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What is the state of our economy?

PRU GOWARD: Good morning, Stuart. How sick do you think the economy is with these very good numbers starting to come through?

STUART SIMSON: Pru, what we're seeing is quite a contraction in local demand. Paul Keating quite rightly pointed out yesterday that, on the export side, the figures are looking quite good. In fact, you've effectively got two economies operating in Australia at the moment. You've got those industries and producers of goods and services who are oriented towards the export market and you've got the local economy which either competes with imports or produces goods and services for domestic sale. And what we're seeing is quite a substantial contraction in local demand.

And there's piles of evidences of this. You can just look at the quite dramatic decisions that have been taken in the last week by our biggest retailer, Coles Myer, which has just stopped capital spending, is laying off staff, is fixing its inventory situation. You can also see it just in terms of magazine advertising for example, where - I hasten to add not ours - but there are some magazines which are running very small volumes of advertising. And it's very tough out there, Pru; it's a very tough consumer market. And the BRW group of forecasters were looking, before Christmas, at in fact two quarters, that is both the March and June quarters of this year actually showing negative growth in consumer demand, what's called gross national expenditure. Just looking at local demand in the economy we'll go backwards for two quarters. So you're going to see a recession and we are experiencing a recession in local demand. We are not experiencing a recession in the total economy. The only real question now is whether the recession, in terms of domestic demand, will be so great that it will produce a figure, when the figures eventually come out, that will tip the overall economy into a negative growth.

PRU GOWARD: Were you surprised to see that there was an expansion in our exports of manufactured goods?

STUART SIMSON: Well, I suppose not really. I mean, frankly, neither way, Pru. As Paul Keating has pointed out there has been a hell of a lot of investment in this sector over recent years, and perhaps we're seeing the fruits of that.

PRU GOWARD: So we're really still poised on a knife edge; we're still not really in a fully fledged recession. That's going to depend on how much, the next couple of months, I suppose.

STUART SIMSON: Yes, that will depend Pru, whether ... a fully fledged recession is when the overall economy - that's both, if you like, the local and exports, when you look at the total economy, those producing for export, when you measure everything, what they call the gross national product, GNP, when that goes backwards you actually get a negative, the March, for two consecutive quarters, for the March and June. And then you can say you've got a recession. But that's all academic in terms of elections and so on because those sort of figures won't be available for months and months and months and months.

PRU GOWARD: Would you have to say that those tax cuts stopped the economy crashing through and in fact gave us a bit of a soft landing?

STUART SIMSON: Well, I'd argue precisely the opposite and, as you know, I did for about 18 months, that it was crazy to have those tax cuts when they had them. And this is part of the problem that Paul Keating's got now. He put those tax cuts in; it fuelled demand; he put petrol on the fire; the balance of payments ran longer and harder than it otherwise would have in terms of high import levels; interest rates had to stay much higher. And now many, many Australian businesses are being crunched and many Australian businesses will not survive.

PRU GOWARD: Yes. Yes, I tend to think that's the conventional wisdom. Stuart, the big problem still remains our rate of inflation. Do you think that there's real hope of cutting the inflationary cycle with this coming wages deal?

STUART SIMSON: Well it's very difficult to see, Pru, because as Mr Keating pointed out yesterday, we do have an inflation rate which is quite high; in fact, it's about double that of many of our trading partners. And we really have to get it down. But when you start fixing up wages deals in what's really the middle of, at the very least, a recession in terms of local demand, you start fixing up wages deals for the future and superannuation deals and all these sorts of things, it just goes against good economics. I mean, basically what we're doing is we're loading in costs in a recession.

I mean, I can't understand why the Treasurer would be just saying: look fellows, I'm sorry; we just simply can't be talking about this at the moment. But, of course, what Mr Keating and his advisers would say to me is: Simson, that's fairyland stuff; we've got an election coming on, we've got to fix it all up.

PRU GOWARD: And you've also got a union movement that says it's waited long enough.

STUART SIMSON: Well, precisely. But we've been saying this for years, haven't we, that we always have to do a deal with the union movement on wages. But the cost of that, the cost of actually not coming to grips with this is that we end up with an inflation rate about double our trading partners, which also means that we have interest rate levels and a risk premium in our exchange rate that needn't be there.

PRU GOWARD: Explain why the inflation rate being out of kilter with our major trading partners is such a problem for us?

STUART SIMSON: Well, what it does, it tends to erode the competitiveness of our export sector. In other words, they're paying the rate, they're paying a level of costs in terms of producing goods and services for export that is higher than their competitors overseas. And the reverse of that is that people who are producing goods for export into Australia, that is for our imports, tend to have an advantage if you just look at this in sheer cost terms.

PRU GOWARD: Now Stuart, just very quickly, the productivity deals that were working through last year, is there any sign that they're making much impact yet?

STUART SIMSON: I can't see it, Pru. I mean, some of those productivity deals of recent years have been really nothing more than wage rises in disguise. They've just been a sham. I mean, there were a number of productivity increases that went through the system last year that, wage increases that went through that bore absolutely no relation to improvements in productivity.

PRU GOWARD: Yes, it's a bit like a teenage child who still thinks that it's defying its parents for the sake of defying its parents, and it's actually in its own interest. Stuart, thank you for your time this morning.