A black Swan

In a Ministerial Statement released this evening, Treasurer Wayne Swan gave up on the endless China boom rhetoric and launched a new rather bearish narrative. The release appears to have three aims. First, it’s fair bet we’re seeing the ground shifted for the news that next year’s surplus is evaporating as we speak. Second, the Budget is being repositioned so it can be loosened if necessary, in much as same vein as the RBA last week. Third, on the eve of the G20, Australia is joining other Anglosphere nations is pressuring Europe to find a solution to its sovereign debt woes.

Without putting too fine a point on it, Treasury must be getting quite spooked.

Mr Speaker, three years ago to the day the Government moved decisively to secure our financial sector with guarantees of bank deposits and wholesale funding. This ensured the continued flow of credit through our economy. Two days later we moved to put in place the first of three rounds of stimulus.

Together, these actions ensured Australia avoided being dragged into the worst global recession in 75 years. In doing so we avoided the massive capital and skill destruction that we saw in many other countries. And we avoided the tragic loss of dignity that has hit working families all around the world.

Over the past three and half years I have periodically updated the parliament on developments in the global economy and their impacts at home. Given renewed financial market turmoil and the forthcoming G20 meetings, it’s appropriate that I do so again today.

Dangerous New Phase

Mr Speaker, going in to the crisis we said that it would be a long and difficult road out. In both the US and Europe, economic growth remains weak; unemployment unacceptably high; and sovereign debt levels are very concerning. In recent months, we’ve seen increased volatility in global capital markets in response to concerns about the implications of a debt default in Greece and possible broader implications. European bank stocks have plunged and a number of European banks and sovereigns have had their credit ratings cut.  The ongoing weakness in the US economy is also depressing markets. As the Chairman of the US Federal Reserve, Ben Bernanke, noted in September, the US economy faces ‘significant downside risks’.

The uncertainty in the global economy, particularly in Europe, dominated the IMF/World Bank and G20 Finance Ministers’ meetings which I attended in Washington two weeks ago.  At these meetings I joined other Ministers in impressing on our European colleagues that Europe needed to lift its game in dealing with what is fundamentally a European sovereign debt and financial crisis, but which has the capacity to affect us all. The depth of international concern was clearly recorded and Europe recognised that more needs to be done.

In response, Europeans leaders have moved to implement swiftly its 21 July agreement to scale up the European Financial Stability Facility. And over the weekend, the leaders of Germany and France have signalled they will outline a comprehensive plan to recapitalize banks and find a “durable” solution for Greece’s debt load. It is critical that European leaders now deliver at their 23 October meeting.

Need For Global Action

This is primarily a European crisis that requires a European-led solution. The challenges facing the US will similarly require US solutions. But as we saw three years ago, developments in the global economy can impact on our own economic performance.

I remember very vividly those historic days with my G20 colleagues in Washington in 2008 when we resolved to take the action required to avert a global economic cataclysm. If the worst fears for Europe are realised this time, the impacts on our own economy could be just as severe as those in 2008. That’s why international engagement is just as important now as it was at the height of the Global Financial Crisis.

I was encouraged by the success of our efforts at the G20 in Washington just a few weeks ago in highlighting the seriousness of the threats we face, and in propelling more action from our European colleagues. But much more needs to be done.

In the coming days, I will meet with my G20 colleagues as we prepare for the G20 Leaders Summit, to be held in Cannes in a month’s time. My clear message will be that both individual and collective action is needed to address global financial market volatility and put the global economic recovery back on track.

Developed countries – in particular in Europe – need to put their budgets on a sustainable footing, while supporting growth where possible. Europe needs to regain the confidence of markets in its capacity to meet its debt obligations.  Progress on the EFSF is encouraging, but more will be needed to convince markets. Collectively they need to demonstrate that the current sovereign debt crisis will be resolved in an orderly way, with arrangements put in place to avoid contagion throughout Europe and beyond. This includes the need for a credible plan to recapitalise the European banking system.

On the US front, more is needed to support the faltering recovery, while putting its budget on a sustainable path in the medium term. Tough decisions must be made on both spending and tax measures. The US Congress needs to end its partisan politics and support President Obama’s American Jobs Act, which would support growth and help bring down the unemployment rate from its unacceptably high levels still over 9 per cent.

More broadly, all countries need to undertake reforms that will both lift and rebalance global growth. With hundreds of millions unemployed globally, it is vital that this work has at its centre the creation of jobs.

Developing countries need to lift domestically generated growth and move to more flexible exchange rates. I argued this case directly to Chinese leaders on my recent visit to Southern China, as well as at recent IMF and G20 meetings in Washington, and I’ll continue to do so at this week’s G20 meetings in Paris. We also need to ensure the IMF has the resources to support adjustment, in particular in Europe, and meet all possible contingencies. This was a message I clearly conveyed to my colleagues at the IMF Annual Meetings and have continued to stress as we head toward next week’s meetings.

Global markets have been rightly concerned about the lack of political will shown in the US and Europe to deal with this crisis. The level of commitment necessary to address current problems is no less than what was needed to defend economies from the Global Financial Crisis in 2008. Recent progress in Europe is encouraging. But we must continue to build on this through the G20 as we head towards the Cannes Leaders’ Summit.

The global financial crisis was a crisis that virtually no one saw coming.

Now we have a crisis that virtually everyone has seen coming. It is our responsibility to provide the political leadership to avert this. The G20 can provide the support for countries to take the individual actions necessary while bringing together the world’s most systemically important countries to work collectively to avoid another crisis like we saw in 2008.

Australia’s Fundamental Strengths

Mr Speaker, while Australia is not immune from global developments, our strong fundamentals mean we’re better placed than just about any other country to deal with the current global instability.  We took action to avoid recession, keep unemployment low and keep the doors of business open through the global recession.

And we are in the right place at the right time, with Asia continuing to grow strongly. Around two thirds of all our exports go to Asia. While some of the goods we export to China go into their exports to the US and Europe, around 80 per cent are predominantly for China’s own domestic use.

By contrast, Australia’s direct trade and financial exposures to the euro area are low.  Around 10 per cent of our total trade is with the euro area and Australian banks continue to be among the world’s highest rated and have negligible direct exposure to peripheral European sovereigns, including zero exposure to Greek Government debt.

This underscores the importance of political leaders in this country not talking down our economy and undermining confidence – this is simply too important to ever play politics with. We have a growing economy, low unemployment, strong trade linkages to rapidly growing Asian economies, a strong pipeline of business investment, a healthy financial system and very low government debt.

The IMF shone a spotlight on these strengths last week, confirming that our strong fundamentals and our successful response to the global financial crisis mean that we’re much better placed to deal with global instability. And it was just last week that we saw another solid rise in retail sales, very healthy export growth and signs of strength in apartment approvals.

Now you can’t read too much into these monthly figures, but they do point to a domestic economy that is more resilient than a lot of the commentary has been suggesting. And we are getting on with the big reforms to strengthen our economy and position it for the future –investing in skills and infrastructure, reforming our tax system and beginning the transition to a clean energy future.

Despite our fundamental strengths, we know that the Australian economy and our budget will not remain untouched from global instability. The domestic fallout from these global events is most evident in our share market, with Australian shares falling to two and a half year lows recently, though recovering somewhat last week. Not surprisingly, global uncertainty and financial market turbulence have unsettled businesses and consumers – and reduced confidence will have consequences for our own economy.

In the midst of this uncertainty, some commodity prices have fallen, with base metal prices dropping close to 20 per cent over September. Coal and iron ore prices – the commodity prices most important to the Australian economy – are holding up relatively well to date, but remain vulnerable to any sharp slump in global demand.  These developments have added to some of the existing stresses on some parts of the economy that are already being affected by factors such as the high exchange rate and cautious consumer.


Mr Speaker, the challenges facing the world economy are the most severe since the Global Financial Crisis. There is a crisis of confidence in the capacity of political institutions in the United States and Europe to deliver the policy responses required. That’s why I will be making clear to my G20 colleagues that urgent action is needed if we are to avoid a return to the global economic dark age of 2008.

Even with action in Europe and the US, it is inevitable that this global volatility will impact us here and that we will continue to see periodic bouts of instability. But we can face this crisis with confidence, built on our strong fundamentals, our position in the world, and with the knowledge that we stared down the worst global recession in 75 years.

Houses and Holes
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  1. MontagueCapulet

    “our strong fundamentals mean we’re better placed than just about any other country to deal with the current global instability”

    Selling stuff to China might actually mean we get hit harder than anyone else except Chile when round two of the GFC starts. When global trade nosedives its typically the exporting nations that suffer the most, not the importers.

    China is a truly spectacular accident waiting to happen and if they hit that windshield the price of iron ore and copper will likely fall in half, and our currency with it.

    I mention Chile because they were one of the hardest hit countries in 1930. When the price of copper collapsed their economy went into a severe depression and their GDP in 1932 was half what it was in 1929.

    Amazingly, they are in a pretty similar position today – copper again accounts for about half their export earnings and a quarter of GDP. Should we see copper fall to less than $2 we can expect their currency to fall with it, and their GDP to again halve in US dollar terms.

    But is Australia any different? If iron ore prices fall back to 2003 levels after the Chinese housing bubble deflates, and our housing bubble collapses at the same time, what do you think will happen to the Australian Dollar? I think 50 cents is a pretty plausible target. The markets seemed to have this idea in mind when the Aussie plunged to 60 cents in 2009.

    • Except that a halving of the AUD at the same time as a halving of USD commodity prices leaves AUD commodity export revenues (income) unchanged…

      …exports recover more generally, imports suffer and RBA rips out 200-300 bps.

      yep, that sure looks like a “jump off a building” scenario to me…

      • MontagueCapulet

        You left out the bit where petrol prices double as the dollar slumps. And the negative wealth effect from housing prices dropping 30%.
        But domestic tourism should pick up and manufacturing should recover.
        Show me the part of my post where I said it was doomsday? I’m talking about a short sharp shock, not the end of the lucky country.

  2. Wasted Opportunities

    He got a shiny gold star for the last stimulus, which did the job but in no small part due to spillover from China’s own enormous stimulus. Now that warmup is over and the main event is about to kick off. I get the feeling our relatively sovereign debt situation may be about to change if there are major shockwaves from a Europe credit event.

  3. Seems he got round to actually speaking to someone in China and they said “don’t be on us this time, mate!”

  4. ..the biggest global financial crisis in 75years ,that virtually no-one saw coming..
    Obviously ,instils the confidence ,that he now knows whats going on….Re-lax

  5. I’m sure you’re right in general HnH – Treasury can see the global economic ship taking water. All in all, there is plenty to fret about and there is no certainty that things will be righted any time soon.

    I suppose the Government should get some credit, though. At least they are conscious of events and are prepared to give us the official line in public. The reality is there are no easy votes in talking about economic threats, and it is difficult to be neither alarmist nor to make light of things.

    The Euro situation is really very grave, in my (deeply bearish) opinion. The system cannot do what it is intended to do, which is to deliver integrated markets, currency stability and trans-continental prosperity. The currency union is a failed experiment that must be unwound, but the costs – political, economic and budgetary – are going to be mountainous. Naturally, the authorities will persist with the status quo for as long as possible. But in the end, they will have to submit to reality and re-construct their system.

    Really, the sooner they do this, the lower the costs will be. But they will resist. It is human nature to hold on grimly, even as the brine is lapping around your knees.

  6. Bloxo (HSBC)….gone. Evans(Westpac)..gone. IMF… gone. Treasurer (& Treasury)… gone.
    Who do the Bullhawks still have on their side – Boom Boom Battelino, Glenny, BIS Shrapnel, Mr Market (on some days only) and the conflicted MSM churnalists 🙂

  7. Wow, nice of him to wait until the carbon tax legislation passed the house before becoming all suddenly bearish.

    • Agree. Nice politics there. Now that the carbon tax is passed, let’s hope that he comes clean like this a bit more often.

      It all says to me that our Swanny is secretly very worried. As Joe Hockey is fond of saying, Labor will never deliver a surplus. Perhaps stimulus will be forthcoming soon.

  8. Mr Swan is warming the crowd for all sorts of unconventional election orientated policies.

    One policy that will not get a run is stimulus specifically directed to the construction of new housing.

    Swan would sooner have an army of tradies building bird houses in state forests than have them do something useful like expand the stock of housing.

    Propping up asset prices may seem irrational and short sighted but when has that ever bothered a pollie facing an election.

    • > Swan would sooner have an army of tradies building bird houses in state forests than have them do something useful like expand the stock of housing.

      and attract some overseas birds e.g. storks to populate the bird houses and also increase our future human population 🙂

  9. I’ve got to be honest, H&H, I read your introduction, then read the speech, then read it again because I thought I must have skipped a paragraph or two. I didn’t read any sign of backing down on the surplus. I didn’t read any real serious concern about global instability. I read ‘gee we’re in bloody good shape, but the US and EU are a shambles and might just mess things up a bit for us’. Apart from that, everything is rosy so all you economic and political commentators out there, don’t you go saying anything different…

    On a positive note, there was admission of a bit of good fortune (as opposed to good economic management).

    On a worrying note, there was also the continuing tone of ‘the GFC passed us by, we didn’t make the same mistakes’ etc etc. And if things go tits up, it’s not going to be our fault but those blasted Americans and Europeans.

  10. …and I love how simple it is for the Australian Treasurer to say how the EU debt crisis needs to be solved: put European budgets on a sound footing, restore market confidence in the ability of nations to meet their debt obligations, resolve it in an orderly way, avoid contagion, recapitalise the banks…

    If only it was that easy.

  11. ” it is inevitable that this global volatility will impact us here”

    A few motivators for Swan’s apparent change in tone:

    1. Rob – spot on, carbon tax passed lower house,

    2. He knows what we know – that we’re in trouble. So expect more of this. Seeing other leaders learn their lessons in GFC 1.0, Swan refuses to be the “ignorant cheerleader” this time around.

    3. Knows there is no chance of balancing the budget, so begins the ‘breaking of the bad news’

    Or perhaps he just had a secret ‘come to Jesus’ meeting with Australian bank execs that scared the crap out of him 😉