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Transcript of press conference: 4 September 2019: Parliament House, Canberra: National Accounts June Quarter 2019; Reserve Bank agreement; interest rates; RBA inflation targeting; productivity



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4 September 2019

Press conference, Parliament House, Canberra

Subjects: National Accounts June Quarter 2019; Reserve Bank agreement; Interest rates; RBA inflation targeting; Productivity

JOSH FRYDENBERG:

Today's National Accounts show that the Australian economy has completed its twenty-eighth consecutive year of economic growth, a record that has not been matched by any other developed economy.

It's a reminder of the remarkable resilience of the Australian economy and a repudiation of all those who sought to talk it down.

In the June quarter, real GDP growth was 0.5 per cent to be 1.4 per cent higher through the year. In year average terms, real GDP grew by 1.9 per cent in 2018-2019. The 1.9 per cent is slightly below the budget forecast of 2.25 per cent, which is also in year average terms.

In the June quarter, nominal GDP grew by 1.2 per cent and 5.3 per cent in year average terms for the 2018/19 year. Nominal GDP growth was slightly above the budget forecast of 5 per cent for 2018/19.

Significantly, these numbers do not incorporate the passage through the Parliament of the most significant tax cuts in more than twenty years and the full impact of the RBA's decision to reduce interest rates by 50 basis points.

As of today, the ATO has issued more than 5.5 million individual tax refunds for the 2018/19 year, totalling more than $14 billion. This money is flowing through to households and will be reflected from the September quarter onwards.

The combination of these tax and interest rate cuts, the stabilisation of the housing market, continued high levels of spending on infrastructure and a more positive outlook for investment in the resources sector has led the RBA Governor to say "there are signs that the economy may have reached a gentle turning point."

The fundamentals of the Australian economy are strong.

We have maintained our AAA credit rating.

Employment growth is at 2.6 per cent, more than twice the OECD average and more than three times what we inherited when we came to office.

A record number of Australians are now in work. The participation rate has never been higher and more than 1.4 million new jobs have been created since we came to office and around eight out of every ten new jobs have been full time over the past year.

The proportion of those people of working age on welfare is now at its lowest level in thirty years.

Free trade agreements now cover more than 70 per cent of our two-way trading relationships and our current account surplus is there for the first time since 1975.

In today's National Account numbers, net exports, new public final demand, household consumption and mining investment all contributed to real GDP growth.

Household consumption which comprises around 60 per cent of GDP grew by 0.4 per cent in the June quarter. Expenditure in fourteen out of the seventeen consumption categories increased in the quarter, including for recreation, clothing and footwear. The largest fall in the quarter was in the purchases of motor vehicles.

Dwelling investment has fallen for three consecutive quarters, detracting 0.2 percentage points from growth in the June quarter and this comes after several strong years of annual growth, averaging above 5 per cent.

Mining investment grew by 2.4 per cent in the quarter. It was only the sixth time it has grown in twenty-four quarters since the height of the mining investment boom in 2012/13. Importantly, there was an increase in mining related investment in machinery and equipment. New non-mining business investment fell by 1.1 per cent in the quarter, but it is 1.5 per cent higher through the year.

New public final demand, which includes spending by all levels of government, rose by 1.5 per cent in the quarter to be 5.2 per cent higher through the year. This was driven by public consumption, including higher disability and aged care funding and flood remediation works in Queensland.

However, public final demand will continue to be supported by the Commonwealth's 10 year $100 billion pipeline of infrastructure spending.

Net exports made a substantial contribution to real GDP growth of 0.6 percentage points in the June quarter. Imports fell in the quarter while export growth was driven by mining exports, which rose by 2.4 per cent.

Rural exports fell by 4.3 per cent in the quarter, the drought continues to have a devastating impact on those communities, with the farm GDP being 8.3 per cent lower through the year.

Inventories detracted 0.5 percentage points from growth in the quarter. This includes a reduction in manufacturing, wholesale trade and mining inventories, partly related to weather events, particularly the drought.

Company profits increased by 2.4 per cent in the quarter to be 12.8 per cent higher through the year. The rise in company profits was driven by very strong mining profits, which were 10.6 per cent higher in the quarter. Profits outside the mining sector actually fell 0.6 per cent but remain 1.8 per cent higher through the year.

Growth in compensation of employees, which is the Wages Bill for the economy, was up 1.3 per cent in the June quarter and 5 per cent higher through the year. Average earnings as measured in the National Accounts grew by 0.9 per cent in the quarter to be 2.5 per cent higher through the year and this is broadly consistent with the Wages Price Index, the WPI, which is at 2.3 per cent.

Importantly, living standards continue to increase with real net national disposable income per capita rising 1 per cent to be 2.7 per cent higher through the year. Productivity fell by 0.1 per cent in the 2018/19 year, reflecting the challenge our economy faces.

As I said in a speech last week, we need to boost productivity as a means of lifting wages and economic growth, and this will require Governments, both Federal and State, and business, to work together on a number of fronts.

Today's National Accounts show the Australian economy continues to grow in the face of significant headwinds, both domestic and international.

It's a difficult time for global economies, with Singapore, Sweden, Germany and the United Kingdom all having negative economic growth in their June Quarters, and the IMF and the OECD have both downgraded their global economic growth forecasts.

In the face of these challenges and the uncertainty created by increasing trade tensions between China and the United States, the Australian economy has again proven its remarkable resilience.

The Morrison Government is implementing its economic plan as set out in the Budget as a means of continuing to grow the economy, reducing taxes and ensuring that more jobs are created.

I'll now just briefly go through a few slides.

If I can go to the first slide. The first slide shows that real GDP growth was 0.5 per cent for the June quarter and 1.4 per cent through the year, which is a bit below the ten year average. To the next slide.

This is the nominal GDP number, and as you can see through the year, 5.4 per cent. Above the ten year average and nominal GDP is a reflection of the term to trade story and will be very key in determining Budget outcomes. Next slide.

This is a GDP-Budget Comparison which is looking at both the nominal and the real GDP numbers, and what is absolutely key from here is that we have outperformed our Budget forecasts when it comes to the nominal side, but we're slightly below our Budget forecasts on year average terms when it comes to the real GDP numbers. Next slide.

Household consumption. Still softer than we would like it to be. 0.4 per cent for the quarter, 1.4 per cent through the year, and below the ten year average. And importantly, just to make the point on consumption. These numbers in the June quarter do not have the benefits of the tax cuts or the full flow through from the interest rate cuts.

Of the seventeen consumption categories, as I said, fourteen are up including discretionary ones. Hotels, cafes, restaurants and recreation, and the biggest fall is in the purchase of motor vehicles. The purchase of motor vehicles tend to be a major purchase for people, a bit like houses, and when the housing market had, the prices of houses had declined, you also see corresponding falls in the purchase of motor vehicles. The next slide.

The next slide is new public final demand, which is Government spending, Federal and State, taking into account both consumption and investment and as you can see, it's a positive story. 5.2 per cent. The numbers in this quarter were driven by consumption as opposed to as much by investment, but that's disabilities, that's aged care, and it's also the payments in relation to the floods and the droughts and the victims. Next slide.

Farm GDP. Well, this is the human story that is behind the economic numbers, and as we can see, that is a lot of volatility over the years in farm GDP, reflecting the cyclical nature and the weather patterns. But now, with the terrible droughts and the floods, we've seen farm GDP down 8.3 per cent through the year. Next slide.

Household saving. Slightly down from 3 per cent to 2.3 per cent. Household savings might be a reflection a little bit of a low interest rate environment, but also the previous quarter saw pay outs, including pay outs on insurance claims for hail storms in New South Wales, but also the floods, and that would have boosted the household income numbers, and obviously that's no longer the case in this quarter's numbers.

In terms of the next slide, compensation of employees. This is the Wages Bill. More people in jobs, and higher earnings, and we're at 5 per cent for compensation of employees. Next slide.

This is the final slide. This is looking at our real GDP growth at the end of the financial year, so this is on the year average basis, and as you can see, despite the challenges that the Australian economy is encountering, very significant challenges, both domestically and internationally. The trade tensions, with flood, with drought, we have still performed relatively well, and I want to emphasise that Germany, the United Kingdom, Sweden, Singapore and others, experienced negative growth in the June quarter, whereas the Australian economy continues to grow. The message out of today's National Accounts is the Australian economy continues to grow. The Australian economy has shown remarkable resilience and these numbers are a repudiation of all those who have sought to talk down the Australian economy.

QUESTION:

Treasurer, you're placing a bit of store, a fair bit of store, in the tax cuts and the rate cuts lifting us up in the next quarter. You won't see the effects of those until December, or September, maybe before you prepare MYEFO you'll get those numbers. Does that mean you and the Government will wait till then before you consider any additional measures such as an investment allowance for business? Or do you anticipate acting sooner on that, or anything else?

JOSH FRYDENBERG:

Well, in terms of investment, and I made that clear in the speech, Phil, we want to see more business investment, and this is a challenge for productivity in this country. So we are having a discussion with key stakeholders about other ways that we can boost investment, and those decisions will be decisions at Budget time. In terms of infrastructure spending, the Prime Minister has written to the Premiers, and he has written about the possibility of bringing forward some infrastructure projects. And when it comes to the tax cuts, as the Reserve Bank Governor has made clear, the tax cuts are flowing into households, and households are spending it at local businesses. $14 billion. Those tax cuts were not reflected in these numbers and that is really important to understand.

QUESTION:

Can I just clarify. You said Budget time, does that mean….

JOSH FRYDENBERG:

Next year.

QUESTION:

Not MYEFO?

JOSH FRYDENBERG:

Well, that's the sort of timetable we're working towards.

QUESTION:

Treasurer, you mentioned purchases of cars. We saw figures come out today saying they fell ten per cent in August and I think that's the worst August since 2010. When do you think people will actually get that confidence to spend through the tax cuts and/or the interest rate? Do you think it's a confidence issue that's at play?

JOSH FRYDENBERG:

Well, I do think confidence is always a factor in the economy and when we look at our current account surplus that's been a good trade story, but what that obscures in some ways is the negative sentiment that's flowed through from the general discussion about the trade tensions between China and the US. I mean, investment decisions are being deferred, capital inflows have slowed, the volume of growth in trade has also reduced. And that plays in to people's mindsets. As I said about motor vehicles, Shane, it's a major purchase for the public. And it's a bit like when you're purchasing a house. It's a smaller purchase than a house, but it's a major purchase nonetheless. We started to see an improvement and a stabilisation in the housing markets. Instead of having 40-50 per cent clearance rates, we're now seeing above 70 per cent. Prices have started to stabilise in the main markets of Sydney and Melbourne, and I think that's again a reflection of the lower interest rates but also the confidence coming back, the election being over, and that's going to be, I think that's going to be good news in time also for household consumption and that would also include motor vehicles.

QUESTION:

Treasurer, obviously Government spending is a large part of these figures. If you take that out of the equation, isn't the picture of the private economy far bleaker than these numbers suggest?

JOSH FRYDENBERG:

Well, there's been strong growth in the net exports, which I've talked about. There's a compensation of employees number at 5 per cent, that's up. The real net national disposable income per capita, which is the proxy for living standards, is up by 2.7 per cent, and household consumption, yes it's a bit weaker than we would like but it is starting, it is still growing at 0.4 and we've yet to see the flow through from the tax cuts. So there's no doubt there is a challenge in the domestic and international economic environment, but as the Reserve Bank Governor, myself, the Prime Minister, Matthias Cormann, and others have made clear. The fundamentals of the economy are sound. And the only person who is disappointed, the only people who are disappointed with today's National Accounts are Anthony Albanese and Jim Chalmers, because their efforts to talk down the Australian economy have not succeeded. These numbers show that the Australian economy continues to grow, that the Australian economy is resilient in the face of those challenges, and we will continue to put in place the necessary measures to ensure that jobs are created and the economy grows.

QUESTION:

So Treasurer, you're happy with the worst annual GDP numbers since the GFC because you thought it might have been worse?

JOSH FRYDENBERG:

Well, it is a challenging environment and as you know, with some people who were speculating in the media, Peter, about a negative quarter of economic growth, and that's what we've seen in Germany, in the UK, in Sweden, and in Singapore. At 0.5 per cent, we would always like it to be higher and certainly the policies that we're putting in place are to drive higher economic growth. But what this number shows, is the resilience of the economy, a repudiation of those who sought to talk it down, and also it is before the $14 billion of tax cuts had flowed through the economy.

QUESTION:

Treasurer, do you know, are we in a surplus at the moment or not?

JOSH FRYDENBERG:

Well, the 2018/19 year will be released in the next couple of weeks…

JORUNALIST:

But do you know if we are or not?

JOSH FRYDENBERG:

I do know the number, and obviously Matthias Cormann, the Finance Minister and I will be announcing that. But what I can say is what I've said publically before. It is that it is a major improvement on the, I think the $4.2 billion deficit that was estimated, forecast at Budget time.

QUESTION:

Can I just ask also, why do you think people are saving less? Aside from the insurance payouts in the last quarter, that makes it a little bit higher?

JOSH FRYDENBERG:

Well, that was actually, that was actually a major factor here. 3 down to 2.3, it's also a reflection that we are in a low interest rate environment as well, there's a bit of that, but the insurance claims were a major factor yes. Michelle.

QUESTION:

Treasurer, your challenge to businesses the other day received a mixed reception, some positive but also some sceptical, do you think that business still has a lot of stepping up to do? A lot of realisation of your argument?

JOSH FRYDENBERG:

Well, Michelle, in fact I was pleased to see the head of Wesfarmers, the head of Macquarie Bank, the head of UBS, the head of SEEK, the Chairman of CSL, the head of MYOB, the head of PwC, all come out and publically welcome my comments.

QUESTION:

Some didn't though.

JOSH FRYDENBERG:

Well, I think it was Mike Kane from Boral who didn't, and he didn't exactly have a ripper number to talk about himself, so I think he would have been better off looking at his own back yard than commenting broader afield. The fact of the matter is, a number of very senior business leaders welcomed this discussion and debate, and I was just pointing out, Michelle, that in the last twelve months, there's been 140 per cent increase in share buybacks and special dividends compared to the average of the four years prior. So 29 billion of the last twelve months compared to a 12 billion average the four years prior. Now, it's absolutely up to companies to make the decisions about capital allocation. But when they're in the possession of excess capital, whether it's from asset sales or a cash flow situation, then invest for growth. Invest in the future of your company. Put it in to capital, put it in to investment. And I citied some, and not all companies are the same, but I cited the SEEKs and the CSLs, great Australian success stories who are investing more and more, Atlassian's another one, more and more in R&D to grow their business. So, I was pointing out, rather than being a little bit risk averse and seeking to buy back shares, to increase the worth of each individual share through share buy backs, maybe invest some of that money in the growth story of your company and for the long term benefits of shareholders and the economy.

QUESTION:

Given the uncertainty of the world, isn't it economically rational for companies to be risk averse and for people not to spend their $14 billion in tax cuts. What makes you think that people will be spending that money?

JOSH FRYDENBERG:

Well, some companies, look, Chris, you're absolutely right that there is uncertainty in the global environment. There's no doubt about that. And that uncertainty is real and it's playing out on investment decisions, on capital flows, and on trade volumes. But business leaders with vision are looking beyond the next twelve months, twenty-four months and short-term cycle. They're looking for the future prospects of their business and that's where investments can pay long-term dividends.

QUESTION:

Treasurer, it's been four months since the election. Usually, when a Government is elected it has a new agreement with the Reserve Bank. Are you planning to have such an agreement? If so when? And are you looking at changing the terms of it?

JOSH FRYDENBERG:

So, the answer to your question is yes, I am looking to have such an agreement and Treasury are currently engaged in a discussion with the Reserve Bank about that inflation target which is two to three per cent. I think it has served Australia well. In fact, Phil Lowe has talked about it. But as you would appreciate, Peter, we're in a new world with low interest rates, relatively low unemployment and low inflation. And if we're going to have a two to three per cent band, then we want to hit that target. And as you know, inflation is currently 1.6 per cent…

QUESTION:

So changing it is possible?

JOSH FRYDENBERG:

Well, let's wait to see where those discussions go. It's not going to be a radical change but there is a discussion about maybe ways we can strengthen that agreement, strengthen that target to ensure that we continue to see inflation where the Reserve Bank and the Government wants it to be. It's at 1.6 per cent today and the target is two to three. As you all know from recent quarters, we have been a long-way short of it.

QUESTION:

Governor Lowe also has also said the unemployment rate needs to be at least four and a half or lower. Your budget forecasts are around five. Is there anything that you can see that will get, from the Government's perspective, unemployment down to that level?

JOSH FRYDENBERG:

Well, you are right that there is spare capacity in the labour market and, again, that is why Phil Lowe, Shane, and the RBA board have moved to reduce rates because they're trying to tackle that spare capacity in the market, not worried about inflation running out of control which would have been a previous approach to these things by central banks in the world where you reduce rates, you've got unemployment at 5 per cent which is traditionally seen as full employment and you were worried about the impact on inflation. The policies that we're putting in place, and that's the tax cuts, that's the infrastructure spending, that's the apprenticeships. They are all designed to boost economic activity.

The trade agreements, one in five Australian jobs are related to trade and, obviously, the current account surplus is, I think, a reflection of the success of those free trade agreements as well as, obviously, a strong production story in the mining sector and a higher terms of trade. But, I believe that the policies that we've put in place, the other things that we continue to contemplate, they will continue to drive good employment outcomes. And I do go back to the employment growth number, Shane. 2.6 per cent. 2.6 per cent compares to an OECD average of 1.1 per cent and a 0.7 per cent rate when we came to Government. So, employment growth is now more than three times what we inherited and as the Reserve Bank Governor I think said as recently as yesterday, there is strong employment growth.

QUESTION:

Just on that point of the positive story with the mining production and what we said of net exports really holding all of this up. Can states specifically like WA be seen as propping up a lot of this growth and the positive story that we're talking about here?

JOSH FRYDENBERG:

Well, WA is the mining capital of the country and certainly the iron ore story has, in terms of the nominal GDP numbers, has been a very positive one. I think the spot price today is around $75, got as high as $120. It was in our budget forecast at $55, so anything above $55 is really a bonus for the budget. But, Western Australia continues to do its part in the national economy. I do point out, though, that one of the positives in the investment story numbers today is that in mining we've seen a pickup particularly in machinery and equipment and that's a bit of a Western Australian story as well. Because it's the autonomous vehicles, it's the state of the art technology which is driving the productivity gains that we've seen in mining, but perhaps not going to see in other sectors. I mean you may remember the speech I said the other day, our productivity gains have come from 5% of our companies. 95% of our companies haven't had much productivity gains but the mining sector, particularly some of the big players, have been at the forefront of those technology improvements.

QUESTION:

One of the key numbers in there is about public investment as opposed to public consumption. Public investment sounds (inaudible) per cent. So, whilst you're encouraging the private sector to invest, the public sector isn't investing as much. Admittedly, the ABS did say that a big chunk of that is driven by the State and Local Government's big decrease in the amount that they're investing. Are you finding it very difficult to try and encourage other Governments to spend on investment? And if so, doesn't that also show that you don't, aren't able to pull all the levers in the economy?

JOSH FRYDENBERG:

Well, as you know, infrastructure investment is a two sided coin. It's the Federal story as well as what the States are investing in a very significant way. We've got that $100 billion ten year pipeline which is important. In terms of that investment story, in terms of public investment that you're referring to in these numbers, there's a couple of projects that, sort of, have ended. The Newcastle Light Rail, the Sydney Metro North-West project, and so you are seeing a sort of timing related issue in some of that infrastructure investment. And as I mentioned, the public final demand is being driven mainly by the consumption side of things, the Aged Care, the disability, the spending on households.

But, you know, what I will say about these numbers is that they do show resilience in the Australian economy. The Australian economy is in its twenty eighth, has now completed, twenty eight consecutive years of economic growth. It's a repudiation of those who've sought to talk down the Australian economy. I mean, our political opponents still have $387 billion of higher taxes as their policy. Could you imagine Labor putting $387 billion of higher taxes, at this time, when we've got such a challenging domestic and international

economy? I mean, Jim Chalmers, you know, talks about being committed to a surplus but then he's asking us for more stimulus. He talks about having, you know, paying down debt, but at the same time, he wants to delay paying down debt and he talks about lower taxes and wants all these higher taxes.

QUESTION:

Just speaking of taxes. Is your tax to GDP ratio going to blow out a bit this year?

JOSH FRYDENBERG:

Well, as you know, we've got a cap at 23.9 per cent.

QUESTION:

And that hasn't changed? It's well under?

JOSH FRYDENBERG:

Well, we're at 23.3, and 23.9 is our cap. And, as you know, Labor was well above that with their $387 billion of higher taxes. So, what I'd say, you know, to Jim Chalmers and Anthony Albanese. Don't lecture us. Take your instructions from the Australian people and they sent you a very clear message at the last election. We're not for your higher taxes. But those are still the higher taxes on Labor's books. $387 billion of higher taxes. Anthony Albanese and Jim Chalmers simply cannot add up. They cannot have it all. They cannot have it all. They can't have more stimulus, lower taxes, higher taxes, and also paying down debt and getting surpluses. They simply can't add up. We are driving the Australian economy in a way that continues to grow, jobs continue to be created, and most of all, we're putting more money into the pockets of hardworking Australians while lowering their taxes.