10 February 2017
Speech - #2017003, 2017

Address to the Citi A50 Australian Economic Forum, Sydney

Check against delivery

Thanks very much for inviting me back here to address you and good afternoon everyone.

This is a forum for frankness.

It’s a chance to discuss the direction of Australia’s economy, its opportunities and its challenges.

And once again I thank my colleague, the Member for Wright Scott Buchholz, for helping to make this important forum a reality, alongside my former colleague and Minister for Trade, the Hon. Andrew Robb.

The fog of unreality

There’s often a tendency to think that just because things are going well, they’ll always go well — and vice-versa.

You can never take economic growth for granted.

Things aren’t black and white — especially when it comes to the economy. We need to always be alert and prepared. This is exactly what the Turnbull Government is attuned to.

As a Government, we know Australia’s strengths. We hear the opportunities knocking on our door and, what’s more, we see the areas that need closer attention — the risks.

Strengths of the Australian economy

So let me start today by talking about our many strengths.  

We’ve enjoyed twenty-five years of consecutive annual economic growth — something that I regard as one of Australia’s greatest achievements.

In this country, an entire generation has grown up without experiencing a recession.

This long period of uninterrupted economic growth is the payoff from flexible macroeconomic policy frameworks, earlier macroeconomic reforms and a once-in-a-lifetime resources boom.

And above all, the product of a nation, a people, that will not be denied our prosperity.

I am confident this will continue. I don’t believe the recent contraction of the economy in the September quarter represents the underlying pulse of the economy. 

Trade

The fact is, the underlying fundamentals of the economy remain sound.

Trade data, for example, points to a strengthening in the trade balance supported by recent strength in commodity prices.

Australia returned to a trade surplus in November 2016.

This was the first surplus since March 2014 — with the rally in key bulk commodity prices late last year beginning to flow through to Australia’s exports, even as volumes continue to ramp up.

Now, these effects continued into the following month, leading to Australia posting a record trade surplus of $3.5 billion in December 2016.

This was the largest monthly surplus on record.

This result is even more impressive given the background of weak trade growth across the world and rising protectionist sentiment.

Of course, we expect commodity prices to fall in line with our MYEFO assumptions, but volumes are expected to continue to rise.

Key markers of growth

And the news continues to be encouraging as you move down the ledger.

During 2015–16, our economy grew by 2.7 per cent, which is well above the OECD average.

It was also faster than every economy in the G7.

Our outlook remains positive, with exports and household consumption expected to continue supporting growth, and dwelling investment also higher in the near term. And we still expect to see a modest recovery in non-mining business investment over coming years. 

In the Government’s mid-year statement, we forecast that real GDP growth will be 2 per cent in 2016–17, and rise to 2.75 per cent the following year.

Indeed, this very morning the IMF has released its Article IV report, which reaffirms that Australia’s robust economic performance reflects the resilience of our economy and our strong policy frameworks. The IMF currently ranks Australia among the top advanced countries for potential growth.

What’s more, growth is leading to more jobs.

Since coming to office in 2013, the Government has seen about 520,000 jobs created, while unemployment has fallen to 5.8 per cent after a post-GFC high of 6.3 per cent.

Businesses continue to report positive business conditions — as indicated by the latest business surveys — and the ANZ-Roy Morgan measure of consumer confidence is above the long-run average.

Opportunities in services

Now, it is also important to recognise that the Australian economy is quite diversified.

Mining currently represents 7 per cent of industry output.

And despite resource exports making up around 50 per cent of our total exports in 2015–16, exports make up only around 20 per cent of the economy.

Furthermore, our economy is transitioning from strength to strength — from the strength of our resources sector to the strength of our non-mining sectors, particularly our all-important services.

Our economy is heavily based on services, with the services sector comprising about 70 per cent of industry output and about 80 per cent of employment.

The importance of the services sector to the transition is evident in labour market outcomes, with the majority of employment growth over the past two years coming from services industries, mainly within the private sector.

As for the future, it holds the promise of greater services exports. 

That is, as long as we don’t miss our opportunity to take advantage of the growing Asian middle class and its demand for our exceptional quality tourism, education and business services.

Australia’s service exports have already grown by about 27 per cent over the last three years, underpinned by an exchange rate that has depreciated by around 28 per cent against the US dollar since the peak of the terms of trade in September 2011.

And we have considerable potential for further growth.

Opportunities in Asia

Due to the good fortune of our geography, Australia is well-placed to take advantage of the fastest growing economies in the world.

Significantly, China is already Australia’s largest services market, with exports of services valued at $10.7 billion in 2015–16, having increased its share of our total exports to around 15.6 per cent from around 3 per cent in 2000–01. 

According to some estimates, China’s middle class is expected to grow to more than 850 million people by 2030. This provides a massive opportunity for our exporters.

Already we are seeing the benefits of this increase, with growth in Australia’s largest services export — tourism — continuing to be driven by the number of arrivals from China, with growth of 19 per cent over the past year to 1.2 million.  

Demand is expanding in other Asian markets as well, including India and Malaysia.

Asia now accounts for around 65 per cent of Australia’s travel exports.

Australian education exports have also been made more attractive over the past two years by the lower Australian dollar and streamlining of student visa policy arrangements. 

Demand from Asia helped Australia’s education exports to reach $19.5 billion in 2015-16, growing 7.1 per cent over the previous year. 

Furthermore, Australia’s existing financial expertise, resources and infrastructure — including our world-class regulatory and prudential regimes — mean we are well positioned to expand the export of our financial services to markets in Asia.

Indeed, globally, investment in the FinTech sector reached US$20 billion in 2015, up from US$12 billion in 2014 and just over US$4 billion in 2013.

Developing Australia’s FinTech industry will help us tap into that expansion and deliver growth for our financial exports. 

Strong banking sector

The Australian economy depends critically on the performance and strength of our banking and financial system.

Ours has proven to be efficient and resilient. Indeed, the IMF in their recently released Article IV report note that the Australian banking system remains strong and has increased its resilience over recent years. Credit rating agencies have also acknowledged the pro-active approach of our regulators in addressing risks to the financial system and improving the banks' balance sheet settings, including capital, funding and liquidity profiles.

But we cannot become complacent. Australia’s ability to respond to the challenges and opportunities of the future depends on our banking sector remaining resilient.

Strong and accountable regulators underpin the smooth operation of the financial system.

To that end the government initiated and is implementing the recommendations of the Financial System Inquiry to position our financial system to best respond to the challenges and opportunities of the future.

We also endorse the Australian Prudential Regulation Authority’s approach to ensure our banks are unquestionably strong.

In addition, as recommended by the Financial System Inquiry, we are working to strengthen the accountability of regulators by providing clear guidance in Statements of Expectations for APRA, ASIC and, for the first time, the Payments System Board.

A strong bond market

The strengths of the Australian economy and its robust institutional framework have ensured that the Australian Government Bond — or AGB — market is widely known among institutional investors for its very good liquidity, highest quality sovereign ratings, and high yields compared to most other OECD bond markets.

Due to development and extension of the AGB yield curve, investors are able to buy a range of maturities that are now comparable with, and can be switched between, all other major sovereign bond markets. 

Australian Government bonds have around 12 to 15 financial institutions actively providing two-way pricing to investors.

The bonds are supported by a number of actively traded Australian dollar derivative products, such as bond futures and interest rate swaps.

Both are very liquid products, which are complementary to the Australian Government bonds, and allow for the easy hedging of interest rate risk.

The many and diverse holders of Australian Government bonds are a testament to the qualities of the market. 

Our bonds are held across the globe, with strong interest emanating from Asia — particularly Japan — Europe and, of course, Australia. And this interest extends to our state or semi-government bond market, which also attracts strong global demand.

For Australian Government Bonds, holdings are well spread between public and private institutions and a variety of differing financial institutions from fund managers, central banks, pension funds, sovereign wealth and hedge funds.

There are currently 23 Treasury Bond maturities on issue — ranging from six months out to the recently established, and very successful, 30-year bond maturing in March 2047. 

Investor interest in the 30-year bond was very strong — $7.6 billion was raised from investors and bids totalled almost double that amount. 

Both the yield and Australia’s sovereign rating presented an attractive proposition to investors. 

The bond further diversified the Government’s bond market investor base by attracting investors with an appetite for very long-dated maturities.  

Strong investor interest was also demonstrated for the December 2021 bond issued last month. 

An impressive $9.3 billion was raised from financial markets, with total bids of around $15 billion. 

This was the largest ever Australian syndicated bond deal.

Around 57 per cent of Australian Government bonds are held by non-resident holders or offshore investors.

They are attracted by good liquidity, Australia’s high quality sovereign credit rating and high yields. 

While this proportion has been falling over the last four years, the absolute volumes held by non-residents still continues to increase. 

Domestic demand has also increased, led by domestic based financial institutions requiring increased holdings of Australian Government bonds as high quality liquid assets.

Mitigating the risks

Of course, there are also challenges and risks for our economy. And, as I said, we need to be upfront about the scale of those challenges.

On the global front, there are a number of vulnerabilities. 

We have seen an increase in anti-globalisation sentiment in some countries and regions, making it difficult to advance or maintain economic reform momentum. 

Over the longer term, low productivity and investment growth, compounded by weak trade growth — and an environment of low inflation — are also risks to global growth.

Chinese economy

China, our largest trading partner, is also undergoing change as its economy slows from a period of extraordinary growth.

China is aiming to boost private consumption and expand the role of services in the economy through progressing longer term structural reforms that enhance competition and efficiency.

But it is also slowing as it attempts to reform.

Of course, a slowing China is not a risk in and of itself. Rather, it is the normal pattern of development following the sustained period of rapid growth that has made China into one of the largest economies in the world. 

The risk is that this development path may not be smooth, given increasing levels of debt and possible volatility in financial and currency markets.

While Chinese authorities have significant tools at their disposal to manage these risks, they will need to find the balance between stability and growth-enhancing reforms that generate productivity, which is the basis for sustained improvement in living standards.

Success on this front will provide further opportunities for Australia, as China’s middle class continues to grow.

Non-mining investment

There are also some challenges on the domestic front.

As in many other countries, non-mining business investment has been the missing link in Australia’s growth over the past few years. 

While mining investment has declined significantly, investment in the non-mining sector has been subdued.

But there are some positive signs.

Non-mining investment in the non-mining states has been improving, which may reflect a more positive outlook for businesses in those states that have experienced stronger demand growth in recent years.

Above-average business conditions and low borrowing costs are also expected to support investment, although this cannot be taken for granted.

Another risk stems from continued low inflation and wage growth.

While the terms of trade are providing a boost to national incomes, growth in wages remains subdued. If inflation and wages remain low, this would constrain nominal GDP growth with implications for tax receipts. 

Housing market

I also want to quickly touch on the housing market.

Prices have been increasing strongly, particularly in Sydney and Melbourne, and there has been a significant rise in the construction of medium-high density housing.

This has raised concerns around oversupply in inner-city apartment markets.

However, to date, settlement failures remain extremely low and while some regional risks remain, the current construction cycle would likely have to run-up faster and continue for longer before oversupply became a nationwide macroeconomic risk.

Regulators and banks themselves are also aware of these conditions and have taken actions.

Regulators have implemented several measures in response to concerns about declining lending standards and the growth in lending to investors since 2014. There are signs that banks have been responding to these measures. For example, banks have lowered the maximum loan-to-value ratios for investor loans, and raised interest rates on interest-only and investor loans.

Nevertheless, there is uncertainty around the outlook for dwelling investment.

While the pipeline of construction remains at record levels, building approvals have been falling, which will reduce the pipeline into the future.  

Our plan for a stronger economy

The recent negative quarterly growth result is a stark reminder that we can never take growth for granted.

It is our job to continue implementing the policies necessary to strengthen economic growth and promote investment. In short, building the foundations for a new generation of prosperity.

Every policy we have initiated is designed around a plan to ensure we foster investment and promote jobs and stronger, more broad-based growth.

I don’t need to lecture this audience about the imperative that economies remain globally competitive for investment dollars.

Australia’s corporate tax rate, at 30 per cent, is comparatively high when it comes to competition for investment.

With the rest of the world looking to stimulate investment and growth through more competitive tax rates — President Trump, the UK and French Governments have all announced reductions or intentions to reduce company tax rates — Australia, as a net importer of capital risks falling behind, becoming uncompetitive and being left out of global supply chains.

That’s why over ten years the Government will encourage investment and higher-paid jobs by reducing the tax rate on all companies to 25 per cent by 2026–27, starting with small businesses with a turnover of less than $10 million on 1 July this year.

This will make Australian companies more internationally competitive in a tough global market place. A tax system that supports enterprise by backing businesses to invest must ensure that Australia continues to be an attractive place to do business.

We are also driving jobs and investment by backing new and start-up businesses through our $1.1 billion National Innovation and Science Agenda.

Just this week new laws passed the lower house of Parliament that ensure equity crowdfunding can be a viable funding source.

Work continues on our objective to make Australia a world leader in FinTech, providing support to a ‘regulatory sandbox’ allowing eligible firms to test a new service in the marketplace without a licence and application process. We are initiating a review of blockchain technology to consider how it can be applied across the economy.

Over $50 billion is being invested in quality infrastructure projects to improve our productive capacity and better connect us to domestic and international markets.

This will support jobs and private investment.

Our twenty year defence industry plan is another critical element in this task and includes an $89 billion investment into the construction of Navy ships and submarines over the next 20 years which will underpin a key element of our defence forces.

This plan will strengthen Australia’s national defence industry, supporting thousands of high-tech manufacturing jobs across the supply chain.

Encouraging foreign investment

I also want to flag, as I did here last year, the importance of Australia keeping the door open to foreign investment — which is critical if we are to continue building on the strengths of our economy. 

As you all know, Australia's economic success has been built on capital from overseas — from Britain, China, Japan and the United States.

It was imported capital that created wealth and jobs.

It helped develop Australian farms and businesses.

It helped build our houses, factories and shops.

Foreign capital has allowed the Australian people — including our generation — to enjoy higher rates of economic growth, employment and a higher standard of living than could have been achieved from domestic savings alone.

We’re a capital-importing economy.

And this is not because there are low levels of domestic savings – in fact Australia’s saving rate is greater than the G7 average. But the demand and numerous opportunities for investment have always exceeded the domestic savings available to realise these opportunities.

This is not changing anytime soon — if ever. And that is why it is unquestionably in our national interest to welcome foreign investment. 

Of course, that welcome must come with a clear set of practical rules to ensure that foreign investment promotes our national interest.

Rather than hinder foreign investment, our investment screening arrangements must play an important role in ensuring that our door always remains open to investment that brings economic and social benefits.

They help reassure the Australian community that this investment occurs on our terms and in our interest.

And that, in turn, reassures investors that their investments are viewed by Australia as valuable and desirable.

In our region of the world, our approach to foreign investment is unusually open and welcoming.

Unlike many of our neighbours, we don’t have an investment black list that limits foreign investment in particular industries or sectors.

We have worked hard to maintain our attractive environment.

We welcome an overwhelming majority of investment proposals from proponents around the world.

As time rolls on, the world economy is bringing us all more closely together.

International markets for investment capital are increasingly competitive, with investors searching the globe for yield.

Global supply chains are long and complex.

The opportunities are immense for our economy and our businesses to exploit our myriad advantages and resources.

As I said earlier, we are extraordinarily well-placed to take advantage of the opportunities associated with our proximity to booming Asian economies.

However, we must not be complacent about this, or assume that capital will always choose Australia as a favoured destination.

We recognised some time ago that we could benefit from liberalising our economy and opening ourselves up to foreign investment.

We should keep that in mind in the context of pressures to protect domestic businesses from competition and reinstate barriers to foreign investment.

Conclusion

In closing, I would like to again thank Citi for the opportunity to address this forum.

What I’ve sought to do today is put on the table a frank account of what the Turnbull Government sees as the strengths and risks of our economy and how our plan charts a path to secure our continued prosperity as a nation.

As I’ve said, we have much to be optimistic about — and proud of — when it comes to the state of our economy. But there is no room for complacency, and we must continue to monitor and engage with the risks that exist if we are to continue succeeding in a changing world.

Thanks very much for your attention.