian economy, Housing, Retail trade, Chinese currency – Press Conference – Phuket

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National Accounts: June Quarter 2003
September 2, 2003
Health Services Advisory Committee
September 5, 2003
National Accounts: June Quarter 2003
September 2, 2003
Health Services Advisory Committee
September 5, 2003

APEC, US economy, Asian economy, Australian economy, Housing, Retail trade, Chinese currency – Press Conference – Phuket


Press Conference

Thursday, 4 September 2003

Phuket – 6.25 pm (local time)

SUBJECTS: APEC, US economy, Asian economy, Australian economy, Housing,

Retail trade, Chinese currency


In addition to general economic developments, there has been quite a

deal of discussion about regional financing mechanisms, the possibility

of deepening regional bond markets and harmonizing regulatory systems

in relation to that. These measures, of course, which we think would

give added stability to economies in the region and it is important that

we continue to work on corporate governance and regulatory improvement.

Finance Ministers have issued a strong call for progress on trade liberalisation

at the World Trade Organization meeting in Cancun. APEC has set itself

an ambitious target of free trade in the Asia Pacific region, we think

that it is important that APEC needs to rededicate itself to that task

and be a force for trade liberalisation, not just in the region, but

globally through the World Trade Organization and we look forward to

a positive step forward at the Cancun meeting next week.


Treasurer, isn’t the US economy (inaudible) some of the (inaudible) economists

that tend to think that recovery, or the economy is still not out of

the woods yet. Do you think that (inaudible)?


Some of the forward indicators are more positive and you have got to

remember that the US went into recession late in 2000, early 2001, so

it has been growing, albeit very slowly now, over the last year or two.

Monetary policy is very stimulatory, there is a lot of fiscal stimulation

going on, a very large budget deficit in the United States, additional

tax cuts coming on stream, and whilst I wouldn’t signal unequivocally

that the kind of growth we got used to in the late nineties is about

to return, I think there are grounds for cautious optimism in the US

economy and all of those factors are coming together, presenting a somewhat

brighter view of the future than we have been used to for the last two

or three years.


Does it worry you at all that the levers of economic policy in the US

may be exhausted (inaudible)? Interest rates are very low, fiscal policy

is quite stimulatory, if the steps taken so far do not engineer increased

jobs growth in the US, what does that mean in Asia?


Policy in the United States is very stimulatory both in the fiscal sense

and in the monetary sense and I think it is beginning to show results.

As I said, after the recession of 2000 it has been a period of slow growth.

The US consumer has been keeping growth going but it does appear from

some of the leading indicators as if there are signs of business reinvestment

and while I wouldn’t say we were about to return to the halcyon days

of the late 1990’s, I think cautious optimism that things are going to

be better in the second half of 2003 than they were in the first half

of 2003 and I think things will be better again in 2004 – that’s good

for this region – it is good for this region where so many manufactured

products coming out of Asia find their way into final consumer products

in the United States – it is good for the region that the United States

is starting to recover.


On the Australian economy, with 0.1% growth in the second quarter, was

that more or less like a pothole, as some economists have called it,

are we going to see an improvement in the third quarter and going forward?


The domestic Australian economy continues to grow very strongly, consumers

are very confident, retail trade is very strong. The expenditure measure

of GDP grew by about 1.5 per cent for the quarter and that was nearly

totally wiped out by the export position. What was the export position?

We had a combination of factors just coming together in that quarter.

A tsunami. A quarterly tsunami of SARS which took tourist arrivals down

by 17 per cent; the drought, which reduced agricultural production by

nearly 30 per cent and you had weakness in the global economy. Now, those

factors are all turning. SARS seems to have come to an end, the drought

appears to be turning and I’ve expressed cautious optimism about the

global situation. So, while I wouldn’t say there are no challenges in

the current quarter, the drought is not fully broken, I think in the

latter part of 2003 and going into 2004 things will strengthen.


Treasurer, can I ask you about imbalances from a different perspective, there

has been lots of concern about mortgage refinancing in the United States (inaudible).

The United Kingdom and Australia face similar circumstances with very strong

housing markets. Monetary policy is obviously a very blunt tool with which to

deflate any asset bubble that might be forming in the property market. Is there

a case for policy makers to use more targeted measures, do you think, to take

the wind out of property markets (inaudible)?


Well property markets have been growing strongly in a number of countries,

but let me talk about Australia. I think it has actually been a source

of strength for our economy in this sense, that you have had weak global

growth. We have had some domestic factors that have hit our exports as

I have mentioned. The fact that people were confident about rising house

prices and the fact that maybe they were able to draw down some equity

kept consumption strong and it kept it strong at a time when you would

have wanted to keep consumption strong to balance out external factors.

Having said that, I always make this point – there is no such thing as

a one way bet on a property market. You saw a major correction in equity

markets going on over the last two or three years around the world. People

must bear in mind that there is no market that keeps inflating in value

indefinitely. And bear that in mind when you are investing in property.

There will be corrections in the property market. I always say build

in a cushion. You’ve seen correction in equity markets factored in, you

are thinking correction in the property markets. That’s my message.


With a 0.8% rise in retail sales (inaudible) does that justify the Reserve

Bank’s position (inaudible)?


Well retail trade is very strong in Australia, continuing strong. You

apparently can’t dent the confidence of the Aussie consumer. They’ve

come through a war in Iraq, the worst drought in one hundred years, SARS

and their confidence is still very strong.

Now why is that? Interest rates are low and employment is strong – people

are in work, interest rates are low, they’re feeling confident to draw

down equity on a rising property market. Is that a bad thing? It’s not

a bad thing at a time when you have got external weakness. As the world

turns in our favour and we get a bit of help from abroad we could afford

to cope with some slowing in consumer demand – but the world is not in

our favour at the moment and so this has actually been a strength for

our economy.


I was wondering if you could comment on the debates or discussion or

wording in the Joint Declaration particularly with regards to the flexibility

of currency regimes and whether or not particular attention was put on

the Chinese currency?


I don’t think there has been any discussion of specific countries. There

has been a discussion about exchange rate regimes but not with reference

to any particular country. I’m not quite sure how the wording has worked

out. You will see tomorrow.


Mr. Snow said today that he was very optimistic and hopeful that there

will be a mention by APEC (inaudible) encouraging monetary and exchange

rate flexibility.


Well there was a bit of a discussion today on exchange rates and I am

not sure that it has been fully resolved. I just don’t know. There was

some further work that was being done. But, let me make this point, once

an economy has reached a certain level of sophistication, floating an

exchange rate gives it a lot of flexibility. It is one of the shock absorbers.

But we learnt in the Asian financial crisis that you can not do that

overnight; that countries have to develop financial systems before they’re

able to move to that final state of a full floating currency. We learnt

that in our own country. I think the experience of the Thais in `97 also

showed that. I think countries should work towards strengthening their

financial system and the long-term result of that will be fully floating

currencies, but it is a question of sequencing and getting it right,

and you have got to work towards getting that outcome, otherwise instead

of a flexible exchange rate giving you a shock absorption, sometimes

it can give you a shock if you are not fully ready for it.


Do you think China should take its time?


I’m not running Chinese economic policy so I’m not going to tell the

Chinese what they should or should not be doing. I make this point. As

China comes into the World Trade Organization, as it begins liberalizing,

as it begins strengthening its financial system it will be able to move

in that direction. But it is a question of timing and sequencing and

I am sure that is the issue that will be very much on their minds.

Thank you very much.