Stock market; corporate regulation; economy; monetary policy

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Consumer Price Index; economy; interest rates; stock market volatility; superannuation; drought; Telstra; Australian Democrats; banks
July 24, 2002

Stock market; corporate regulation; economy; monetary policy


Tuesday, 23 July 2002
9.30 am


SUBJECTS: Stock market; corporate regulation; economy; monetary policy


What toll do you think all the turbulence on stock markets might take on confidence

amongst consumers and on growth in general?


I think the down-turn, particularly in the United States market, is very severe.

It’s been a very large fall over a number of days. Now, you have got to put

that in context, that is coming off rises over a number of years. But where

it would start to affect the real economy, is if Americans who have lost money

on the stock markets begin to stop spending or lose confidence, or if businesses

cease hiring, if it works its way out into the real economy, and that is the

risk. This has been quite an extended period of stock market volatility and

weakness and if that works its way into the real economy it’s going to affect

US prospects. Now, the good news is that Australia has been a stronger economy

than the United States. Our stock markets have performed better than the United

States. But we are not immune from international developments and international

developments affect our stock markets and they also have an effect on our economy.


Is this shaping, in your view, as a bigger potential shock than the Asian financial



I don’t think so. I think the shocks that the Australian economy has weathered

over the last five years have been, firstly, the Asian financial meltdown, which

was undoubtedly the worst, we came through that. Secondly, the American recession

of 2000, when we came through that, and became the strongest growing economy

in the developed world. This is a third shock and I would not put it of those

dimensions yet, but, if the volatility in American stock markets, if the loss

of capital from individual investors works out to consumer spending and business

intentions, that is, if it flows out of financial markets and back into the

real economy, that would be pretty significant.


Mr Costello, the US President and the Federal Reserve Chief have both tried

to put a ceiling under these falls and it’s really had no effect. What is needed

to restore some confidence?


Well, I think what is going to be needed in the United States, is, first of

all people have got to be reassured that companies are now reporting their profits

accurately. That the days of dressing up balance sheets are over. That all of

those companies which did dress up their balance sheets bring to account proper

profits. There has also got to be an understanding that accounting standards

will be rigorously enforced and that this will be disclosed to the market. What

you are getting now is you are getting an overhang. People think, well, some

companies have dressed up their balance sheets therefore we can’t be sure of

others. And it is the overhang in relation to companies that are being affected

by the bad conduct of some. Now, that is what the market is looking for, that

kind of reassurance. In Australia we have made great efforts over the last decade

to clean up corporate practices. We insist on continuous disclosure which the

Americans don’t do. Our accounting standards have the force of law. Now, I am

not going to say to you that there haven’t been bad incidents in Australia,

obviously there have. One of them is the subject of a Royal Commission at the

moment, HIH. But we have got that in a Royal Commission, our Corporate Regulator

has already taken enforcement proceedings, people have been already been brought

before the courts. And I think there is a very strong message out there to corporate

Australia that we don’t want anybody to dress up their balance sheet, that it

is important that the public knows the situation of these companies because

it is the public’s savings.


Should this market volatility be a factor in the Reserve Bank’s Board’s deliberations

next month?


Look, when you are making decisions about monetary policy what guides you is

the real economy. That is, the state of the real economy, the state of inflation,

what is happening in relation to the real indicators. You do not sit down there

and work off stock markets. But stock markets are relevant to this extent, to

the extent that they affect the real economy. That is the importance of the

developments that are going on now, to the extent that they affect the real

economy and they affect the real economy through peoples’ decisions based on

where they see their savings going.


Are growth projections in the May Budget now looking shakier?


Well, in the May Budget, which are the best forecasts of Australian growth,

we forecast Australian growth to continue the strongest in the developed world,

stronger than the United States. And what you have seen is considerable US weakening.

But we were always forecast to be a stronger growing economy than the United

States. And I think the episode of the last couple of weeks probably has confirmed


Thank you.