Source: Australian Treasurer
Much has happened since I delivered this address last year.
COVID has had a major impact on the world economy and the geostrategic landscape.
Today I will address three key issues.
First, the key structural changes to our global and regional economic landscape stemming from COVID-19;
Second, significant challenges facing the Indo-Pacific, most notably increased strategic competition between the US and China;
Third, how the Morrison Government is responding to this more complex and dynamic environment.
COVID-19 is reshaping the global economic landscape
The economic and human cost of COVID-19 has been immense.
We have seen record economic contractions and job losses, as countries took measures to contain the spread of the virus.
The IMF is expecting global GDP to contract 4.4 per cent in 2020. This compares to a fall of just 0.1 per cent in 2009 during the Global Financial Crisis.
The equivalent of 600 million full time jobs have been lost over the first half of this year.
At around US$13 trillion or 15 per cent of global GDP, the policy response has been rapid and substantial, with fiscal policy carrying the bulk of the load.
Due to the combined fiscal and monetary responses together with the strong health measures that have been implemented, there are promising signs of an economic recovery emerging in many countries.
But our economic success hinges on our ability to control the virus, and the path out of this crisis will not be smooth.
COVID-19 continues to surge across the world with the growth in new daily cases increasing at record rates earlier this month.
Right now, we are seeing new restrictions measures being put in place across parts of Europe and the United States.
This is a timely reminder that we are not yet through this crisis and we must all remain vigilant until an effective vaccine has been delivered to our communities.
Beyond the near term prospects of recovery, COVID-19 is driving important, deeper, changes to our global economic landscape.
I want to highlight a few key examples of this.
First, even if we are successful in defeating the virus, the unprecedented fiscal response we have seen, will leave a legacy of structurally higher debt levels across the globe.
During the GFC, public debt levels in advanced economies jumped from around 80 per cent, to over 100 per cent of GDP.
And in emerging market economies, public debt also increased.
Over the course of the last decade, these debt levels had still not recovered to their pre-GFC levels.
And now, as a result of COVID-19, we are seeing another major step up in debt, to even higher levels.
In 2020, public debt levels in advanced economies are expected to rise to around 125 per cent of GDP and to over 60 per cent in emerging market economies.
This structural shift, will leave the global economy more vulnerable, with a greater risk of volatility and disruptions to capital markets.
Higher debt levels will also reduce some countries’ fiscal space to respond to any further economic shocks.
This is particularly the case for emerging and developing countries, who have less capacity to access global capital markets.
Early in the crisis a number of these countries came under significant pressure and experienced rapid capital outflows.
Exchange rates in key emerging market economies fell substantially, including the Brazilian Real, the Mexican Peso, the Indonesian Rupiah and the Turkish Lira.
And over US$80 billion in capital flowed out of emerging market economies in March alone.
Financial market conditions eased significantly as a result of strong actions by central banks around the world to boost liquidity including buying government and corporate bonds and putting in place foreign currency swap lines.
By reducing debt-servicing costs these actions have helped ease fiscal pressures and stabilise financial markets.
But while high debt levels are being managed they are not yet being resolved, leaving the global recovery more vulnerable.
And if the recovery falters pressure for higher levels of government spending, and therefore higher debt, will continue.
With global interest rates at historic lows including negative interest rates in much of Europe and Japan, monetary policy has little room to move.
While global financial markets have shown great resilience to date, we cannot rule out renewed pressures and volatility, or sudden disruptions to capital flows.
Last week, I attended a meeting of the G20 Finance Ministers and Central Bank Governors where we committed to help address the high levels of debt many countries are accruing.
We agreed to a new global framework that will allow low-income countries to restructure their debt from both official and private sector creditors.
Continuing to manage these global debt pressures, whilst ensuring there is sufficient support for the economic recovery, will be a critical task for global policy makers in the months and years ahead.
Secondly, domestic, regional and international supply chains have been stretched and disrupted by COVID-19.
The crisis has sharpened the focus of all countries on the need to build national resilience in a highly interconnected world.
We are already seeing this manifest through a push for countries to become more self-sufficient and produce more critical goods in their home markets.
This is a legitimate response and course of action, where it is necessary to protect our citizens and our national interests.
Australia felt these pressures first hand during the early stages of COVID-19, with our domestic manufacturing sector pivoting to assist with the production of masks and other medical equipment.
However, it is important that calls for greater self-sufficiency do not go too far, resulting in a more fractured global economic system or become a backdoor to increased protectionism.
We are already seeing more discussion globally around the prospects for ‘economic decoupling’.
As a strong trading nation, with the sum of our annual imports and exports close to $900 billion in 2019-20 or around 45 per cent of GDP, it is against our interests for this to occur.
As I have said previously, attempting to ‘decouple’ our highly integrated global supply chains, would be more than disruptive.
It would carry huge economic costs.
The answer to building economic resilience is not to shut ourselves off from the benefits of economic openness.
Instead there are opportunities to build resilience by developing new international partnerships and establishing new markets.
And each country needs to play to its own strengths.
Just as we have done through our recent Modern Manufacturing Strategy, which targets our key areas of comparative advantage such as food production, critical minerals, clean energy, medical products and the defence and space industries.
This appropriately balances the need for national resilience with the need to maintain a strong, efficient, flexible and open economy.
Rising strategic importance and competition in the Indo-Pacific
I would now like to turn to our region – the Indo-Pacific.
As has been well documented over recent years, global power and economic weight is shifting towards our region.
On the economic front, the region is very well-placed to emerge from this current crisis even stronger.
The region has been relatively successful in containing COVID-19, compared to many other regions around the world.
China, South Korea, Vietnam and Taiwan, together with Australia and New Zealand, have been effective in limiting transmission whilst keeping their economies strong.
And some countries in our region remain largely COVID-free, including many of the Pacific islands to our north.
The Chinese economy has also rebounded strongly.
The sharp contraction in GDP that China saw in the March quarter was completely recovered in the June quarter of this year.
Indeed, China’s rebound in real GDP in the June quarter was equal to the total size of Belgium’s economy in 2019.
And this recovery is expected to continue in 2021. In the Budget, Treasury forecast Chinese GDP to grow by a further 8 per cent.
These two factors – our relative success on the health front and China’s strong recovery – will further enhance our region’s prospects as we move into recovery.
And Australia will benefit from this.
A stronger region will help boost our own recovery from COVID-19.
Our major trading partners are forecast to grow by 5¾ per cent in 2021, compared to world growth of only 5 per cent.
But even beyond the immediate recovery, the prosperity and strategic weight of our region will continue to grow.
This goes well beyond just a China story.
It is also tied to the continued, longer term, rise of India, Indonesia and Southeast Asia.
India represented 7.1 per cent of world GDP in 2019, compared with just 4.0 per cent in the year 2000.
And the ASEAN-5 countries represented 5.7 per cent of world GDP in 2019 compared with 4.4 per cent in the year 2000.
These growth engines of the future – with relatively young and growing populations – will continue to reshape the region and create important new opportunities for Australia.
That is why the Morrison Government is deepening our economic partnerships, to take advantage of these new opportunities.
Two-way trade and investment between Australia and India doubled between 2014 and 2019.
And our two-way trade with ASEAN exceeded $120 billion in 2018-19 – making the region collectively our second largest trade partner.
This year, Australia has elevated our relationship with India to a Comprehensive Strategic Partnership and our Comprehensive Economic Partnership Agreement with Indonesia has taken effect.
And just over the weekend, Australia signed the Regional Comprehensive Economic Partnership (RCEP) Agreement between Australia and 14 other Indo-Pacific countries.
RCEP is the world’s largest free trade agreement with its members accounting for nearly 30 per cent of global GDP.
This builds on the Governments ongoing success in securing trade agreements and, importantly, it signifies that our region remains committed to the principles of open trade.
Since coming to office our two way trade covered by free trade agreements has increased from 26 per cent to over 70 per cent with the goal of reaching 90 per cent in coming years.
We have secured agreements with Japan, Korea, China, and the 11 nation Trans-Pacific Partnership.
This will ensure that Australia is well placed to reap the full benefits of a strong and growing Indo-Pacific region, now and into the future.
Our deepening partnerships are more than just a trade story.
We are working to ensure that all countries in our regions can recover strongly from COVID-19.
That is why we have recently committed $500 million to help ensure that the countries of the Pacific and Timor-Leste are able to achieve full immunisation coverage, and make a significant contribution toward meeting the needs of Southeast Asia.
And just last week, I signed with my Indonesian counterpart, Dr Sri Mulyani, a A$1.5 billion bilateral loan from Australia to Indonesia to support Indonesia’s ongoing economic and health response to COVID‑19.
I would now like to turn to the changing strategic landscape in our region, which has broader implications for the world.
The post-WWII global architecture, based on a system of well-established rules and norms, has served our region well.
It has underpinned the economic success of countries like China, and helped lift millions out of poverty.
But the economic weight of the world has now changed.
And not surprisingly, our current institutions, rules and norms are coming under increasing pressure.
We see this most clearly through the lens of increased strategic competition between the US and China.
This has seen the US shift from viewing China as a strategic partner to a strategic competitor.
This is creating a more complex and uncertain environment across the region including in trade, and countries like Australia are not immune.
But we stand ready to engage with the Chinese Government in respectful, mutually beneficial dialogue.
Both of our countries have benefitted hugely from our growing trade relationship. Without this, we both lose.
The fact that we have different political systems and different values means we will not always agree.
That is not new.
But despite our differences, we are committed to maintaining a strong and productive relationship.
Australia’s approach to these challenges
This more complex international environment, characterised by greater strategic competition, will be with us for some time.
This will be felt throughout our region.
As Australia navigates this changing environment, we will always protect our national interests, first and foremost.
This is non-negotiable.
We will continue to work closely with our friends and like-minded countries, through bilateral and multilateral means.
This week, Prime Minister Morrison is in Japan, as the first foreign leader to be welcomed by Japanese Prime Minister Suga.
A clear illustration of the strength and importance of our bilateral relationship.
And we will continue to stand up for our values and our long term security, prosperity, and sovereignty.
But in doing this, we will always champion the open, rules-based global system that has served us so well.
And we will work constructively with all other countries – to identify common interests and build mutual respect.
Reduced economic cooperation will make us all poorer and put at risk all of the gains we have made over recent decades.
In defending our national interest, we are also seeking to maintain Australia’s reputation as a destination for investment and trade.
It’s not a zero sum game.
The recent changes to our foreign investment regime are a good example of this approach in action.
In responding to COVID-19, in March the Government temporarily reduced all screening thresholds to $0 to ensure appropriate oversight of proposed foreign investments.
This was necessary to safeguard the national interest during this uncertain and difficult time for Australian business.
And we now have legislation before the Parliament that will strengthen the framework on a range of fronts, including the introduction of a new national security test.
This has helped to ensure that Australians remain confident in the benefits of foreign investment for the longer term and that the Government has a foreign investment framework that is fit for purpose.
With these reforms Australia will continue to be an attractive destination for foreign investment.
Without counting those applications made only because of the new threshold, preliminary data indicates that for cases processed by Treasury, around 1,450 applications were received from January to October 2020, more than the 1,280 applications received in the equivalent period last year.
These numbers are promising, particularly when seen in light of estimates from the United Nations that global FDI flows fell 49 per cent in the first half of 2020 compared to 2019.
To conclude, Australia sits in a region that will be the centre of global strategic and economic power for decades to come.
This will bring important new opportunities, with the potential to boost Australia’s prosperity and wealth.
But it will also bring with it a more complex, unpredictable and challenging strategic environment.
I am confident that we can navigate these waters successfully.
Underpinned by our fundamental strengths as a country.
Our shared values.
Our dynamic and competitive economy.
Our strong institutions.
And the quality of our people.