National Accounts; Interest rates

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Budget; leadership; euthanasia; Andrew Theophanous; smoking; Coalition; Telstra; ABC; tariffs; tax – Interview with Neil Mitchell, 3AW
May 24, 2002
ACCC Appointment
June 12, 2002
Budget; leadership; euthanasia; Andrew Theophanous; smoking; Coalition; Telstra; ABC; tariffs; tax – Interview with Neil Mitchell, 3AW
May 24, 2002
ACCC Appointment
June 12, 2002

National Accounts; Interest rates


Press Conference
Wednesday, 5 June 2002
12.00 pm


SUBJECTS: National Accounts; Interest rates


Today’s National Accounts showed that the Australian economy in the March quarter

of this year grew at 0.9 per cent, and on a through the year basis, 4.2 per

cent. Very solid growth, which means that Australia is growing faster than any

of the major developed countries of the world and reinforcing our economic security.

The March National Accounts also shows that inflation remains moderate.

Our growth in the March quarter was led principally by household consumption

growing at an annualised rate of about 4 per cent, supported by strong consumer

confidence, low interest rates and strengthening conditions in the labour market.

The March quarter figures also show that dwelling investment continued to add

to growth in the March quarter, although the Government has forecast that it

expects that to unwind in the current quarter and in future quarters. Although

private business investment fell slightly in the March quarter, it was up by

3.4 per cent through the year, and the Government has forecast a very large

increase in business investment in the forthcoming financial year, 2002-2003.

The good news in relation to today’s figures is that net exports contributed

to growth. We saw the strongest quarterly growth in exports since September

of 2000 and that would be consistent with a strengthening in the world economy.

During the period of the global economic slowdown and the United States recession

through 2000-2001, Australia’s exports were down, we were not getting a contribution

to growth in relation to exports and the good news from today’s figures is that

we’ve had a contribution to growth from exports and we would expect that this

will strengthen as the world economy strengthens.

The measure of inflation in the National Accounts was 0.9 per cent for the

quarter and 2.5 per cent through the year, which is very moderate indeed, and,

although wages showed an increase on a National Accounts basis of 3.7 per cent

through the year, productivity was up 4.4 per cent. And I want to make a point

about this because, if wages are increasing in line with productivity, or as

in these figures actually, below productivity, and, let’s bear in mind, productivity

bounces around, but let’s say, if productivity is growing as fast as wages,

or even nearly as fast as wages, you are getting no pressure in relation to

prices from wages. And I think it is very significant that productivity increases

are as high as they have been, the Australian economy is one of the economies

along with the United States, which have led the world in terms of improvements

in productivity in the 1990’s particularly the second part of the late 1990’s.

What today’s growth figures show is that Australia is growing faster than any

of the major industrialised countries of the world, but it is strong robust

growth. I think there’s been a tendency in some quarters to overreact both ways.

Back in 2001, many of you were predicting recessions, in 2002 many people are

talking about unsustainable growth rates. A 4.2 per cent growth rate is a very

sustainable growth rate for Australia. It is a robust growth rate, but looking

down the track in relation to business investment and exports, this is, I believe,

a very sustainable growth rate. In fact we forecast 3 ¾ per cent for this

year and 3 ¾ per cent for next year.


Mr Costello what’s your reading on the housing market? We’ve had warnings from

most of the major industry groups today, that rates rising (inaudible) of stopping

the housing market? What’s your (inaudible)?


Well, our assessment is that the housing cycle which increased dramatically

prior to 1 July 2000, and then dropped dramatically after 1 July 2000, and then

was rebuilt dramatically as a consequence of low interest rates and the First

Home Owners Scheme is now really about at its historical levels, and we’re expecting

a slowing in relation to the housing market. You can’t have the kind of growth

that you’ve had through the course of 2000, late 2001-2002 continuing. The housing

cycle has to even out. And in particular, we think that it will even out because

of capacity, that is, that supply is now tending to reach demand and also of

course the Government is unwinding it’s additional First Home Owners Scheme,

the additional 7 per cent which has dropped first to 3 per cent and will drop

to, will drop away on 1 July. Now, once housing has had its rebuilding phase,

you want to get the housing cycle onto a sustainable basis.


But why, why are the housing (inaudible) wrong in talking about (inaudible)?


I don’t know that there will be, there will be a drop off in activity, we have

said that. We don’t expect new dwelling investment to be a contributor to economic

growth in the current or in future quarters. Why? Because there has been such

an incredible increase, and supply is tending to meet demand. You can’t continue

to build houses without people to buy them.

And we have now rebuilt the housing cycle back to, really, where it was prior

to 1 July, possibly even a bit higher than it was prior to 1 July.




Mr Bongiorno, Sir.


Thank you very much Treasurer. There seems to be some concern in business circles,

for example, the Master Builders are suggesting that following the Reserve Bank’s

comments on Friday that this cycle of interest rate rises could go to 1½

per cent, that that could in fact stall the investment that has been forecast



I don’t think it will stall business investment. As I have said consistently,

housing investment grew very strongly through the latter part of 2001-2002.

It is now back at historical levels. That won’t continue, and as I have said,

I wouldn’t even expect it to be contributing to growth in this quarter and future

growth quarters. But capital, capital investment expectations are very strong,

and you saw that in relation to the most recent CAPEX figures. Let me remind

you, and you’ve probably heard me on this theme before, there are a very large

number of major capital investment programs going on in Australia at the moment.

The North West Shelf expansion, the fourth train, the Alice Springs to Darwin

rail line, the North West Shelf second trunkline and pipeline, the Queen Victoria

site in Melbourne. Likely commencements, Comalco Aluminium Refinery at Gladstone,

the magnesium project outside Rockhampton, the Lane Cove tunnel, the Duke Energy

gas pipeline across Bass Strait, the Western Sydney Orbital. There are numbers

of very large projects, which have either commenced or are scheduled to commence

in 2002. Now you add to that strong corporate profitability, and that’s another

point I’d like to bring out in relation to the National Accounts, profit share

is now at 23.8 per cent of GDP which is historically very high. You’ve got in

relation to mixed income, which is your small business proprietors and your

farmers, increased 11.7 per cent over the year, which is the highest annual

increase since 1989. So you’ve got a strong profit share, even at the smaller

business end, a strong growth in income, historically low interest rates and

strong business investment intentions, and I think that’s what you’ll see through


Mr Atkins, sir.


Treasurer, you say that the growth in the economy is sustainable, but doesn’t

the rhetoric and the actions of the Reserve Bank suggest otherwise?


Well can I come to today’s announcement by the Reserve Bank which was an increase

in the official cash rate of 25 basis points to 4¾ per cent. In the course

of this year, the official interest rates have risen by 50 basis points, which

reverses the cut of 50 basis points after the 11th of September,

the World Trade terrorist attack. Essentially what we’ve seen this year is the

unwinding of the response to the World Trade Centre terrorist attack. In the

wake of that, not just in Australia, but around the world, interest rates were

cut 50 basis points, and that was after the 11th of September.

That’s now been reversed. So at 4, 4¾ per cent or at a standard mortgage

variable interest rate of 6.5 per cent, these are still the lowest mortgage

interest rates in 30 years. If you leave aside the response to the 11th

of September, these are still the lowest mortgage interest rates in 30 years.

So I don’t think you could say in relation to that, that there’s any great concern

about overheating. What you’ve done is you’ve reversed the response to what

we hope will be a one-off event. I hope there’s never another terrorist attack

like the 11th of September, but in the wake of that, I think it was

prudent to reduce rates, and that’s now been reversed.


But the Bank’s saying there is more to come, isn’t it?


Well, you know, you can read into the Bank what you want. You know…


It’s not reading…it’s a statement isn’t it?




He’s not reading anything into it, it’s a direct statement.


No, I don’t think it was. You can read in what you want. I mean I don’t have

the liberty of textual exegesis on Reserve Bank statements to the extent that

you Talmudic scholars do. But, can I make this point, that the Reserve Bank,

I think, prudently in the wake of the 11th of September cut rates.

It believes that the world economy is strengthening and so do I, and it’s unwound

that. Now, as for what will happen in the future, that’s a matter for textual

analysis. But the point I’m making today, in relation to the National Accounts,

is this – an economy which is growing faster than any of the major developed

economies of the world, at four point two per cent, strong, robust growth, but

not growth which is careering out of control, 0.9 per cent, probably a little

less than many people were expecting. With low inflation, and the opportunity

I think to have employment growth, which can see us reduce unemployment further.

Now I’m not, you’re going to have a labour force figure tomorrow, these labour

force figures bounce around. And I’m not saying that tomorrow, but I am saying

over the course of the months, I think we can bring unemployment down in Australia

and get it down to levels that we haven’t been in for quite some time.

Mr Walker, sir.


Treasurer, on the value of the dollar, are you concerned that these continued

rate rises are helping to pump up the value of the dollar vis a vis the US dollar,

thereby lessening Australia’s competitiveness, as you’ve pointed out to us,

net exports in the March quarter were positive, or more positive than they had

been for several years?


Tony, there was a period of what we interpreted as $A exchange rate weakness

through 2001 and 2002. And I kept making the point then that I don’t think the

story of 2001-2002 was so much an $A story as a $US story, ie the US dollar

was rising. And I can remember sitting down in Ottawa late last year with the

Governor of the Bank of England and the Chairman of Fed and we were discussing

the fact that the $US was rising against every currency in the world. Why? Because

of massive capital inflow. And I remember the observation being made there that

this massive capital inflow couldn’t last forever, and when the massive capital

inflow stopped, then the rise of the US dollar would be followed by the fall

of the US dollar. And I think what we’ve been seeing in recent weeks is more

a story about the fall of the US dollar, than a movement in relation to the

A dollar. The A dollar fell comparatively as the US dollar rose above what would

be considered historical value and the A dollar has been rising as the US dollar

has been coming back to historical value, and I think that’s the main thing

that’s being going on in currency markets.


The consequence will be, of course, less competitive exports?


The consequence of that will be, and what was the phrase I used to use, super

competitive exchange rate. You will lose the value of your super competitive

exchange rate, but you may still have a competitive exchange rate. More important

for us will be the fact, I think, that the world economy growing will give our

exports more markets to find. And there’s actually some good news on the terms

of trade, the terms of trade have been moving our way, which is pretty good.

We did a big paper in the Budget on how the terms of trade had actually been

moving in our favour quite recently.


Do you see or do you hope that if the rising dollar does dampen exports a bit,

and the two rate rises dampen consumption, that that could (inaudible) slow

growth down in this quarter and then remove the RBA’s excuse for further rises?


Too many assumptions in that question for me to touch it. Sorry.


Can you shed any light on the big fall in Government investment over the March

quarter (inaudible)?


Well we had a look at that, and the only answer I can give to you is that it

seems to be a correction from the big rise in the previous quarter. If you go

to general government capital formation, in relation to defence it went up 99

per cent in the December quarter and it has come off 50 per cent in the March

quarter. The other general Government capital formation, this is table four,

which had gone up 45 per cent in September and six per cent in December, came

off 23. So, I think the best answer is that there is extraordinary volatility,

and a large part of it is a correction. I have made some inquiries and I am

told that it is across the board in relation to Commonwealth, State and local,

so no one explanation.


How much more is the average mortgage costing a month now, Treasurer? And,

you also mentioned unemployment, how low do you think that can go ?


How much more is it costing? Well, what, what, what benchmark would you like

me to take? Since when the Government was elected?


No, you mentioned fifty basis points (inaudible)?


Since the Government was elected it is now, on a $100,000 mortgage, people

are paying $330 a month less than when the Government was elected which seems

to be a fair benchmark to me…


And how much more (inaudible)?


…because when the, and I’ll come to that, because when the Government was

elected the standard mortgage variable interest rate was 10.5 per cent and it

is 6.5, I’ll work on 6.5, the saving on a $100,000, $330 a month. The answer

to your question, is, on a $100,000, twenty five basis points is about $20 a



Treasurer, how concerned are you about rising household debt, people spending

more on mortgages and credit cards, is that, is that a worry?


Look, people have obviously paid more for houses as the real estate market

has gone up, particularly in Melbourne and Sydney, over the last couple of years.

And, I guess you would expect that. If interest rates are at 30 year lows people

can afford to pay more for a house. And what you have really got to look at

with their borrowings, is, their borrowings against their assets – if the house

is worth more then the borrowing is sustainable.

But the point I would make to people, and I have made it over and over again,

is it is always wise to stay within your means, and you know, some of the house

prices are looking pretty strong at the moment. You have got to remember that,

I think there are some people that have felt I have got to get into the market

because it is going to inevitably rise, and rise, and rise, and rise, and I

am not sure that is right. I would say to people, look for a good buy and do

not feel as if you are being stampeded into the real estate market.


Do you think housing prices could fall, or would you see them plateauing? Is

that possible?


I don’t, I don’t, look, I don’t know that they ever fall but certainly the

rate of increase will not always be what it is now, that is the point.


Treasurer, on interest rates again, the Governor today said that the Bank would

shift rates to a neutral stance, and on Friday he indicated that a neutral stance

was a real rate of 3 or 3 ½ per cent. Do you think that is an appropriate

approach for monetary policy in the current circumstances?


I don’t know that he did say that did he?


In the last paragraph of his statement?


Less expansion is what he said. He said this, “Against this background

the Board assessed that the case for moving to a less expansionary monetary

policy” still remains in place.


Again, in terms of his testimony on Friday…


He did on Friday, yes, that’s right.




A more, well, you know, I thoroughly agree with this proposition; that when

the World Trade Centre collapsed, when we had a terrorist attack of dimensions

that nobody had ever experienced before, with the world’s greatest economy,

largest economy, probably already in recession, it was prudent for monetary

authorities around the world to move to more expansionary policy.

In the wake of the 11th of September, the US Fed. cut rates by a

further hundred and seventy five basis points. The Bank of England cut rates

by a hundred basis points. The Reserve Bank of Australia cut rates by fifty

basis points. Now that was an expansionary monetary policy. And, you know, I

can remember standing here and we were all discussing, what will this mean for

the world economy? Will the world economy go into recession, will financial

systems collapse? We are now, what, eight months on from that, ten months on

from that, I don’t know. Our economy has come through. It looks like the US

is beginning to rebuild, and so monetary authorities, monetary policy, does

not have to be as expansionary. We have reversed that fifty basis points. And

the point I make, having reversed these fifty basis points we are at the lowest

interest rates in 30 years, that is where we are.


(inaudible) there is no need to go further?


No, I am not. I am just saying we are now back where we were prior to the 11th

of September, the terrorist attack on the World Trade Centre. You had the monetary

policy response, that has now been unwound. That is where we are and we are

now going to look forward. So, when he talks about less expansionary, what does

he mean? Less expansionary than the monetary response to the world’s greatest

terrorist attack. Now, it would be hardly surprising that if the world has survived

that terrorist attack, and we hope it has, you did not reverse it.


Treasurer (inaudible)?


One from Mr Bongiorno and one from…




…Ms Dodson.




Okay, three. Alright, come on. It’s like dealing with children at home. He

has one lolly, and…


Treasurer does that mean that you don’t accept at all that the Budget deficit

has contributed in any way to the, to place, to put pressure on interest rates?


No, because what we are forecasting for the future year in monetary policy

works in the future, the medium term, of course, is surpluses. And, so, you

know, with all due respect Paul, you know, I know you would not believe it for

a moment and you are just putting it to me because you feel obliged to because

it is a cheap line that is being run by the Labor Party. But the premise of

the question does not even stack up, it does not even stack up. You know, the

point about monetary policy is this, that monetary policy is looking at the

economy and inflation. Australia’s fiscal policy has been the strongest in the

developed world. Much stronger than the United States, much stronger than the

United Kingdom, much stronger than France and Germany. I have said before, I

thought it was appropriate in the wake of a global down-turn and the 11th

of September, that fiscal policy played its part. The fact that it did means

that our unemployment rate, what, peaked at I think 7, and is now coming down,

that our economy is growing at 4 per cent and now we are looking into the future,

4 per cent growth, we can bring unemployment down further, I believe, as long

as we keep working on structural policy, and the Government’s fiscal policy

continues the strongest in the developed world. But I want to make this point

too, Paul, because I know you will put this to the Labor Party when you next

interview them. If they are worried about fiscal policy, surely they would not

be voting down savings measures in the Budget, would they? This is the…


Treasurer, I was just going to ask you about that.


This is the, okay, this is the absolute Achilles heal. Just tell me what the

criticism is. Is the criticism that we have not tightened fiscal policy enough,

in which case you will be voting for all my savings measures, and demanding

more. Or, is the criticism that this Government is too tight, in which case

you will be voting against our measures. Just tell me what it is, but straddling

the barbed wire fence, it is painful to watch them. Painful even for me to see

these people, you know, with legs so spread apart on thorny barbed wire, just

tell me which side you want to jump.



Treasurer, was any progree made in your negotiations with the Democrats yesterday

over the Budget measures?


Well, I had a very worthwhile discussion with Senator Natasha Stott-Despoja.

It lasted about an hour. I tried to explain to her the Government’s thinking

and whether or not she found it persuasive, we are, we are yet to find out.

I don’t, I, you know, she walked out of my office, she didn’t appear to be looking

at any Damascan light.


Any more plans, any more meetings?


I’d love to, yes, love to. The more the merrier.


Treasurer, you mentioned Ottawa before…


I have mentioned what?


Ottawa, Ottawa, sorry, it hasn’t escaped attention this week, I think, that

you, with Mr Paul Martin’s having fallen by the wayside, you’re the longest

serving Finance Minister in the G 20, do you have a comment on that and are

there any possible parallels in circumstances that took place in Canada and

an evolving political situation here?


Well, look, Paul Martin became Finance Minister before I became the Australian

Treasurer. We were good friends, we saw each other at the International Finance

Meetings, and I thought he did a very fine job as Canadian Finance Minister.

I do not want to get involved in domestic Canadian politics. I don’t know the

circumstances that have led to that outcome, but, you know, I will miss his

company. And I am sure the new Finance Minister will be good company too, but

I, and I look forward to meeting him. I will probably meet him at the next IMF

meeting. But I am not going to comment on my own, my own longevity because I

did that recently in Adelaide and I produced an absolute scoop for the Adelaide

Advertiser, so they thought, so they thought.

Thank you very much for your time.