Transcript of Question & Answer Session Panel participation at The Australian's Strategic Forum 2020

Thank you gentlemen for being here today. In a discussion about our future growth outlook, perhaps no other country looms larger, of course, than China. It buys a third of our exports and it's been a growing share recently. But as we all know, there's been a series of imposts and threats on various of our exports to China, whether it's wine or beef or barley, and of course, this has led some people to say that we must diversify away from China. We must find other markets. My predecessor in this role, David Uren, he recently wrote, "Australia has no realistic alternative market to China for a third of its exports." He said, "If China didn't buy our iron ore, there would literally be nowhere else to send it." So Philip, my first question to you, is it feasible that we can actually diversify away from China?

Thanks, Adam. It's good to be here. I don't think it's a matter of diversifying away from China. It's a matter of building other markets over time. The trading relationship between Australia and China has benefited both countries tremendously. China has benefited from our natural resources and our education exports, and we've benefited from importing a range of manufactured goods from China. So, it's incredibly mutually advantageous to both countries to keep that strong trading relationship in place, and I'd hope to see that take place. Over time, there's tremendous opportunities to broaden out our markets. Australia is in a fantastic location on the globe. We're close to the fastest growing regions of the world. We have good relationships with both Indonesia and India, huge populous countries with a tremendous opportunity for growth over the next two decades. So I see great opportunity there in the Asian region, and it's a matter of building on those opportunities rather than diversifying away from China. We need to keep that strong relationship with China going. It's mutually advantageous to both of us.

Just on this issue, Michael, do you think perhaps that we might have to trade away a bit of our future economic growth for more geopolitical security just on the question of China trade, given what's been happening in the recent months?

Well, I think all countries in the world, so to speak, are facing this challenge of how to pursue their economic interests with a country which is becoming much more strategically assertive. And so that's a challenge, and there's no question that the nature of China's economic engagement with the rest of the world is going to change substantially. Those investment flows and technology transfers which were accelerating the integration of China with the rest of the world's economy are not going to play the same role that they have done in the past. But it seems to me that it's in, as Phil says, it's in the interests of China and Australia and the United States for the economic relationship between the two to continue. And I'd just add to the very good points that Phil made about the opportunities in Southeast Asia, where there's going to be an increase in demand for our commodities and our processed foods and so on, and India.

Australia has been very good historically at diversifying its exports. We've dealt with a couple of … two or three very big challenges, both economy-wide and in particular sectors going back to the time that the UK joined the European common market … and various restrictions that the United States put on our exports to US. And in pretty well all these cases we've been through quite tough restructurings and we've come out the other end very successfully, and I feel very optimistic that to the extent there are problems in the relationship with China, that we'll manage those quite well.

Philip, one of the things you said last year in a speech was something that kept you up all night. Well, not all night. Something that you worried about was trade disputes globally over technology. So now that there's likely to be a Biden presidency next year, almost 100% certainty, are you more reassured?

I think the broader issue here is the globe faces many problems that need a global solution. Dealing with this pandemic and future pandemics, dealing with climate change, dealing with technology, dealing with the taxation of the digital economy, the UN development goals. And so there are a lot of global challenges that we face and we're going to be in a much better position to address them if the major countries in the world are working constructively together to address those challenges and I would hope that the new US administration would be part of the effort to solve these very important global problems that need global action. No country can address these issues that I just touched on by themselves. We all need to work on this together and to the extent the US is inside the tent, we're going to be in a better position.

Can you see, Michael, any practical ways in which a Biden presidency will change Australia's growth outlook in the next few years?

Well, the main one will be if he can get the United States back on a faster growth path than it is right now. And also if we can collectively move away from protectionist impulses that are fairly strong in quite a few of the major economies. We can see those impulses in a number of comments by the Biden administration or the impending Biden administration, things like Buy America, investing in American manufacturing. But I think it's a reality we have to face that people are going to look to build their national resilience. That means paying close attention to supply chains of nationally important capabilities, both manufacturing, technology, pharmaceuticals, critical infrastructure, energy, and so on. So to the extent that Mr. Biden can regenerate some movement in international trade negotiations and so on, that would be good.

But being realistic, that's not going to happen. I don't want to repeat the good points made by Minister Birmingham and the Director of the US Study Centre and Joe Hockey that I don't think much is going to happen on that front. And really, we're at the beginning of a period where we're going to have to work out what sort of economic relationships we're going to have. I don't think for example, there's going to be a lot of common understanding on data flows. And as I mentioned investment in particular, in technology, communications, cross border payment systems, these things are all going to be extremely difficult. And I'm not pessimistic that there won't be more if you like, global integration. There'll be more international integration, but it's likely to be not global. It's more likely to be regional and in particular, in some very important and sensitive areas like communications, internet, financial flows, personal data, and those sorts of things.

Now, just to return to the domestic outlook, I'd like to focus there. It's fair to say before the coronavirus pandemic, the outlook was not fantastic, most growth in Australia was driven by population growth, which was one of the fastest rates in the world. Productivity outlook was not fantastic, neither here nor in other Western countries. Philip, you gave a relatively upbeat speech on Monday night where you talked about one of the silver linings of the COVID crisis is that there's greater use of digitisation and more working from home and maybe more efficient use of capital labour, but surely that is not enough to turn the ship around, so to speak?

And so my question is, what are you seeing across Australian governments now, state and federal, where you're seeing actually a reform agenda that can turn productivity around?

Well, I think as you say, digitisation of the economy will help. We're all finding new ways of doing things, and this forum is a very good example of that. And, over time, we'll master how to use this new technology, we'll do things more effectively and efficiently and that'll help drive higher living standards. So digitisation is incredibly important, and I know the federal government has a whole series of initiatives in the digital economy, including in the payments area, in health, in the delivery of government services, so we will, over time, see a dividend of that.

Another thing that we've seen as a result of the pandemic is increased spending on infrastructure. We need infrastructure to be an effective modern dynamic economy and increased spending there, I think, is welcome. And we're also seeing in a number of areas increased reform and a good example of that yesterday was the New South Wales government's decision to consult on a switch from property in stamp duty to a general property tax.

That's the type of reform that people have been calling out for years. It's been slow in coming. It's politically difficult, but we've seen the New South Wales government decide to move in that direction. The federal government is also working on industrial relations that has these various committees looking at possible changes there. And I know the state and the federal governments are both looking at the recommendations in the Shifting the Dial report from the Productivity Commission a couple of years ago, which has identified a lot of opportunities to improve the delivery of government services, health, education, general government administration. To the extent that they can push forward those, we will see a dividend from those over time.

Just briefly, on the federal government's reform agenda, you mentioned there those five industrial working groups, but it's certainly been reported that they're not going to reach an agreement and so if they don't, there's actually a threadbare agenda at the federal level then, on reform.

Well, I'm more optimistic. I've had no particular insight into how those will work out, but I'm optimistic that there will be progress there because there's a broad consensus that the enterprise bargaining system needs fixing, so let's hope we can make some progress there. The government has a very strong focus on the digital economy. It's trying to remove unnecessary regulations. And I think one example of this is the reforms to the responsible lending laws, which I think makes sense. So, there are no really big signature moves that will quickly move the dial.

But there are a whole series of individual initiatives, which I think will add up to make a difference, but there's a long list of things to be done and we're making incremental progress and let's hope we can make a bit faster progress over time.

Just on the US, Michael, obviously you've spent many years there, I'm wondering, is there anything that we can learn as a country in terms of reform from the US? Any kind of rules or regulations or things that we could apply here, so we grow faster?

On the whole, I'd say that our recent experience of dealing with the epidemic shows that the US doesn't have much to teach us. Looking at Australia from – and I'll come back to that question because there is one thing – but just looking at Australia from outside, I mean, Australia has done, I would say remarkably well. Actually, I think Australia's showing in this period has been really quite remarkable. The government moved fast on fiscal policy; the Reserve Bank moved fast on the monetary front. The handling of the epidemic apart from the occasional mistake, which of course is very costly, but it's perhaps inevitable that not everything's going to go perfectly, but it's been a stand out.

And one of the very positive features of this, looking from outside, is that Australian confidence in institutions, in the government, in the way its administration works –

in Australia, we're always whingeing about it and probably with reason – but looking at it from outside, Australia's moved very fast and very effectively.

And then the other thing, speaking as someone working in a funds management company, the fact that the government quickly adopted the line that growth is the key thing and to get growth with the agreement of the states' premiers to make reforms, and that we're going to rely on the private sector and free enterprise to get the economy going. These were all very positive things and at the end of all of this, our debt will be big, but pretty well any other country in the world would look at our level of debt with envy.

The one thing I think that we can learn from the US is to embrace risk and entrepreneurship and I was very pleased to see the government came back to an issue that five years ago we had a go at, which was reforming the bankruptcy law. We need to, I think, give more support to people starting businesses. We need to look at how the tax system can help, but in particular, support people who are having a go and not have them condemned morally if they fail at a business enterprise.

You mentioned the growth in debt there, Michael. I wanted to ask you, Philip, about the explosion in federal debt and state debt that we're seeing around the world. We had the New South Wales budget just yesterday and I think some market participants were shocked by the growth that's forecast from 20 billion to about 100 billion, I think, just over the next few years.

My question is, are central banks, including the Reserve Bank, basically encouraging governments to borrow a lot more than they otherwise would because of their various money creation programs and of course, as most people know, the Reserve Bank is going to create $100 billion in the next six months and partly buy state government bonds. You've been at pains to say this is not financing governments, but surely it's making it much easier for them to borrow?

Well, our actions are lowering the cost of government debt, the cost of raising these bonds in the capital markets. But our actions are also lowering the cost of someone buying a house for the first time or a business wanting to expand. So, collectively our actions are lowering the cost of finance for everybody, and governments are included in that.

In the current environment where we're suffering a once in a century pandemic, it's entirely the right thing to do for the governments to borrow against future income to support current income. What's the alternative? If the government doesn't do this, we'd have an even larger fall in economic activity and a bigger increase in unemployment. So it's exactly the right thing to do, to borrow against future income. And the cost of doing that at the moment is very low. Global interest rates are extraordinarily low and they're going to stay low for quite some time. So, we need to borrow to support future income.

It does put a focus though on future income. We've got to make sure that future income is growing strongly, because the best way to repay this debt in the future is going to be for the economy to be growing quickly. It's going to be very hard to reduce the debt to GDP ratio if the economy is not growing quickly, so the structural reforms, the productivity issues we were discussing a minute ago, are really critical.

Just briefly on the growth of debt … surely there must be some end to this process of every time there's a dip, we just massively increase our debt. Of course it happened in the financial crisis dramatically. It's happened again now. Can we just keep doing this forever, effectively? There must be a point where we can't?

You obviously can't keep doing it forever, because what we're doing is borrowing against future income. So if we don't have strong future income, it's very hard to borrow against it. I think it really puts the focus, as I said, back on to make sure that our future income is high and growing. If it isn't, then obviously you'll get into trouble if you keep borrowing against future income and the future income doesn't come. It's incredibly important that we borrow against that future income, and we do the reforms that give us that future income.

Do you think, Michael, that this enormous growth in debt will be a significant weight on the growth, both of Australia, and the West more generally, in years to come?

Well, Australia is in a very particular position here because it's a capital importer. Confidence in the way that Australia manages its debt, and its monetary policy is very important. But I recall once coming with a group of colleagues and talking to a former prime minister, and the comment that my colleagues made as we came out was, "We don't need to worry about this place. We know that the people in charge can be relied on to take sensible decisions." I think that's a great advantage that Australia has. We have a well-managed economy. We have a well-managed budget. Leave aside the partisan belly aching, we're in a very strong situation. We have a population which doesn't like debt, which puts political pressure on governments always to come back to sensible budget management over the cycle. I think there are many other countries which are not in such a fortunate situation, and I think there will be problems. But I emphasise that for us, in Australia, maintaining the confidence of foreign investors and people who are supplying capital is very important.

Is there any chance, Michael, that historians will look back and think that the Australian government massively overreacted to the crisis in terms of its spending? You'll recall that in the financial crisis, the Rudd government spent the famous $42 billion to stimulate the economy, and at the time people thought that was extraordinary. But if you sum up all the support now, it's about $330 billion, sizably larger. Could we have overreacted?

Well, that's something that we'll only be able to say in hindsight, but looking at it, it all seems to me to be in proportion. It was a very strong budget for fiscal stimulus, which was spent very effectively. It was spent quickly. It went straight to the people who needed it. If I'm right, I think the net national debt, it peaks at something like 40-45%, I mean, that's big, but Australia, if it goes back to its normal growth path, and there's no reason why it shouldn't. That depends a bit on population growth, and so on, but I can't imagine that Australia, when things are settled, doesn't go back to a strong immigration policy. And because of its location, as Phil mentioned, I think, with China and Asia, Southeast Asia, and India, as well as Japan, and Korea who are going to continue to be very large economies, we're very fortunately placed. So I wouldn't worry too much about it.

Okay. Well, just one last question to Philip before we take questions from the audience. Glenn Stevens used to talk a lot about a two-speed economy in Australia, sometimes three-speed in fact. Now, how would you characterise briefly the Australian economy right now, where the public sector is doing very well, but the private sector really is not. Are they the two speeds now?

I think the first point I'd make here is we're in a recovery. We've had a huge drop in output, and we're on the road back. It's going to take time, but we are on the road back. There's a lot of stimulus in the system. There's increasing confidence the health situation is going to be managed. Balance sheets are in reasonable shape, and the government has laid out a lot of incentives for firms to hire people, and to invest, so I think we're on the way back. That's the first point.

The second point is it's very uneven. You just think about retailing, there are shops in the city, many are closed, but online retailing is booming. And the property market, the property values of distribution centres are rising strongly, but CBD office and retail are falling. In the housing market, the price of housing is rising and the price of apartments are falling. It's very uneven. I think it's going to be uneven for quite a while until we find the new equilibrium in the post-COVID world.

All right, well, let's take some questions now from the audience. Philip, there's one here for you, and I think the person means that you urged on Monday night for businesses to take more risks to boost our growth, so should households be taking more risks too? Surely those who complain about low interest rates should be investing more in shares?

I'm not going to give financial advice to households about how they invest. The point I was making on Monday night, and Michael was making the same point just now, we need a strong culture of entrepreneurship and businesses being prepared to take risk. That's a mindset in the business community and also a responsibility of the government to set the settings to allow businesses to do that. That, as Michael rightly said, that's about taxation. It's about the insolvency regime, and the culture we establish within the country, where we shouldn't penalise failure. We should encourage businesses to innovate, to take risk, to expand, and to take advantage of the fantastic opportunities this country has. We need this culture of entrepreneurship to be reinvigorated, and if we can, I'm confident that we can look forward to a positive future. And I'm not going to give households financial advice.

No, that's fair enough. Now, this is one for your Michael. Someone writes, "China was supposed to become more democratic with free trade. It clearly hasn't, so why are we still pursuing the same failed big picture strategy?" I guess, why are we still engaging in the same way?

Well, I don't think we are engaging in the same way. As I said, we're at the beginning of a long period of working out exactly how to deal with a country which has gone very authoritarian, and is increasing more and more controls, and behaving in a way, which we find difficult, in many areas, to accept, and which is in effect, throwing its weight around more. At the same time, it's a very important part of the world's economy and we need to work with it. It will take time to work out the new guidelines, if you like, for those relationships.

Adam, I'd just go back to the point Phil was making. The other thing of course is that the service sector has really been left behind both in the US and in Australia and it will take time to pick up. That's where we know a lot of consumer spending is. I think the vaccine, if it proves as effective as the first signs seem to be, this will mean it will take time, especially in the US because the pandemic is on the march again. But in a few months, we will see probably a big shift in confidence and attitude. So maybe towards the second half of next year, we might see, the service sectors gaining more confidence and more activity.

Right, the next question is about the housing market. Certainly, a favourite topic of many people. The person writes here with low rates and mortgage backstops, has the Australian household mortgage become too big to fail? I think we can paraphrase this by saying, aren't you worried, Philip, that the fact we've got rising house prices, quite rapidly growing debt, but rents are falling. Doesn't that have the whiff of the bubble on our hands here in the housing market?

I don't think so and remember, housing prices, up until very recently, have been falling in Sydney. Maybe they've stabilised and they're probably still falling in Melbourne. The lower interest rates do support housing prices and that's indisputable. In the current environment, that's what we need. We wouldn't be better off at the moment if housing prices were falling precipitously.

So the support that lower interest rates are giving to asset prices is helping household and business balance sheets. That support to the balance sheet is helping people to be confident about the future and keep spending.

It's certainly possible that lower interest rates cause housing prices to rise at an unsustainable rate. So it's possible, but I think it's unlikely. The population dynamics have changed a lot. The population this year is going to grow at the slowest rate since 1916, when many, many thousands of Australians left Australia to fight in World War I. So the lowest population growth in more than a century. Vacancy rates for residential property particularly apartments are rising and rents are falling. So it doesn't feel like at the moment that the fundamentals are there to drive an unsustainable increase in housing prices.

If that were to occur and debt was to increase very quickly as well, which I think is unlikely, we know from experience of recent years that the macroprudential instruments can curtail the growth in debt in a stabilising way. So it's an issue we're watching carefully, but I'm not particularly worried about it at the moment.

Just on that issue of population growth, I noticed yesterday, the New South Wales Treasurer said he was all for a big Australia. I think you said something similar actually on Monday night. Yet, opinion polls show that a rapid population growth of the sort that we had before this crisis is just not popular, so does it worry you that we just won't be able to politically go back to those rates of immigration?

No, I wouldn't say it worried me. If we don't go back to the previous rates of immigration, then we will have to get used to slower growth in our economy. That might be a trade-off we're prepared to make. That's really an issue for the parliament and the government. But I would make the point that Australia is the great immigrant country. In the post-World War II period, we've had our greater share of the population come from overseas than any other country.

We've done that tremendously well. We've got a dynamism in our country as a result of that. The people who come to Australia want better lives and largely, they've worked hard and they've made new businesses, developed contacts back with the countries they come from.

So the country has benefited tremendously from this immigration. It's a matter for the government and the parliament to decide whether we want to continue on that track or go on a different one. I think we're better off staying on the track we were on, but that's an issue for the government.

All right. Well, there's a question here from Michael, how do Australian boardrooms compare in quality and their attitude to risk-taking to their US counterparts?

Oh, that's quite a tricky question for me. Well, I think it's very important for boards to have people who have very strong experience in a variety of fields and that are able to bring the perspective of the shareholders in a forceful way to the company. My personal view is that in the past, Australian boards have been a bit cliquey and that, I think, has been changing in the past 20 years, I guess. Since I first joined Capital Group, I've noticed that.

But as we've seen in recent cases in Australia with the Royal Commission and other unfortunate things, there've been cases where boards really haven't been up to the mark. I think we've been given a wakeup call and I think most companies are hearing that. We don't want boards to run companies, but we want them to be a source of advice and to represent the interests of the long-term shareholders in that company.

Well, just a final question from me. Sorry, Michael, I have to cut you off there because we're running out of time. But I do want to bring up the issue of working from home. Now, just a very quick answer from both of you. Of course, some people like it, some people hate it. Have you enjoyed working from home and do you think in two years' time, it will be a thing of the past or it will be the norm? Philip, you first.

Well, I haven't worked from home. I've had one day working from home, but I have three children, a wife also working from home and I have a fantastic office in Martin Place, so I've chosen to come into Martin Place at the Reserve Bank almost every single day. So I'm not in the position to comment. I know many people value the extra time they get from working from home. I don't think we'll see a return to people coming into the office five days a week.

Okay. And you, Michael?

Oh, I agree with that. Well, I've had enough of it, personally. I'd like to be able to go to the office from time to time. I'd also like to be able to travel a bit more because what we're losing is face-to-face contact with people or at least I feel that, and so I think we need a bit more balance.

Okay, gentlemen. Well, thank you so much for a fascinating discussion.