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"The context for Australia's G20 presidency": Address to the CEO Institute Summit, Sydney



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“THE CONTEXT FOR AUSTRALIA’S G20 PRESIDENCY” SENATOR THE HON ARTHUR SINODINOS AO ASSISTANT TREASURER CEO INSTITUTE SUMMIT 2014

SYDNEY, 29 JANUARY 2014, 8AM

** CHECK AGAINST DELIVERY **

Introduction

Good morning, it is great to be here with you in a room of such esteemed

company. It is also a great pleasure for me to be speaking with you as Prime

Minister Tony Abbott’s representative.

Today I want to outline “The Context for Australia’s G20 Presidency.” It comes

just days after the Prime Minister delivered his address on the G20 in Davos.

Australia assumed the presidency of the G20 last December. Throughout this

year we’ll be hosting around 4000 international delegates (along with 3000

media) at the most significant meeting of world leaders in Australia’s history.

The presidency affords us a rich opportunity to shape and influence the issues

that most profoundly affect global growth and resilience.

It’s a weighty responsibility, but one Australia is well placed to accept.

This morning I want to give you the international and domestic context for our

G20 host year, and briefly outline why the G20 matters to the world, to

Australia, and to Australian businesses.

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The history of the G20

Today, the G20 is the world’s premier economic forum.

Back in 1997 when the Asian Financial Crisis gripped much of East Asia and

raised fears of global contagion, the Group of Seven or ‘G7’ developed

economies became conscious of the need to consult more broadly to determine

economic policy directions for the global economy.

Out of this experience, the Group of Twenty Finance Ministers forum was

created in 1999.

When Australia hosted the eighth G20 Finance Ministers meeting in Melbourne

in 2006, under the theme of ‘Building and Sustaining Prosperity’, the G20 was

focused on spreading the benefits of growth, which at that time seemed like a

global paradigm that was here to stay.

Then in 2008, following the collapse of Lehman Brothers and the consequent

stock market crash, the global economy experienced its most difficult period

since the Great Depression of the 1930s.

This situation required the attention of leaders who could take urgent and

decisive action, and commit to the exceptional measures that were necessary to

support the global economy and stabilise financial markets.

The G20 acted effectively as a ‘crisis manager’ by:

• coordinating global action to address fundamental weaknesses in financial

sector regulation, governance and architecture;

• securing critical agreement to a coordinated fiscal policy response;

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• brokering IMF reform to enhance its legitimacy and increase its resources,

providing a critical safety-net for the global economy; and

• mitigating against the risks of a global currency war.

In the years since the crisis, the G20 has continued to steer a path of economic

recovery and reform.

As the Prime Minister has clearly stated, Australia’s Presidency of the G20 will

not be about leading a talk-fest. The Abbott Government will be striving to

achieve real outcomes in order to promote global growth.

The global economic context

I’d like to turn now to the current global context in which we’ll be hosting the

G20.

It’s more than five years since the peak of the Global Financial Crisis, but the

recovery since then has been weak.

And last year was particularly disappointing, with global growth at its weakest

since 2009.

As we enter 2014, there’s both hope and caution for the global economy.

Hope, because we may have turned the corner; and caution, because we know

we’re not yet out of the woods.

Global growth is expected gradually to improve through 2014 and 2015.

And underpinning this are welcome recoveries, of differing extents, in the

advanced economies.

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In the United States we’re seeing signs of recovery, which have been given a

vote of confidence with the US Federal Reserve’s decision to wind back its

asset purchases program.

But this recovery is long overdue, and remains the slowest US recovery of the

post WWII era, with employment levels yet to return to pre-crisis peaks.

In the euro area the recovery is weak and uneven, but it follows one and a half

years of contraction. And, as with the US, the positive news of the last year has

been most welcome.

Still, jobs also remain a concern, with unemployment at record highs. And

weak inflation has made deflation a real risk to the outlook, an ‘ogre that must

be fought decisively’, as the IMF recently observed.

Any re-escalation of the euro area crisis, whether it comes from fiscal concerns

or the region’s troubled banks, remains one of the key risks to the global

recovery.

In Japan, we are seeing encouraging signs - under the Abenomics or ‘three

arrows’ policy agenda, Japan is a country determined to exit from years of

deflation. Maintaining the political commitment to reform will be crucial to

ensuring that a recovery there becomes self-sustaining.

Indeed this is the case for the US and Europe too.

While advanced economies are leading the good news of late, emerging markets

remain the engine room of global economic growth.

The IMF projects emerging and developing economies will account for around

three quarters of global growth to 2018. And Treasury’s long-term projections

indicate that this trend may well continue out to 2030.

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In China, growth rates closer to 7 per cent will likely be the norm in coming

years, as its economy undergoes inevitable - and necessary - structural changes.

The structural shifts in the Chinese economy will have implications here at

home, and we will no longer be able to rely on rapid growth in the resources

sector.

The rising Asian middle class will of course bring incredible opportunities in

services and high-end goods, but our success here is not something we can take

for granted.

Outside China, we have seen a number of emerging markets slow, reflecting

tight financial conditions and structural impediments to growth and investment.

With advanced economies recovering and a return to more normal times,

countries can focus on developing good fundamentals - good institutions and

opportunities - to attract investment.

This is particularly important in our own region, where the normalisation of US

monetary policy has seen capital outflows and currency depreciation in India

and Indonesia. Nevertheless, the shift in global economic weight from west to

east won’t be halted by the bouts of volatility that we have seen in recent times.

Instead, this highlights the importance of having sound macroeconomic policy

settings and robust institutions to help withstand crises and smooth adjustments.

To re-iterate the Prime Minister’s message at Davos, it is important for

Governments everywhere to promote sustainable, private sector led growth and

employment - and to avoid government-knows-best action for action’s sake.

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Globalisation provides both opportunities and challenges. For instance, on the

tax front arrangements have not always kept up with the rise of services and the

pervasiveness of digital technologies.

The Prime Minister expressed the aspiration in Davos that there is a frank

leaders only discussion in Brisbane about the biggest issues we face, including

digitalisation and its implications for tax, trade and global integration.

In relation to financial regulation, work will always be ongoing. We need to

ensure the reforms in train are finalised and that financial systems meet the

growth needs of the world economy.

On infrastructure, Australia has already announced reforms to improve the

effectiveness of Infrastructure Australia and to encourage State governments to

recycle capital by selling existing assets to finance investment in greenfields

infrastructure.

The G20 provides an excellent forum to bring together policy makers, financiers

and builders to identify practical ways of increasing long-term infrastructure

financing.

The domestic economic context

Australia is likely to remain a bright spot among advanced economies.

We have 22 consecutive years of growth under our belt.

And we’re well placed near some of the emerging markets that remain the

dominant contributor to global growth.

Indeed, over the next five years, Australia’s real GDP growth is expected to

outperform that of every major advanced economy outside the US.

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But with the global recovery, the experiences and challenges faced by

individual countries will be increasingly different, so it’s worth reflecting on

some of our own.

Similar to many economies, ours is undergoing a period of transition: from

growth driven by resource investment to growth driven outside the resources

sector.

It is underway, but it is slow, and we expect below-trend growth over the next

two years.

The Abbott Government is actively working to reduce the burden of red tape in

Australia that has put a brake on our economy for so many years. With our

target of reducing red and green tape by $1 billion per annum we are working in

partnership with the private sector to lift our productivity growth.

It is important to note that this applies across the economy - from the big end of

town, to small business owners. The focus on the engine room of our economy

- small business - is being successfully led by my colleague the Hon Bruce

Billson.

The resource investment boom is at or near its peak, and while resource

extraction and export will increase, this phase won’t support as many jobs as the

construction phase, and we still need to see growth in non-resources sectors

pick up in order to meet the shortfall.

The unemployment rate is expected to drift up to 6 and a quarter per cent by

mid-2015.

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Wage growth has slowed and is expected to remain subdued, and this will be an

important adjustment mechanism for supporting employment growth as the

economy transitions.

Another positive adjustment is the fall of the Australian dollar since its peak in

July 2011 of US$1.11, which helps trade-exposed industries that have been

under pressure from the high dollar.

These adjustments, along with significant support from monetary policy, are

expected to encourage activity in the non-resources sectors, helping to support

growth in 2014-15 and beyond.

Investment outside of the resources sector remains soft. There have been some

positive signs, like a recent improvement in business conditions, rising to a two

and half year high.

However, with capacity utilisation remaining below its long run average, it is

expected to be some time before businesses significantly increase their level of

investment.

New housing construction is recovering, but more slowly than in past cycles.

Consumer confidence is above average, but it remains to be seen if this will be

sustained. Consumers have been quite cautious since the global financial crisis,

and have been saving more.

At the same time that the falling terms of trade start to detract from national

income growth, our ageing population will mean lower levels of workforce

participation. These factors suggest that, if labour productivity were to grow at

its long term average, gross national income per capita would grow by around

three quarters of a per cent per year on average over the decade ahead. This

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would be much less than the two and a quarter per cent annual growth that

Australians are used to.

Absent elevated terms of trade, future growth in Australian material living

standards will be determined by productivity growth.

Indeed, to achieve per capita income growth in line with its long term average,

we would need sustained labour productivity growth of around 3 per cent,

which is in excess of what we have averaged over any decade in the past, and

double the rate achieved over the last decade. A concerted, persistent reform

effort is clearly required.

This is not just an issue for Australia; it’s common to other advanced

economies. For example, the euro area economies and Japan would benefit from

reforms to lift productivity and thus living standards, including in the face of

ageing populations.

Importance of G20 to Australia

With these challenges looming large, the G20’s focus on jobs and growth could

not be more relevant.

It matters to Australia to be at the top decision-making table. We can influence

the global agenda, secure better outcomes on key policy issues to promote a

secure and stable economy, smooth the changes in geo-economic and political

weight and so provide better outcomes for all Australians.

It’s important to Australia that the G20 itself prospers. If it doesn’t, we risk

being cut out of important discussions. Australia was not part of the earlier

incarnations, the G7 or G8. Any move away from the G20 will fragment the

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international economic architecture that has served us well, and that has brought

Australia to the table in the last five years.

Hosting the G20 in 2014 gives Australia a valuable opportunity to influence the

economic policies of the major economies of the world and contribute to a

healthy, growing and resilient global economy.

Australia’s G20 agenda is based on two key themes that are directly relevant to

business:

• Promoting stronger economic growth and better employment outcomes;

and

• Making the global economy more resilient and able to deal with future

shocks.

There is a direct link between the focus of the G20 and the Government’s

ambitions for Australia. We are particularly focused on reducing barriers so

Australian businesses can invest, create jobs and participate in the global

economy through trade.

Our commitment as a Government to doing this can be seen through our

successful conclusion of a free trade agreement with South Korea and we are

also working on bilateral agreements with Japan, China, India and Indonesia as

well as plurilateral ones such as the Trans-Pacific Partnership.

The Prime Minister will use the G20 Presidency to promote free trade and he

has called for the roll back of protectionist measures put in place since the

global financial crisis, supported by domestic reforms that promote global

engagement.

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We also want to make it as easy as possible for countries to attract investment

dollars to build the infrastructure they need.

Importance of G20 for business

A fundamental principle of our G20 agenda is that growth must be led by the

private sector.

As the Prime Minister said in Davos last week, “A strong economy is … one

spontaneously generating its own growth. After all, government doesn’t create

wealth; people do, when they run profitable businesses.”

The key to a strong and resilient global recovery is a thriving private sector.

At the moment, weak demand, uncertainty and dim prospects for future growth

are undermining the private sector’s willingness to invest, create jobs, develop

new trade links and enter new markets.

The G20 has an important role to play in returning the global economy to a

sustainable growth path by fostering an environment that reduces uncertainty

and encourages businesses to invest.

G20 leaders will unite this year around a common purpose to improve global

growth, resilience and confidence, and will remain vigilant and proactive in

supporting the global recovery.

The G20’s coordinated approach to implementing policy is critical for restoring

business confidence and boosting consumer demand.

As President we will be asking countries to put forward comprehensive growth

strategies in 2014 to lift global growth. These growth strategies have significant

potential to increase trend growth, employment, productivity and investment.

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The success of the G20 in achieving its goals will depend on how the private

sector responds; and equally, the success of the private sector will depend in

large part on how effectively the G20 can facilitate international cooperation

and reach decisions in the interests of all.

Conclusion

By any measure, our G20 host year is an exciting and significant moment in our

history.

It’s an unprecedented opportunity for us to lead and influence the global

economic community at a critical time.

We welcome this opportunity, and look forward to the work and the rewards it

promises for Australia and the world in the year ahead.