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Economic
Slowdown in US,
Japan & Europe;
High Growth in
China, India,
Russia & Brazil
New Govt's Strategy
to Face Challenges
Australia's new
Prime Minister
Kevin Michael
Rudd in an address
to Lord Mayor's
Business Breakfast
in Perth on January
21, 2008 talked
about his government's
strategy to face
economic challenges
triggered by inflation,
down slide in
global economy
and the rise of
China and India
as new global
economic powers.
He referred to
the new regime
as a Government
that anticipates
the challenges
of the future
and a government
that has a plan
to tackle these
challenges head
on. Excerpts.
Over the last
six months, the
global economy
has entered into
uncertain times.
On the domestic
front, we face
the underlying
challenge of how
long we can expect
Australia to enjoy
the best terms
of trade this
country has had
since the early
1950s.
Nonetheless, despite
more than five
years of unprecedented
global economic
growth, and a
record terms of
trade, we have
experienced three
years of net exports
detracting or
making no contribution
to our growth.
We have also faced
declining productivity
which of itself
impairs our international
competitiveness.
And for the last
couple of years,
slowly but steadily
inflation has
once again let
loose in the Australian
economy resulting
in inflation numbers
for Australia
that are significantly
above most OECD
economies.
And overarching
all these challenges
are the mega changes
represented by
the rise of China,
the rise of India
and the unfolding
economic and environmental
reality of climate
change.
Therefore the
national government
faces a very full
economic policy
agenda indeed.
Reinforcing the
need for responsible
economic management
combined with
a clear cut strategy
for investing
in Australia's
long term economic
future:
• Where
the macroeconomic
fundamentals are
strong;
• Where
we build world
class education,
innovation and
infrastructure
to drive long
term productivity
growth;
• Where
we intelligently
invest in the
industries of
the future.
And driving all
of these concerns
are the underlying
needs of Australian
working families,
both now and into
the future.
Today, I would
like to talk about
the global economic
environment, the
nature and causes
of the inflation
challenge that
we face, and to
outline the Government's
five point plan
to fight inflation.
It goes without
saying that Australia's
economic performance
is directly shaped
by the state of
the global economy.
In economic policy
there are factors
within our control.
Just as there
are factors beyond
our control factors
to which we must
remain alert and
vigilant in terms
of our own economic
policy settings.
We are experiencing
uncertain times
in the global
economy.
The US economy
is weakening as
a result of a
severe downturn
in its housing
market and associated
troubles in financial
markets. There's
no doubt that
developments in
the US housing
market pose risks
to the global
economy, as well
as our own. Already
higher financing
costs in global
financial markets
are having real
impacts on Australian
families through
increased mortgage
rates imposed
by Australia's
commercial banks.
Consensus forecasts
have stated that,
in part due to
developments in
the US economy,
economic growth
is expected to
slow in Japan
and Europe. These
developments pose
significant challenges
for the global
growth outlook
and for the Australian
economy. But they
come at a time
where strong economic
growth in the
Asia-Pacific region
is continuing
to drive global
demand for our
mineral and energy
resources.
In 2007, emerging
economies including
China, India,
Russia and Brazil,
drove two-thirds
of the growth
in the global
economy. The G3
economies of the
US, Japan and
the Euro area
contributed less
than a quarter
of global growth.
The World Bank
in its Global
Economic Prospects
publications noted
that: “Resilience
in developing
economies is cushioning
the current slowdown
in the United
States”.
China is expected
to continue to
grow at double-digit
rates over the
next two years.
And China's growth
momentum is being
increasingly sustained
by domestic forces.
Over coming years,
developments in
China will increasingly
shape both global
and Australian
economic conditions.
The Indian economy
has become one
of our fastest
growing export
markets and is
expected to continue
to post impressive
rates of economic
growth. Combined,
China and India
accounted for
around 40 per
cent of Australia's
export value growth
in 2006-07. Emerging
economies such
as Russia and
Brazil are also
expected to continue
to contribute
to global growth.
The economic expansion
within our region
has only heightened
the need for careful
management of
our domestic economy.
And the most pressing
economic challenge
domestically is
inflation. Australia
therefore faces
conflicting economic
currents:
• A global
economy (led by
the United States)
which appears
to be slowing.
• An ongoing
terms of trade
boom driven by
Asia Pacific economies.
• And significant
domestic inflationary
pressures at home.
The inflation
problem we currently
face has not emerged
overnight. The
truth is it has
been building
for some time.
It cannot be solved
overnight. But
we can start immediately.
And we have.
The inflation
challenge we face
today is a direct
consequence of
policy neglect
in the past, compounded
by the terms of
trade boom. Strong
global demand
for our commodity
exports has seen
our terms of trade
rise to 50 year
highs. This has
provided a significant
stimulus to our
economy boosting
employment, company
profits and incomes.
We have the right
institutional
framework to deal
with pressures
on monetary policy
an independent
central bank with
an inflation target.
Shortly after
taking office,
the Governor and
the Government
announced a number
of measures to
enhance the independence
and transparency
of the Reserve
Bank, through
a new Joint Statement
on the Conduct
of Monetary Policy.
The new Statement
re-affirmed the
Government's commitment
to the Reserve
Bank's 2 to 3
percent inflation
target. It strengthened
the Reserve Bank
by enhancing the
statutory independence
of the Governor
and Deputy Governor.
It also incorporated
new transparency
measures in the
Board appointments
process, the publication
of Board minutes,
and a statement
following each
monthly meeting,
irrespective of
whether the cash
rate was changed.
A range of specific
factors have also
been pushing inflation
higher. Oil prices
are being pushed
to record highs
by ongoing geopolitical
tensions, strong
demand and supply
concerns. And
here at home,
the ongoing effects
of our devastating
drought are leading
to higher food
prices. These,
of course, are
factors over which
we have little
control.
But with China
and India likely
to continue to
grow strongly,
demand side pressures
are likely to
continue to influence
the Australian
economy, despite
a weakening in
the US economy.
This emphasises
the need to direct
all arms of economic
policy towards
the things we
can influence
to take the pressure
off demand, reduce
costs in the economy
through regulatory
reform, and further
boost the supply
side capacity
of the Australian
economy to alleviate
inflationary pressures.
That's why our
Government in
its earliest days
has declared war
on inflation.
This will be a
tough fight, but
unless we engage
this fight, the
consequences for
businesses, employees
and families will
be very negative
indeed.
Our economy has
also been held
back as bulk commodity
ships queue off
our ports, urban
congestion clogs
up our major cities
and both rural
and urban areas
experience chronic
water shortages.
CEDA estimates
that Australia's
infrastructure
backlog is costing
us around 0.8
per cent of GDP
a year in lost
production that
is the equivalent
of $8 billion
a year.
There are few
other states that
have felt the
impact of these
deficits more
than Western Australia.
Unemployment in
Western Australia
is the lowest
of any state at
3.1 per cent.
The growth in
job vacancies
in Western Australia
is far higher
than in any other
State, with vacancies
growing by 36.3
per cent over
the last year,
reflecting the
difficulties that
employers have
in filling jobs.
Iron ore miners
in Western Australia
report that rail
and port infrastructure
facilities are
stretched to their
limits.
The consequence
of this failure
to address the
skills crisis,
to lift workforce
participation
and plan for the
demands on critical
infrastructure,
has created a
set of deep underlying
drivers of Australia's
current inflation
problem.
Yet these pressures
were aggravated
even further by
an increasingly
in disciplined
approach to fiscal
policy on the
part of our predecessors.
A Five-Point
Plan to Fight
Inflation
The government
is not in the
business attributing
all of Australia's
inflationary pressures
to the policy
failures of our
predecessors.
As I have already
noted, a number
of these pressures
have been created
by external factors.
But equally, responsibility
must be accepted
for domestic policy
complacency and
failure where
it has occurred.
Policy failure
on skills, workforce
participation,
infrastructure
and fiscal policy
are clear cut
cases of neglect.
There is however
absolutely no
point in decrying
our predecessors
culpability on
this unless we
at the same are
pointing the way
forward.
That's why today,
I would like to
chart the way
forward, and set
out a broad five
point plan to
fight the fight
against inflation.
A plan that addresses
both demand side
and supply side
pressures on inflation.
A plan that uses
all the tools
available to us
both macroeconomic
and microeconomic
levers.
• First,
we will ensure
the Government
takes the pressure
off demand by
running a strong
budget surplus.
This will help
make the task
of the Reserve
Bank easier.
• Second,
in the period
ahead we will
examine all options
to provide real
incentive to encourage
private savings.
• Third,
we will be unfolding
our plan for tackling
chronic skills
shortages in the
economy.
• Fourth,
we will provide
national leadership
to tackle infrastructure
bottlenecks.
• And fifth,
we will provide
practical ways
of helping people
re-enter the workforce
and remove disincentives
to working hard,
to lift workforce
participation.
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