TRANSCRIPT
of
THE HON PETER COSTELLO MP
Treasurer

Doorstop
Melbourne

Thursday, 7 November 2002
12.00 noon

SUBJECTS: US interest rates; Labour force; Australian growth forecasts;

Mid Year Review; US economy

TREASURER:

Overnight the Federal Reserve in the United States cut interest rates by 0.5

per cent which is a decision we welcome, given the fact, that the American economy

seems to be weakening again. Having gone through recession in 2001, showed signs

of recovery in 2002, the American economy has been showing signs of weakening

again in the fourth quarter of 2002. And the fact that the Federal Reserve intervened

in the way that it did indicated that policy makers do have concerns about the

American economy which is the engine for the world economy, and it confirms

our own view which for some time has been, that the international situation

has been weakening. With America sluggish, Europe very sluggish, Japan very

weak, Australia continues to outperform the developed economies of the world.

But undoubtedly, the weakening international situation will have downside effects

on the Australian economy as will drought, which is continuing to take away

from rural incomes and of course those that rely upon rural incomes in regional

centres, and generally. The good news for Australia today of course is that

unemployment has fallen again. That unemployment is now down to 6 per cent which

is the lowest it has been since the great recession of 1990, which in the face

of a difficult world economic climate, really shows that the Australian economy

is in a strong comparative position and is performing better than the other

developed economies of the world. It is doing that because we put in place measures

to strengthen the economy, with the New Tax System, with repayment of $61 billion

worth of debt, and new industrial relations. And it is important that we continue

those reforms if we are going to get further benefits for the Australian economy

and what will prove to be, in my opinion, a difficult international environment

over the next 12 months.

JOURNALIST:

Doesn’t it show that there’s a growing problem with underemployment, people

aren’t working as many hours as they would like?

TREASURER:

What these figures show is that unemployment has fallen to 6 per cent which

is the lowest it has been in Australia since the great recession of March 1990

and in the face of economies around the world which are sluggish, I think that

is something to be welcomed. Now, we won’t be immune from international developments,

they will affect us, as will drought. But we start from as strong a position

as we have been really since 1990, twelve years ago.

JOURNALIST:

But if it shows that people are going to get a job, it is more likely to be

a part-time one than a full-time one?

TREASURER:

Oh no, I think over the course of the year there have been something like 51,000

new full-time jobs, over the course of the last 12 months. There has also been

an increase in part-time employment and people are looking for part-time work.

But, whatever way you look at it, an unemployment rate of 6.0 per cent, which

is the lowest it has been since the great recession of 1990, you would have

to say is a good outcome.

JOURNALIST:

Treasurer, how likely, or how possible is it to get down to 5.5 per cent? And

in what sort of timeframe?

TREASURER:

Well, we actually were forecasting unemployment to be a little higher than

it is today at 6.0, so given the international situation and given the drought,

I am not predicting immediate or rapid declines in unemployment further. What

I do say is this, that over time, if we can get industrial relations reform

through the Senate, and if we can ride out the international downturn and if

we can continue to run strong budgetary policy over time, you would get further

falls. But I certainly haven’t forecast that during the course of this financial

year.

JOURNALIST:

(inaudible)

TREASURER:

The Government hasn’t revised its forecasts and won’t do so until the Mid Year

Review, which I propose putting out some time this month. Probably later this

month. As I have noted however, since the Budget, the two developments which

are of significance to the Australian economy has been the continuing weakening

of the international situation, particularly the United States, and drought.

And I have described both of those as downside factors. But, we haven’t changed

our growth forecasts. We won’t do that until such time as we release the Mid

Year Review.

JOURNALIST:

(inaudible)

TREASURER:

Well, as I said, I haven’t changed the Budget forecasts and I wont be doing

that until such time as we put out the Mid Year Review.

JOURNALIST:

Were you expecting the Prime Minister to jump the gun on the figures yesterday?

TREASURER:

Well, I have repeatedly said myself that the changes since the Budget are on

the downside. And I think the Prime Minister probably said that yesterday. But

there has been no change to official forecasts, not by him, and not by the Government.

JOURNALIST:

He did say the figure would be closer to 3 per cent.

TREASURER:

Well, there have been no changes to official forecasts and there wont be any

change to official forecasts until I publish the Mid Year Review.

JOURNALIST:

Have you actually set a date for the Mid Year Review?

TREASURER:

Later this month.

JOURNALIST:

Treasurer are there any immediate implications of the rate cut in the US for

Australia?

TREASURER:

Look, what the rate cut in the US means is this, that the American economy

is showing some worrying signs. There was an economy which was in recession

in 2001 and it showed recovery in 2002. And it seems in this quarter as if things

have weakened, quite significantly weakened. The fact that the Federal Reserve

has intervened now, and intervened with 50 basis points, indicates the amount

of concern that there is amongst American policy makers. We have been concerned

for some time. This confirms our own view. The fact that they have intervened

in such a dramatic way, I welcome, because I think the situation has been quite

serious in the United States. I think the policy makers recognise that and the

policy makers have to exercise the options that are available to them to deal

with it. And one of them obviously was the rate cut overnight.

JOURNALIST:

The dollar has strengthened overnight, that makes it more difficult to sell

exports overseas?

TREASURER:

Well, I think what you have seen overnight is that the US dollar has probably

weakened and the reason for that is that the US economy looks like it is weakening.

So, I don’t think people would be surprised that that happened overnight. But,

the only thing that, and I have said this over and over again, the only thing

that is more difficult for the world than a buoyant, strong US economy which

we had through the late 1990s, is a US economy in recession. That is worse.

And we have been through that in 2001 and we certainly don’t want to go through

it again in 2002. And, by taking the interest rate change that they did overnight,

I think they are dealing quite significantly and in quite a practical way, with

the options that are available to them to meet that challenge.

JOURNALIST:

But is it much of a signal? Because at 1.75 down to 1.25, it is not much of

a difference?

TREASURER:

One and a quarter, an official interest rate of one and a quarter, could well

be a negative interest rate. That is, if your inflation is greater than one

and a quarter, that could well be a negative interest rate. And we haven’t been

in that kind of territory for a very long period of time.

JOURNALIST:

Do you think the disparity between US official rates and Australian official

rates could give the Reserve Bank cause to move on rates in coming months?

TREASURER:

Look, our Bank met on Melbourne Cup day and it looked at the Australian economy

and it made its decision. Its view of the Australian economy no doubt is very

close to my own. And that is this. That the Australian economy continues to

grow stronger than any of the other developed economies of the world. We still

have job creation, whereas most of those economies are shedding jobs. We have

a situation, where despite the downturn and despite the drought, we continue

to grow, where many of those economies are sluggish to zero growth. So you have

got to take all of the factors into account – domestic, international, urban,

rural – and it made its decision. And it is one that I am very comfortable with.

I can assure you of that.

JOURNALIST:

You say it is a dramatic cut in the US. Has Greenspan hit the panic button?

TREASURER:

Look, an interest rate of one and a quarter, an official interest rate of one

and a quarter per cent is by historical standards, with few precedents. If you

have inflation, it could well be a negative interest rate. It is an indication

I think, of the concern that policy makers in the United States have about the

American economy and it is a concern that I have had for some time. It is a

concern that I have aired in international forums and I have aired here in Australia.

And I actually welcome the fact that they have made the policy response that

they have, because I think in the current climate its important that they did

make a strong policy response and I welcome the fact that they did it. Thanks.