Senator the Hon Mathias Cormann
Minister for Finance
Senator for Western Australia
Date: Wednesday, 20 January 2016
JONATHAN FERRO: Mathias great to have you with us at the World Economic Forum in Davos.
MATHIAS CORMANN: Good to be here.
JONATHAN FERRO: Number one question for you, and you’re going to get it for the next three days whilst you are here in Davos. What’s going on in China and what is the read of the Australian Finance Minister of the world’s second largest economy right now?
MATHIAS CORMANN: When we met for the IMF annual meetings in Lima in October, the IMF was predicting growth in China of 6.8 per cent in 2015. The other day the report came in that growth came in at about 6.9 per cent. So broadly in line with expectations. China has been growing very strongly for a number of years, much of it infrastructure investment driven growth. We understand what China is working to achieve. China is working to achieve a transition from investment driven growth to more sustainable, more balanced domestic consumption and services driven growth. That transition was always going to have its challenges along the way. So we understand that. We are quietly confident about how China is tracking and we see a lot of opportunity, a lot of upside opportunity for Australia to expand our trade relationship beyond resources into other sectors of the economy. In particular in agricultural and food exports, service exports as the increasing size of the Chinese middle class continues to increase its expectations in these areas.
JONATHAN FERRO: We could debate whether the 6.9 per cent, 6.8 per cent was credible. I just wonder whether that that is the growth number that Australia experiences right now. Because as you say the service sector is doing okay but the manufacturing sector, some people would say is in a recession. Do you see that?
MATHIAS CORMANN: In Australia we are an open trading economy. China is our most important trade relationship. It has been predominantly focussed on exports of resources, iron ore, coal and a number of other resources. What we see moving forward is a lot of opportunity to expand that trade relationship into other parts of the economy. From an Australian point of view significant falls in global commodity prices for our key commodity exports, yes it has had consequences for our economy. It has had an impact in the economy, but our economy continues to grow. Our economy is transitioning quite well from resource investment driven growth to broader drivers of economic activity. Other parts of the economy are becoming more competitive as the floating exchange rate adjusts to the changes in our terms of trade. Moving forward, the Government is doing a whole range of things to ensure that we are the most competitive that we can be internationally. We are pursuing tax reform to make our tax system more growth friendly, we are pursuing an ambitious deregulation agenda, we are pursuing an ambitious free trade agenda, with free trade agreements finalised in the last 18 months with South Korea, Japan, China. We are pursuing a free trade agreement now with India and hopefully with Europe down the track. And we’re pursuing an ambitious innovation agenda, an ambitious infrastructure investment program. There are a whole range of things that are happening in the Australian economy to assist in the transition that needs to take place, but we are quietly optimistic about the outlook.
JONATHAN FERRO: Some would say it hasn’t happened quick enough and what is happening in China at the moment does expose a significant weakness in the Australian economy. But what we have seen as a buffer to some extent is the fall of the Aussie Dollar. Has it fallen enough to compensate what’s happening with commodity prices?
MATHIAS CORMANN: The value of the Australian Dollar is set by the market. That is a key feature of the Australian system. We have a floating exchange rate and it means that there are immediate adjustments to the value of the Australian Dollar depending on what is happening in relation to things like our terms of trade. That is an automatic stabiliser in our system. It is designed that way. It helps to transition the Australian economy and it helps the Australian economy deal with the sorts of challenges that we have been facing in recent times. But if you look at the totality, the Australian economy has grown in the most recent twelve months period by 2.5 per cent. That is above the OECD average. Our employment growth is comparatively strong at 3 per cent. Our unemployment rate at 5.8 per cent is well below the OECD average of 6.5 per cent. So yes, we are facing challenges, but by the same token the Australian economy is in its twenty-fifth year of continuous economic growth. Businesses across Australia are doing something right. From the Government’s point of view we are doing everything we can to make sure that the environment is there for business to be as successful as possible.
JONATHAN FERRO: When I lived in Australia for a while it was the line that was always pushed around, this two decades of continual growth. At the time we were just coming off the back of the Financial Crisis and I remember the politicians like yourself talking about the resilience of the Australian economy to the Global Financial Crisis because you were so close to China. It does show there is a little bit of a weak spot there and no country will grow forever. Do you think it can see itself through – the economy can see itself through the potential for a significant downturn in China?
MATHIAS CORMANN: We are an open trading economy and China is our most important trade relationship, but we do have important trade relationships with other nations around the world; Japan, Korea, the United States, Europe. Moving forward, there is a lot of opportunity for Australia as well as a lot of challenge.
JONATHAN FERRO: Where are they Mathias, where are the opportunities?
MATHIAS CORMANN: We are part of the Asia-Pacific region. Looking at the medium to long term, the Asia-Pacific is the part of the world where most of the economic growth will be generated for years and decades to come. The challenge for Australia is to ensure that our economy is as competitive as possible, to take advantage of those opportunities while making sure that we are as resilient as possible in the face of inevitable global economic headwinds that will come our way from time to time. That is certainly what we are doing.
JONATHAN FERRO: You share some similarities to the UK, property prices being one of them, particularly in the major urban areas. Are you concerned about what is happening with property prices given that growth is starting to come lower and given what’s happening with monetary policy as well with rates at 2 per cent, property prices continue to go higher – is it a concern for you?
MATHIAS CORMANN: Prices are, in any market, a function of supply and demand. When you have strong demand and comparatively low supply prices will go up. Then inevitably there will be a supply response, which is what we have seen happen in some of these markets in Australia where there was particularly strong demand and prices stabilised. From the Australian Government’s point of view, it is important that there are no distortions in the market, that there is an efficient capacity to bring supply to market, to meet the demand for housing and much of that responsibility in Australia rests with State and Territory Governments. From the Australian Government’s point of view, yes we are focussed on housing affordability, we are focussed on making sure that the market is transparent, efficient and effective, but by the same token, in the end prices will be set by the market.
JONATHAN FERRO: So you don’t see financial stability risk coming from the property market in Australia?
MATHIAS CORMANN: The short answer to that is no. It is a situation that we continuously monitor but we do have a regulatory framework with our prudential regulator APRA, appropriately monitoring the lending activities of the banks in that area and making appropriate decisions independently from Government about capital standards and various other prudential standards that ought to be complied with.
JONATHAN FERRO: You sound optimistic and on the surface of things I looked at the economic data for Australia, the breakdown, things seem ok despite the concerns about China. Your focus though, and your Government’s focus will shift towards getting re-elected. Do you have a message for the voters at a time when concerns about China, you come to this forum you know everyone is going to ask you about it, the electorate will be concerned about it as well. Do you think the economy can be resilient and is it enough to get re-elected?
MATHIAS CORMANN: Over the past two and a half years the Australian Government has been working to ensure that we are the most competitive we possibly can be, that we are in the strongest possible position to deal with global economic headwinds and that we are in the strongest possible position to take advantage of opportunities coming our way. Our message to the Australian people in the lead up to the election will be, we will point to our track record and we will say that we have the plan to continue to strengthen growth and create better opportunity for people across Australia to get ahead. Hopefully the Australian people will give us their confidence for another three years.
JONATHAN FERRO: Mathias Cormann thank you very much.
MATHIAS CORMANN: Always good to talk to you.
JONATHAN FERRO: Thank you.