ric battellino : the strength of the australian economy and financial markets remarks by mr ric battellino, deputy governor of the reserve bank of australia, at the launch of the 2007 australian financial markets report and the invest australia gold book, sydney, 19 september 2007. * * * it ’ s a pleasure to take part in the launch of these two reports that highlight the strength of the australian economy and financial markets. i would like to congratulate invest australia, the asx and afma for putting together such comprehensive and informative documents. they are of immense benefit not only to market participants and foreign firms looking to enter the australian market, but also to regulators, academics and students. i would also like to congratulate the three organisations more generally for the excellent job they do in supporting, promoting and helping to regulate australian financial markets. this is important work because finance makes such a vital contribution to the australian economy, not only directly, but also through its role in supporting other sectors of the economy. as noted in the invest australia report, australia has had an extended period of strong economic growth, which is about to head into its seventeenth year. even if we take just the past decade, real gdp has grown by a cumulative 40 per cent and nominal gdp has grown by 90 per cent. financial markets have exhibited even faster growth over this period. the value of companies listed on the asx has grown by 275 per cent, and the value of debt securities on issue in australia has increased by 170 per cent. the growth of turnover in financial markets has been even more dramatic, increasing by 290 per cent over the decade. so while the nominal economy has almost doubled in size over the past ten years, turnover in financial markets has almost quadrupled. the remarkable thing is that the pace of growth shows no sign of slowing. the members of the campbell inquiry, who helped set australia on the path of financial deregulation and market development, would i think be very pleased at the way the financial system has evolved over the ensuing 25 years or so. the previous speakers have outlined the highlights of the reports being launched today, so i won ’ t repeat them. rather, what i would like to do is take a step back from the impressive figures contained in those reports, and consider two questions : • why do financial markets and market turnover consistently grow faster than the economy as whole? and • what does all this increase in financial activity mean for the real economy? turnover and gdp let me

and the ratings agencies seem to lie behind a perpetual question mark about australia and its financial institutions. it is unlikely we will ever be able to change definitively the views of all the sceptics. and – let us be clear – we should welcome the sceptics. perhaps some of their concerns are valid. the reserve bank gives a lot of thought to these issues ; we certainly do not dismiss them. we should always be wary of the conventional wisdom being too easily accepted. we should never, ever, assume that “ it couldn ’ t happen here ”. it is in that vein that i wish to pose a set of questions that are thrown up by these sceptical views. in particular : how much of the recent relatively good performance was due to luck? to what extent did we improve our luck by sensible policies, across a range of economic and financial fronts? are there signs of any of the things going wrong that people typically worry about? bis central bankers ’ speeches and if there are, or were to be, such signs, could we do anything about it? to begin, i shall re - state some key metrics. graph 1 graph 2 bis central bankers ’ speeches graph 3 these charts really require no exposition ( graph 1, 2 and 3 ). the message is clear. it is fair to conclude that, given the circumstances internationally, the australian economy has exhibited more than acceptable performance over recent years. this conclusion would stand whether comparisons were made either against most other countries, or against our own historical experience. why was it that australia did not have a deep downturn in 2009 when so many other countries did? and why was it that we have returned to reasonable growth, when others have struggled to do so? this question has been answered on numerous occasions. there are several elements. first, the australian banking system went into the crisis in reasonable shape. to be sure, there were some poor lending decisions during the preceding period of easy credit and there was, in hindsight, too much reliance on wholesale funding. but among major institutions, credit quality issues have turned out to be manageable. asset quality was not as good among some of the regional banks, and even less so among some foreign banks operating in australia, but the problems have not been insurmountable. some observers might counter that the banks received assistance with wholesale fund raising in the form of the government guarantee. but the banks paid for that, and it was an appropriate response at a time of massive market di