THIS morning I returned from APEC where my discussions with leaders from all around the region confirmed what we already knew: that the world economy is deteriorating rapidly.
The impact of the global financial crisis, which began out of the US sub-prime crisis only 12 months ago, has grown from a trickle to a flood.
It is now sweeping across the world - from China to Chile, from Germany to Japan.
It has affected the traditional economic powers of the North Atlantic and the emerging economies of the Asia Pacific.
Every nation. Every government. Every economy.
Or as many leaders said in discussions over the weekend: were all in this boat together.
There is no point in sugar coating the situation. The global economic downturn is accelerating. It will get worse before it gets better.
Every morning we wake up to more sobering developments from abroad.
Bank bailouts 30 and counting.
Diving sharemarkets down 50 per cent and counting.
Government rescue packages from 15 countries and counting.
Major developed economies, like dominoes, are falling one by one into recession.
Japan; Germany; Italy and the eurozone have already fallen.
Other major economies have already experienced quarters of negative growth this year: including the United States; the United Kingdom; France; Italy; Canada among others.
And the projections emerging for the US for the fourth quarter are not good.
These are all fundamentally strong economies.
But all have been unable to sandbag their economies against the worst financial and economic crisis the world has seen in over three quarters of a century.
The Australian Government has been upfront about the global financial crisis from the beginning.
As the worlds 14th largest economy, we experience the good and bad of economic globalisation.
For the past decade and more, globalisation has served Australia well.
For 10 years we have ridden the wave of a commodity price boom which has filled the Treasury coffers.
We sailed through this period with record terms of trade, leading to low unemployment and high growth.
But the global tide has changed and the good times have now turned to bad.
And our economy is now being pulled in a new direction.
It is important to continue to be absolutely upfront with the Australian people about the challenges we face and the strategy we shall prosecute to see Australia through.
The impact of the global financial crisis on our economy will be real.
Its impact on our businesses will be real.
Its impact on our families will be real.
Its impact on our workers will be real.
Its impact on our country will be real.
Mr Speaker, today my intention is to update the house on recent developments in the global financial crisis especially the most recent outlook for the global real economy; to outline the possible effects on the Australian economy for the period ahead; and to reaffirm the Governments commitment to continue to take whatever action is necessary to support growth and jobs and to protect Australians from the worst effects of an economic crisis they did not create.
Mr Speaker, the global financial crisis began in the mortgage markets in the United States where easy money, lax regulation and excessive risk taking led to an extraordinary asset bubble.
The unwinding of that bubble brought heavy losses for the network of financial institutions involved in the origination, securitisation and ownership of mortgage assets.
The cancer in the system in this form of extreme capitalism has been the operation of credit default swaps which led to a collapse of trust between financial institutions as no-one could say with confidence who owed what to whom.
This assault on transparency and the perversion of reward structures that gave rise to greater and greater risk decoupled from any direct sense of responsibility for that risk caused this crisis in the US mortgage market to spread throughout the global financial system.
This in turn has created a crisis of confidence both in the financial sector and more broadly in the real economy.
The Government has been acutely aware of the profound effect that the global financial crisis was already having on economic growth now and the risks that it has created for the global economic outlook for 2009.
Already by the end of October, global share markets had fallen by 37 per cent over 2008 - this represented a massive destruction of wealth of some US$27 trillion.
Each of the worlds seven largest advanced economies had recorded a negative quarter of growth in the first three quarters of the year.
And government budgets around the world were being battered with every member of the G7 bar Canada having already gone into deficit.
Australia is not isolated from events abroad and our forecasts have reflected this fact.
Global funding conditions had affected borrowing costs here at home, with households and businesses facing sharply higher interest rates as banks passed on up to 60 basis points of their higher costs of funding.
Our stock markets had fallen by 38 per cent in the year to October similar to other comparable stock markets around the world.
Quarterly household consumption had fallen for the first time in 15 years in the June quarter.
In addition, MYEFO indicated that the global financial crisis has also had a profound effect on our Budget position.
The Government projected that tax receipts would be nearly $40 billion lower over the forward estimates than had been anticipated at the time of the May Budget.
The last six months of the global financial crisis has resulted in a quantum shift in Australias economic and financial position as it has in practically all other economies.
Mr Speaker, beyond the economic statistics, the global financial crisis is imposing a very real personal cost on Australian businesses and Australian families.
Put simply, the global financial crisis means tough times ahead for many people.
It means Australian families will find it harder to make ends meet.
It means more challenging conditions for older people whose incomes derive from share market investments.
It means harder conditions for the more than two million small businesses and independent contractors who form much of the backbone of the Australian economy and employment.
And it means a tougher employment environment for many people who will find it more difficult to find their first job.
A few weeks ago I received a letter from a shop owner in regional Queensland, which contained the following:
"I write to you at my wits end ... The people who shop in the shopping centre I am in are struggling
my business has dropped 65 per cent in sales over the last 3 months. I have already had to lay off three of my seven staff
Im scared Im going to lose my business to bankruptcy. Im scared my parents are going to lose their family home as it is security for my business loan.
Mr Speaker, Ive received many other letters like this one. I am sure many other members have as well.
They show the unfolding personal dimensions to an unfolding international economic crisis.
In recent weeks, the global economic crisis has taken a further turn for the worse.
The most recent data released in November indicate that the United States is unlikely to avoid a deep and protracted downturn.
US equity markets have fallen dramatically in the last month now down 50 per cent from before the crisis.
Data released on the 19 November shows US housing starts fell in October to the lowest level since 1959 and building permits fell by a massive 12 per cent in the same month.
Data released on the 14th of November showed US household consumption has slowed sharply, with October nominal retail sales experiencing the sharpest monthly fall since the series began in 1992.
In the year to October, the big three car companies of Ford, General Motors and Chrysler have seen their sales fall by at least a third.
Data released on November 7 indicated the US unemployment rate has jumped to 6.5 per cent, up 1.7 percentage points from a year ago and the highest rate since March of 1994. More than half a million American workers were added to the ranks of the unemployed in October alone.
And, as of this week, US financial giant Citigroup now appears to be joining the list of US companies requiring a Federal bail out including AIG, Bear Stearns, and Merrill Lynch.
Both the IMF and the OECD are predicting a prolonged downturn for the US economy, with growth contracting sharply until at least the middle of 2009.
The deterioration in other advanced economies has also been rapid.
The OECD warned in its Economic Outlook published overnight that: Many OECD economies are in or are on the verge of a protracted recession of a magnitude not experienced since the early 1980s.
In our own region, the IMF expects growth in emerging and developing economies to slow to 6.1 per cent in 2009, the slowest rate of growth in more than 6 years.
The latest economic data from Asia paints a sober picture of economic activity:
Growth in China has already slowed by 2½ percentage points over the past year. The global slowdown has had a heavy impact on Chinese businesses especially in coastal export zones where Chinese Minister for Social Services described the employment situation last week, frankly as grim.
Taiwan, Hong Kong and Singapore have all recorded negative growth in the September quarter. Singapore and Hong Kong are already in recession.
Mr Speaker, I wish I had better news to report to the House from my discussions with global and regional leaders, but the truth is these discussions they have reinforced the gravity of the challenges we all face and reflects the gravity of the data released during November.
It is important to remember that the Australian economy has so far fared well relative to our peers in advanced economies.
However, the global events of the last few weeks have brought further bad news for the Australian economy as well.
In the last three weeks Australian share markets have fallen by a further 17 per cent, bringing losses since the start of the year to over 50 per cent, the same as for the United States.
These falls have been coupled with falling house prices which have now dropped for two consecutive quarters.
Consumer confidence data released on 12 November shows confidence remains at levels not seen since the early 1990s.
Retail sales data released on 17 November shows volumes grew only marginally in the September quarter, after falling for the two previous quarters.
Car sales data released on 19 November also fell sharply over the quarter by 8 per cent.
Building approvals data released on 5 November show that approvals plummeted in the most recent data (that is, September) to the lowest level since April 2001 indicating that housing investment is likely to be very weak over at least the next six months.
The outlook for business investment has also deteriorated.
Credit conditions continue to be challenging with the November ACCI-Westpac survey showing that the incidence of businesses reporting difficulty in obtaining finance has grown to a 26 year high.
Weaker global growth will make it for a more difficult for our exporters to find markets.
Of all of our major trading partners that have reported growth numbers for the September quarter, only Korea has published positive growth.
Countries to which we send nearly half of our exports, we find that those countries are already in recession or are beginning to slow. The deteriorating outlook for the global economy, particularly the slowdown in China, has also seen the expected demand for commodities soften, resulting in sharp falls in spot commodity prices.
As a result of falling commodity prices, the outlook for Australias terms of trade is weakening.
As detailed in MYEFO, we are forecasting a fall of 8½ per cent in the terms of trade in 2009-10.
A sharper fall cannot be ruled out if the global downturn intensifies, and this would further reduce national income growth.
Mr Speaker, the Australian Government has already taken swift and decisive action across a range of fronts to support growth, families and jobs during these troubling times.
The Government has been proactive in addressing the effects of the crisis.
We have sought to be ahead of the curve from the start.
And to the extent that it is humanly possible, we intend to remain ahead of the curve for the future.
The Governments economic strategy this year has been framed against the background of this unfolding global financial crisis.
In May, the Government delivered a strong budget; in the budget the Government delivered: $9 billion in tax cuts to help ease the cost of living pressures facing all Australian taxpayers, and to create further incentive for individuals to participate in the workforce.
The Budget built a strong surplus which has proven to be a crucial buffer giving the Government the flexibility to respond to the global financial crisis as it has unfolded.
This equates to about 1 per cent of GDP in July 2008.
In October the Government acted to strengthen the economy further and deliver much needed support to Australian households through the $10.4 billion Economic Security Strategy.
As part of the Strategy, Australias four million pensioners, carers and seniors will receive lump sum payments.
Around 2 million families who are entitled to Family Tax Benefit Part A will receive a one-off payment of $1,000 for each child in their care.
As part of the ESS $1.5 billion has been allocated to first home buyers.
At the end of November, the Government intends to make a third investment through the substantial but responsible proposal we will put to the states and territories in education, health, and in other critical services.
The Commonwealth is prepared to invest more than $11 billion more into critical government services over the next 4-5 years, starting in 2009.
Not only is this designed to prosecute the Governments long term economic reform agenda - in particular its productivity agenda.
It also provides further stimulus to the economy now by creating more jobs and better paid jobs in health, education and beyond.
As a general principle, a further $10 billion in public investment will add 75,000 additional jobs.
Mr Speaker, these measures are in addition to the $6.2 billion the Government will invest from 2010 onward to support the long term future of Australias auto sector.
This sector is under great stress globally as recent developments in Detroit and Washington have demonstrated.
And while much global uncertainty lies ahead, the Australian Government has decided to do its part to co-invest with this industry long term to help support the more than 200,000 Australians who are employed directly or indirectly in this sector.
Beyond all these measures - short, medium and long term - the Government remains ready to take whatever additional action is necessary to help steer Australia through this current crisis.
Mr Speaker, throughout this, the Government, ably supported by the economic regulators, will continue to keep a weather eye on the continuing stability of the financial system.
We have weathered the first part of the storm well.
But as recent events overtaking Citigroup demonstrate, we are by no means through the storm yet.
Furthermore, deterioration in the real economy in turn can produce a further round of effects on the balance sheets of banks and the non-bank financial institutions if loans arrears become more of a problem.
The Government maintains the closest possible rolling consultation with the financial sector on both continuing and any emerging problems that arise in these unprecedented times.
Once again, the Government has throughout the year acted ahead of the curve against the deepening global financial crisis.
Throughout the year, the RBA has responded to the uncertainty in financial markets by providing additional liquidity to the market as required.
In May this year, the Government announced that it would increase its issuance of Commonwealth Government Securities to the tune of $25 billion.
In September ASIC acted in concert with regulators around the world to put temporary restrictions on short selling. In November ASIC lifted the ban on short selling of non-financials, while the ban on financials continues.
In September the Government also announced that the Australian Office of Financial Management would be authorised to purchase Australian residential mortgage-backed securities.
In October the Government secured final COAG agreement for a seamless national consumer credit regulation funded by a government commitment of an additional $71m.
And in October also, the Government also provided a guarantee for the deposit and wholesale funding liabilities of authorised deposit-taking institutions.
Mr Speaker, in addition to the measures I have just outlined, the Government continues to operate taskforces in conjunction with most branches of the financial services sector to deal with the range of practical problems that continue to arise as a result of the massive dislocation caused to that sector by the global financial crisis.
Mr Speaker, domestic policy action by the Government on the financial system and the real economy is necessary.
But to be fully effective, this must be accompanied by decisive international policy action as well.
At the G20 Summit on 15 November in Washington leaders made three fundamental decisions.
First, having taken extensive and, in some cases, radical action to stabilise financial systems, leaders agreed to take whatever further actions were necessary to stabilise the financial system into the short and long term future, and agreed on a concrete action plan to that effect.
Second, as global economies slow down because of the financial crisis, global governments need to step in to stimulate aggregate demand and stabilise the economy through coordinated macroeconomic action.
G-20 countries committed to further use their national budgets to stimulate domestic demand to rapid effect, given the different economic needs and budget flexibility available to each government. Around the table, leaders agreed that the best way to protect jobs is to sustain aggregate demand.
The mathematics are like this: the reality is that the global financial crisis is projected to cut global growth by three per cent of global GDP. Which means that in a US$60 trillion global economy, coordinated government macro-economic action is necessary to inject some $1.8 trillion into the global economy at a time when the private sector cannot be relied upon to act.
The alternative is larger scale global unemployment.
The third decision made at G-20 was to open global trade and investment further.
The G-20 leaders agreed that we must not put up new barriers to investment and trade. Moreover, we resolved to conclude the WTOs Doha Development Agenda this year with an ambitious and balanced outcome.
Furthermore, APEC leaders directed their Ministers to meet in Geneva in December to conclude the Round.
Mr Speaker, the Government, based on the data available, has been upfront about the impacts of the global financial crisis on the economy, and on the budgets and on jobs.
But the emerging data on the global financial crisis continues to evolve in unpredictable ways.
We face great uncertainties ahead. There are great volatilities in the data. Meaning it is impossible to predict the future with absolute precision.
If global growth continues to deteriorate in the period ahead, consistent with the economic data that is emerging during November, then there will be a further slowing of growth in the Australian economy as surely as night follows day.
If Australian economic growth slows further because of a further deepening of the global financial crisis, then it follows that the Australian Government revenues will reduce further.
Under those circumstances, it would be responsible to draw further from the surplus and, if necessary, to use a temporary deficit to begin investing in our future infrastructure needs including hospitals, schools, TAFEs, universities, ports, roads, urban rail and high speed broadband.
Mr Speaker, under those circumstances, such action would support growth, would families and jobs and would be undertaken in the national interest. In fact Mr Speaker, failing to do so would be irresponsible and would sacrifice growth and jobs. But any such action would need to be temporary, consistent with the discipline of maintaining a surplus across the economic cycle.
These circumstances do not prevail in Australia at present. Our current circumstances do not require us to embrace such a course of action. And the Government will do everything possible to swim against the global tide to support both growth and the surplus but this is becoming tougher and tougher.
The Government will continue to be candid with the Australian public about the volatile global economic environment that has been created by the global financial crisis and the uncertainties that therefore, lie ahead. Amidst these uncertainties, the Government remains prepared to take whatever action is necessary in the future to support economic growth, families and jobs.
Over the decades ahead, historians will write the history of this global financial crisis in three chapters.
Chapter one will be the impact of the global financial crisis on international equity and debt markets.
Chapter two will be the impact of the global financial crisis on the real economies of developed and developing countries around the world.
And chapter three will be the impact of the global financial crisis on employment.
The challenge for the leaders of today is to do everything humanly possible to ensure this period is recorded as a snapshot in history, not an enduring memory.
That we deliver decisive policies which stimulate demand and lead to a strong rebound in growth.
That we deliver policies which create jobs and boost long term productivity growth.
That we put the mechanisms in place to ensure a financial crisis of this scale does not occur again as a consequence of extreme capitalism, out of control.
And that through our actions to deal with this crisis, and the sharp temporary measures necessary to deal with it, that we do not sow the seeds of the next.
Mr Speaker, this is the Governments mission.
This is the nations mission.
This is also the mission of the international community.
To be candid about the challenges, to prosecute a coherent strategy in response to those challenges, and create a rational basis for confidence in the future.
That is the course of action to which this Government is committed.
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