Less than two weeks ago, finance ministers and central bank governors from G20 nations gathered in Fukuoka, Japan. The meeting took place amid rising trade tensions and a softening in the global economic outlook.
In my discussions at the G20 and in subsequent meetings with counterparts and industry leaders in London, Berlin and Washington, there were three key take-outs for Australia.
First, our economic performance, both past and present, remains widely admired. With 28 consecutive years of economic growth, a AAA credit rating from the three leading agencies and a budget that is returning to surplus for the first time in 12 years, the fundamentals of our economy remain sound. Among the major advanced economies, only the US is growing faster than Australia, and at 1.8 per cent our annual growth rate is higher than that of Canada, France, Germany and Japan.
Our labour market has been strong and general government net debt is about 20 per cent of gross domestic product, putting our country in a strong position to withstand future shocks.
Second, trade tensions between the US and China are weighing heavily on the economic outlook: investment decisions are being deferred and trade volumes reduced. As the world becomes more interconnected and global supply chains more efficient and cost effective, the implications of trade tensions and protectionist measures are felt far and wide.
Australia’s case for supporting a rules-based trading system and multilateral institutions such as the World Trade Organisation for the settlement of disputes is more important than ever.
With growth in business investment in the advanced economies forecast to slow from 3.8 per cent in 2017 to 2.5 per cent this year and trade volumes down over the past 12 months, the International Monetary Fund has said that the risks to the global economy are “tilted to the downside”. It was a view espoused repeatedly by those I met.
While the total amount of tariffs the US and China have imposed on each other’s goods may cover only about 2 per cent of world trade, the potential for the dispute to escalate and uncertainty about where it may end are creating the greatest concern.
In this context there is a lot at stake for the global economy at the forthcoming meeting in Osaka between US President Donald Trump and Chinese President Xi Jinping. The tenor and tone of US-China relations reverberates around the world and shape the global order for years to come. Australia’s economic partnerships with the US and China are vitally important. China is our No 1 trading partner and the US is our No 1 investor. We have benefited greatly from free trade agreements with both countries.
On trade and investment, our message is consistent and clear. Free trade and foreign investment creates jobs. Tariff barriers and obstacles to investment cost jobs.
One in five Australian jobs is related to trade and we have gone from having just one FTA in 1991 to 11 today and counting.
Last year Australia recorded a 50 per cent increase in foreign direct investment, putting us in the top 10 nations globally as a destination for FDI. This investment reflects the many opportunities in Australia that cannot be funded by domestic savings alone. Our economic interest, and indeed that of the international community, is advanced by the promotion of open markets.
Third, there was recognition among advanced economies that in an environment of low inflation, low interest rates and low unemployment, the productivity agenda is more important than ever. Raising productivity is the most effective and sustainable means of driving growth and ultimately higher wages.
At the same time, the persistence of low inflation and low unemployment is forcing central banks to reassess their understanding of what constitutes full employment and the implications that has for monetary policy. In Australia, this thinking has been a factor in the Reserve Bank’s recent monetary policy decision but, as it has rightly made clear, monetary policy is not the only option for driving unemployment lower.
This is why we must press ahead with implementing our pro-growth agenda as set out in the budget and endorsed by the Australian people at the election.
Tax, infrastructure and skills are all important policy levers that can increase economic growth. The Coalition’s tax cuts, which provide short-term relief and long-term structural reform, will boost household incomes and incentivise workforce participation. This will not only provide greater reward for effort but it also will encourage aspiration.
Our instant asset write-off for companies with a turnover under $50 million also will support the investment needed to boost productivity. Our $100 billion infrastructure program across the decade will increase the productive capacity of the economy.
The skills agenda is also a critical piece of the productivity equation. With 80,000 new apprenticeships and increased funding for education and training set out in the budget, Australians are getting the opportunity to equip themselves with the skills most in demand.
What was interesting from this visit was that many global leaders in innovation and technology, such as Siemens, IBM and MasterCard, have established a significant research and development presence in Australia. They are looking to capitalise on the skilled Australian workforce and test new approaches and technologies in what they consider to be a sophisticated market.
As rapid developments in artificial intelligence, quantum computing, automation and robotics create many new opportunities and challenges in the economy, new skill sets will be required. For those countries that best adapt to these new technologies, the productivity gains will be enormous.
At a time of significant global economic change, Australians have reason to be confident about their future. Yes, there are significant challenges, including trade tensions, the uncertainty of Brexit and the domestic impact of flood and drought, but we have the economic plan to see us through.
We are always open to new initiatives to meet our economic goals and will add them to our policy agenda as appropriate, but what we know for certain is that productivity is the key to sustained growth and higher incomes. This was the consistent theme abroad and will remain a priority at home.
Josh Frydenberg is the federal Treasurer.