Webcast

Protecting the Australian economy

21 October 2008

Transcript of Webcast

The international financial crisis is causing unprecedented turmoil in world markets. Governments and regulators in the developed world are pumping huge amounts of money into financial institutions. They’re increasing guarantees of bank loans and bank deposits and of course they’re moving very quickly to sure up the entire financial system and reduce interest rates to help stimulate economic activity.

All of these things are helping already to stabilize the world situation, but nonetheless we have an extraordinary amount of turmoil that is putting considerable pressure on the Australian economy and exposing us to great threats and risks that weren’t there a year ago, two years ago.

Australia is very well positioned to cope with these stresses, we have a very strong budget surplus, very well capitalised banks and financial institutions with none of the problems that American banks have had with dubious mortgages, and of course very strong regulators and very robust regulatory system that is supported by both sides of Parliament.

We’ve got tax cuts that are flowing into the economy since July, helping to sustain economic activity and generally very good economic settings with our terms of trade, the prices we get for our exports at near record levels and a lot of money still flowing as a result of the mining boom. But even all of those things, even the strength that we have innately from our own activity and from our own good positioning may not be enough to protect us from serious consequences from the international financial crisis.

That is why the Reserve Bank has taken the extraordinary step of reducing interest rates by a full one percentage point and it is speculated that it may take further action in this regard. That is why the Government has introduced a package of $10 billion of additional spending measures that go to pensioners, the families, the first home buyers in order to stimulate economic activity.

When the economy slows and people reduce their spending there is less activity, fewer jobs and that tends to ripple through the economy in ways that become multiplied by less activity, meaning few jobs, less activity, less spending again, and fewer jobs again, so it is very important that we push back against these very powerful downward pressures on our economic activity.

The Government’s already revised its expectations for economic growth and jobs for the forthcoming year or so. We expect they will be weaker than was originally forecast and in the very near future we’ll be releasing formal updated estimates of where the economy is heading and there is no question that those estimates will show significant slowing, and they will project some increase in unemployment.

Its crucial for the Government to get ahead of theses stresses to make sure that rather that reacting after things have turned bad, we get in there and prevent things from turning bad, that’s why you’ve seen the government make the decisions to guarantee bank deposits and to guarantee lending to institutions, to our financial institutions, by wholesale lenders, particularly internationally. That stabilizes our financial system even though there is nothing fundamentally wrong with it, it’s been caught up in the implications of the global situation. That and the stimulus from the spending package will be very powerful factors together with the fallen value of the Australian dollar and reduced interest rates in keeping economic activity happening, keeping jobs growing, keeping the economic levels in reasonable shape. That will all play a major role in helping Australia to ward off the worst effects of the most serious economic crisis in a generation.

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