At least Treasury secretary Ken Henry ended his final appearance before federal senators with a smile on his face.


The sometimes gruelling quizzing by the Senate economics committee has not always ended amicably.

But his 22nd and last attendance of budget estimate hearings before his retirement in April was somewhat less argumentative.

Even so, reminded of the number of times he had appeared there in his decade-long role as the boss of Treasury, Dr Henry joked: “There is a chance I’ll miss some of this”.

Dr Henry told the committee that Australia’s economic performance had been “quite outstanding” while some parts of the world were still suffering the lagged impact of the global financial crisis.

“But one should not get complacent about the risks that are out there in the global economy,” Dr Henry said on Thursday.

He said the extraordinary growth being experienced in China, and to a lesser extent in India and other parts of east Asia – bar Japan – was presenting very high prices for iron ore and coal and other commodities that Australia has in abundance.

Commodity demand is highlighted in Australia’s exports and the terms-of-trade boost to the national income that is being reflected in business investment.

New data on Thursday showed that businesses intend to invest a whopping $129 billion this financial year, a 3.6 per cent increase in forecasts made three months ago.

The Australian Bureau of Statistics’ December-quarter capital expenditure report also showed the first estimate for planned investment for 2011/12 at $133 billion, 30.3 per cent higher than the first estimate for 2010/11.

Actual spending in the December quarter rose by 1.3 per cent compared with the previous quarter, to $29.7 billion – less than the 2.2 per cent growth expected by economists.

However, the key “equipment, plant and machinery” component that feeds into next Wednesday’s gross domestic product (GDP) for the quarter rose by 6.1 per cent to $14.3 billion.

RBC Capital Markets strategist Michael Turner said this suggested a firm GDP number next week.

Still, Dr Henry told the hearing, the consequence of the economy’s upbeat performance had been the double-edged sword of an appreciating Australian dollar.

“If the Australian dollar does not appreciate, the alternative consequence, and it is unavoidable, it would be one of rapidly accelerating inflation and wages,” Dr Henry said.

But it also means a loss of competitiveness in international markets, which is impacting on domestic economic development.

Dr Henry said he believed the US economy would experience sub-trend growth for some time, as would most of continental Europe and the UK.

On top of that are risks associated with sovereign debt, particularly in Europe.

“Although I think one would have to say that Europeans, with the assistance of the International Monetary Fund (IMF) have managed these risks quite well to date, the risks are, nevertheless, there,” Dr Henry said.

Greece, Ireland and Portugal stood out as countries that presented some risk of volatility in sovereign debt markets, he said.

“That would not be helpful … to the international economy. It probably would not be helpful in Australia’s case as well,” Dr Henry said.

He said if there was a sovereign debt crisis, Australia might look like a very attractive place for savers globally.

“But, of course, that would mean … an even higher exchange rate and even a higher loss of competitiveness,” he said.