This is Treasurer Peter Costello’s press conference, in Canberra, today.
Costello took questions on the June quarter National Accounts figures released today.
He also answered questions on Iraq, Wilson Tuckey, ethanol and the jailing of Pauline Hanson.
- Listen to Costello (3m – beginning only)
Transcript of Treasurer Peter Costello’s press conference.
COSTELLO:
Well the Australian economy slowed but grew in the June quarter. And when you consider the factors that buffeted the economy during the quarter and the effect that they had on exports, it was probably one of the most difficult trading quarters that we have seen.
The economy grew by 0.1 per cent in the June quarter and 2 per cent during the year. And we had strong growth from domestic factors, expenditure growth contributing nearly one and a half percentage points to GDP and all of that taken away by the net export position, with exports falling 5 per cent.
The decline in exports was led by the decline in travel services, a 17 per cent fall for the quarter. No doubt a consequence of the SARS epidemic and the war in Iraq.
The decline in rural exports as a consequence of the drought was 27 per cent over the year. Some measure of the effect of the drought which we have seen in the National Accounts can be gathered by the fact that agricultural income fell 37 per cent in the quarter and 72 per cent over the year. This is the most extensive drought in Australian recorded history and it’s had a dramatic effect on both production, income and exports.
So what was it that kept the Australian economy growing in the midst of a global downturn, SARS, a drought and war? Well, essentially domestic consumption continues to be strong and our non-farm economy grew by 3.9 per cent over the 2002-03 year. It is almost like we have got a dual track economy operating here. Confidence in the domestic sector, consumers still having confidence and engaging in consumption, in the midst of a very severe drought, war and SARS.
Private business investment rose 1.8 per cent in the quarter and 11.3 per cent over the year and new engineering construction rose 1.6 per cent in the June quarter and 36 per cent over the year. And that’s some of the very large projects that are going on in Australia at the moment – projects such as the Darwin to Alice Springs rail line.
Although dwelling investment came off in the June quarter it is at historically high levels and building approvals which have been released in both June and July show that construction will be strong in the next quarter.
Although corporate profits fell, and this was yesterday’s news, they were up 6.3 per cent over the year. And the profit share as a proportion of GDP is still at historically high levels. I think I said in relation to last quarter it was a record. Yesterday’s figures came out, people were trying to reconcile this strong reporting system with something of a fall in corporate profits and I would just make the point that although they came off slightly in the quarter, they are up over the year and they are at still historically high levels.
Inflation remains in check with the household consumption chain price index falling 0.2 per cent in the quarter, rising 2.2 per cent over the year.
So, we have come through a very difficult quarter in terms of trade. Although the September quarter will still be a difficult quarter, there are signs of improvement. It is expected that Australia’s cereal crops will return to average. There has been substantial plantings, it will take some time for Australia’s livestock to recover. Monthly tourist arrivals in July have bounced back after the SARS epidemic seems now to have come to an end. Hostilities in Iraq are less than they were before although one must note that the threat of terrorism seems to be quite a constant threat. The United States economy appears to be strengthening although some of the European economies appear to be going back into recession. Although some of our trading partners are in recession, such as Korea, we think that there will be something of a strengthening in our East Asian trading partners.
So, although we will not be free of difficulty in the September quarter there are positive signs and the Australian internal domestic economy continues to grow strongly supported by strong employment outcomes, low interest rates and strong consumer sentiment.
JOURNALIST:
Treasurer, were you relieved this morning when you saw the figures and realised the economy actually grew more than it went backward?
COSTELLO:
I said when I did this National Accounts three months ago, in relation to the March quarter, that June would be a weak quarter. And I put everybody on notice of that. I think that the drought probably bit a little bit more than we were expecting.
And it was impossible to forecast the full effect of the SARS epidemic in relation to tourism. So this was always going to be a difficult quarter to get through. And I am pleased that we got through it with the economy continuing to grow. As I said, we are not free of all difficulty yet but I think the signs for the next quarter are a bit better than they were for this quarter.
JOURNALIST:
When does it become a problem that domestic expenditure is being underpinned by a lot of credit, and I mean, you have spoken before about “Harry Potter”, I mean we have got programs like “The Block” now, fuelling people wanting to improve their homes and so on, when does that become a problem?
COSTELLO:
Well you would have noticed that last, Sunday week ago, after “The Block” aired to a record Australian audience, if you had stayed tuned, “60 Minutes” came on with me warning people against overheated property markets. I suspect I didn’t rate nearly as well as “The Block”. I suspect that the optimism that “The Block” was portraying was more powerful than my sobering counsel.
But I have made this point, and I will make this point again, people have got to remember this, that interest rates are at 30 year lows. They must factor into their thinking that house prices don’t always rise. I always say to people who are investors, give yourself some room. We are already seeing some signs that the medium density housing market prices are falling in some markets, particularly in relation to Melbourne. There is no such thing as a one-way bet. We saw equity markets fall. Now of course, equity markets are coming back. This may in fact take some of the allure out of the property market, I don’t know, I am not an investment adviser.
JOURNALIST:
How concerned are you that some of the expenditure is being done on credit cards, that people have been buying these houses and then a lot of the domestic expenditure that’s kicking the economy on is built on credit and debt?
COSTELLO:
Well let me make two points. One of course is that we are not against strong house prices. For most Australians this is a very welcome thing. And incidentally there are 40 per cent of Australians who own their home outright. That is, they have no mortgage. So we’re not against strong house prices, nor are we against low interest rates. And when interest rates are low and employment is strong, you would expect confident consumers to spend. Now this has not been an altogether bad thing. We’ve been through a trading environment, the worst drought in 100 years, which normally brings on a recession, and a US recession, which normally brings on a recession, we had both at once. And the Australian economy didn’t go into recession and one of the reasons is that consumers were confident. Now that is not a bad thing to have consumers confident, but having said all of that, let me also back up my warning against excesses.
JOURNALIST:
Isn’t there a broader point though Treasurer about this, not necessarily related to debt, which is you wouldn’t want to see the economy continuing to rely on consumption expenditure with all these other factors recovering, would you? I mean this goes straight the current account and to imports, which is not an attractive look.
COSTELLO:
Well the story in the June quarter was that the current account was led by a downturn in exports. Sure, there was strong imports and some of it was of course capital imports. The Qantas restocking, in particular, which was so, so large, but that’s actually a good thing, as long as Qantas can use that aircraft for making profit. But the current account was led by a downturn in exports. You don’t have to look very far to see where it was. It was in rural production and, it was in tourism. Now, if the world moves our way, and I don’t you could have such a combination of bad factors coming together again in one quarter to the extent that we’ve had, the export story will pick up. And that may well take a bit of the weight off consumption, which has been required to drive the economy.
JOURNALIST:
What about the $2.4 billion trade deficit in July? Do you think that’s a flash in the pan?
COSTELLO:
No, I said earlier that I think the September quarter will be a difficult quarter. The drought is not yet broken. And even when the drought breaks, it will take farmers who are in livestock quite a deal of time to restock. I also said, although the war in Iraq is finished, terrorism appears to still be with us and that will affect tourism. Hopefully the Rugby World Cup will be a positive for tourism in this quarter. We also had in the June quarter as I say in my statement, a currency appreciation. That has come off a little. So I would not say that September will be a return to normal conditions, but I would say it’s hard to think of those three factors – war, SARS, drought – coming together with the severity all at once that we experienced in the June quarter.
JOURNALIST:
Treasurer, you always say that Australia’s got one of the best performing economies in the world. Does this figure put an end to that?
COSTELLO:
No, the Australian economy continues to out perform the G7 average, most of Europe and quite a deal of East Asia. Korea, Singapore, I think contracted by three per cent in the June quarter. Now they were affected by SARS like we were, but I think more so. That’s a three per cent contraction. So the Australian economy has slowed, make no mistake about that in this quarter, but it has grown. And there are a lot of economies that have actually contracted. I think I’ve been saying in the Parliament probably every day for at least a year, this is a difficult time. I think that our confidence has been such that it’s a message that people haven’t wanted to hear. This is a difficult time. This is a time of war and drought and severe epidemic. And the fact that you can continue growing at all indicates the resilience of the economy.
JOURNALIST:
Treasurer, you said earlier on in your opening remarks that the hostilities in Iraq were less than they were, you said recently that war has finished, but this is presumably not the scenario that Cabinet was looking at when it made its decision to get involved in the war in Iraq in the first place?
COSTELLO:
Well, from the Australian Government’s point of view from the outset, we made this point: that we would be part of the Coalition of the Willing and we would contribute combat troops and ships and aircraft to the war, but that when the war was over, we had other commitments closer to home, which would necessitate bringing our troops out, which is what we did. Now, obviously we would all hope that the level of casualty and deaths and bombing that is still going on in Iraq would come to an end. But from the Australian Government’s point of view we did anticipate coming out once the active warfare had come to an end.
JOURNALIST:
What about your commitments though as an aggressor?
COSTELLO:
As an aggressor, did you say?
JOURNALIST:
Yes. You had commitments under international law about the safety of the people who were left in Iraq, who actually have to live there.
COSTELLO:
Well I don’t accept that Australia is an aggressor in Iraq. I don’t accept that for a moment. Australia made a contribution to bring down a brutal and violent dictator along with its allies, which will save tens of thousands of lives in Iraq, hundreds of thousands. The only reason we did it, well the outcome of what we did will save thousands of people. It wasn’t for any territory or Australian advantage that Australia made that commitment.
JOURNALIST:
But legally isn’t Australia defined as an occupying force that then has requirements under international law to protect the security and of the residents.
COSTELLO:
I think Australia is making a strong contribution in the areas where we can, in relation to food supply, in relation to, we have air traffic controllers, which are helping secure Baghdad International Airport. We are making a contribution in relation to water, which is an area where we have a great capacity. We have Trevor Flugge over there making a contribution in relation to agriculture. Australia, and we are making aid contributions, Australia is making contributions but our policy was clear from the outset in relation to active warfare. We would be engaged in active warfare and were with land forces, naval forces and airforces, but we would not be staying in Iraq with those active brigades in the long term. The reason for that is we have other obligations and you’ve seen one of them. Since those troops came out of Iraq, Australian troops have gone into the Solomon Islands incidentally.
JOURNALIST:
Well whose responsibility is the deteriorating situation in Iraq, which is not secure for Iraqis?
COSTELLO:
Well the responsibility at the moment is being taken by the, principally the United States, and in some areas of Iraq, the British. And there are attempts to get other contributions and I think it would be a good thing if the UN were able to see its way fit to continue to make a big contribution. But bear this in mind, the UN itself has been bombed in Iraq.
JOURNALIST:
Going back to the economy Mr Costello, you’ve said that you’d expect things to improve from here and most commentators would agree with you. What do you think the main risk to the economy is over the medium term?
COSTELLO:
Well I would like to see the international economy pick up. I think that’s our biggest problem. Let me…
JOURNALIST:
So could the Iraq situation worsen that significantly?
COSTELLO:
Well I hope not.
JOURNALIST:
But would it?
COSTELLO:
I don’t think, well let me go through what I mean by the international economy before I… the international economy, we had a situation where Korea has had two negative quarters, it’s our second largest trading partner. Japan is weak. Germany is in recession. The US appears to be recovering. Now, I don’t think what will happen in Iraq caused the US recession or will delay it. I think US recovery is the most sensitive issue at the moment and the possibility that we might see radical realignments on some of the exchange rates. I expect, I’m going to APEC today, I expect this to be a topic at the APEC Finance Ministers’ Meeting, particularly the exchange rate between China and the US. We would not want to see extreme volatility in exchange rate realignment, which could cause trouble.
JOURNALIST:
Treasurer, the Government spending was particularly high during the quarter, was that largely to do with the war?
COSTELLO:
Defence, defence.
JOURNALIST:
Treasurer, you cite consumer confidence as one of the things that …inaudible… do you think that’s remained high into July and will we see….
COSTELLO:
The Australian consumer is very confident. You look at these figures on consumer sentiment – in fact sometimes I puzzle how it is in the midst of war and a drought and the SARS epidemic, that the Australian consumer remains so sunny. And it’s almost as if, as I’ve said, we’ve had a two-track economy. We’ve had the Australian economy, the Australian consumer in the urban areas who seems to be able to pass off what’s happening in the world, and the international region and maybe even in the country region. But the good news is, I think things are picking up in the country regions. I think the worst of the drought is now over. But let me put this caveat on it, the water storages are still so low that the irrigators will get, in some areas, no water this summer. So they might get a crop in, but as they front up to summer there is going to be no water allocated. I know in the Murray-Goulburn, think it is the Murray-Goulburn, no water allocations, so they have to get through a summer with no water. It is going to be very difficult for them. So your crops will come back, but I think in some industries, dairy, livestock, you are still going to have some trouble.
JOURNALIST:
Treasurer…this property price bubble (inaudible), and is that a difficult time for the economy?
COSTELLO:
Well this is a difficult time for the economy because the world is weak and has been at war, and terrorism is a new factor, and that is something we are all coping with and we are all coming to grips with that, including the Reserve Bank.
JOURNALIST:
Treasurer on the exchange rates you mentioned a moment ago, Secretary Snow has called on China to revalue the Renminbi. Do you see that as a concern? Is that what you fear could figure these volatile exchange rate realignments?
COSTELLO:
I think this is going to be a source of concern on the US-China relationship. The fact that the Chinese are running such a trade surplus with the United States, and doing it on a fixed exchange rate, when it is clear that the US Administration believes that they should be re-valuing their currency, I expect that there will be a lot of resistance from the Chinese in relation to that. They see it as a source of their strength. The flip side of this of course is that, what are they doing with the surpluses? To a large degree they are funding the US Budget deficit, going back in they’re re-investing in US Treasuries. So although the US may not like the huge trade surplus, they are actually profiting from some of the savings and that adds a new and intriguing twist, so I think that there will be quite a deal of discussion at the APEC meeting on exchange rates and particularly the Renminbi-US dollar exchange rate.
JOURNALIST:
Treasurer, you say consumer confidence and the economy is strong, it appears voter confidence in this Government is not as robust as it once was, with Labor gaining traction on the most recent polls, and you see the Prime Minister’s approval rating take a big hit today. Do you think these series of scandals that have hit the Government over the past couple of months are now denting voter confidence in the Coalition? And are you concerned that, given we are going into an election year, that the Government is starting to take hits?
COSTELLO:
Well look, I think it has been, there have been some rocky incidents in recent weeks, and yes, you would expect that they would have an effect. But in terms of government policy in relation to defence and security, in relation to the economy, and in relation to domestic policy, I think the public believes that this is a Government very much in control. And I think they appreciate the strong leadership at this time. Now, I know there have been some incidents as I have said, that the Government would have wished hadn’t occurred, but they did…
JOURNALIST:
They could have well been avoided, those rocky incidents as you put them.
COSTELLO:
…well…
JOURNALIST:
Tuckey could have (inaudible).
COSTELLO:
…I think the Prime Minister has said, and I have said that the Tuckey incident was foolish.
JOURNALIST:
Does the Government have…
JOURNALIST:
Isn’t the voters wanting the Government to go further? Isn’t the, aren’t voters looking for the Prime Minister in particular to take a stance and take firm action against say Minister Tuckey?
COSTELLO:
You know I didn’t think that the Labor Party was getting traction actually. When I looked at that poll, I thought…
JOURNALIST:
49.
COSTELLO:
…well I thought that when I looked at their primary vote that in fact they weren’t. It occurred to me, I don’t know how they distributed all of those preferences, but it might be a One Nation factor in there.
JOURNALIST:
Does the Government have to be careful with the truth do you think in the coming months?
COSTELLO:
Well look, look, you raised the Tuckey incident, it shouldn’t have been done, it was foolish. What more can you…
JOURNALIST:
But there is also the ethanol incident.
COSTELLO:
…what more can you say?
JOURNALIST:
What about ethanol?
COSTELLO:
Well, you know what I think about ethanol? I think that at the end of the day, I haven’t heard anybody arguing that the policy was wrong…
JOURNALIST:
It wasn’t the policy, it was the failure to disclose…
COSTELLO:
…that is what I keep coming back to…
JOURNALIST:
That’s avoiding the issue, isn’t it?
COSTELLO:
Is the Opposition saying that ethanol should be taxed? I don’t know.
JOURNALIST:
No, they are accusing the Prime Minister of misleading the Parliament.
COSTELLO:
You see, at the end of the day I think if we get the policy right…
JOURNALIST:
But you opposed the policy…
COSTELLO:
…and people will…
JOURNALIST:
…your Department opposed the policy.
COSTELLO:
…I am always amazed that when I look around the Cabinet table I never see you there Michelle…
JOURNALIST:
But you weren’t there either, Mr Costello…
COSTELLO:
…and yet you have such a clear view as to what happens.
JOURNALIST:
But you were missing as well.
COSTELLO:
You know, I think when I come into Cabinet meetings and I say hello to all of my colleagues I will now nod at the vacant chair and say ‘Good morning Michelle.’ Sorry, was there a last question?
JOURNALIST:
Treasurer I was wondering if you can tell us whether you have been concerned at all by the way the debate about Pauline Hanson jailing has developed over the last week?
COSTELLO:
Look, I have made a few points about this and I will make them again. The first is this: those people who say that this is a conspiracy are wrong. This case was heard before jurors, who heard the evidence and gave a unanimous, I believe it to be unanimous, verdict. OK, that is the first point. So let’s not say this was a conspiracy of the Liberal Party, or the Labor Party or anybody else. People should know this, that an independent prosecutor brought charges which were heard by a jury. The second point is the sentencing was done by a judge in accordance with law. Now, if you actually look in Queensland, the law is, probably dating back to the Fitzgerald inquiry, that people in public office do get heavy sentences.
I think that probably had its origin in the Fitzgerald inquiry. But if the judge has made a mistake in relation to sentencing, well that will be heard in relation to the appeal. Now, I don’t think that the way to resolve political disputes is through the courts. I think the way to resolve it is at the ballot box. It is a point that I have always made in relation to One Nation, I was always prepared to argue why its policies were wrong, and let’s determine that at the ballot box. But if you are in politics and you happen to break the law, then the law steps in. It is just what happens, and you can’t stop it. Let me make this point, if the reverse had happened and if for some reason it was said that somebody in public life didn’t have a charge brought against them because they were in public life, you can imagine the outcry there. The public wants to believe that the criminal law be enforced against all people on an even-handed basis, and once you accept that principle, which I do, then it is a matter for the jury and the judge, and I will leave it to the jury and I will leave it to the judge. Thank you very much.
