HI5003 Economics For Business

Table of Contents

Question:

The economic growth of Australia over the past 3 to5 years.

Answer:

Introduction

The gross domestic product (GDP) is the measure of a country’s economic performance.

Australia saw an average annual growth rate of 3.4 percent every year for the ten years preceding the great recession in 1999-2008.

Global financial turmoil in 2009 led to a decline of 1.6 percent in economic growth.

2009 was the worst economic year for Australia since the recession (Kelly, 2014).

The country was resilient to the global recession to the point that it was included in the 2009 list of countries with positive growth statistics.

As evidenced by its 2.7 percent annual economic growth rate between 2010 and 2013, the country saw an economic recovery.

Since the early 2000s, emerging countries have had high demand for raw commodities. This led to an increase of global commodity prices. This was a significant contributor to Australia’s economic structure.

Higher terms of trade led to an increase of consumers’ purchasing power, which in turn led to an increase of commodity prices and an explosion in investments in mining of iron or coal.

The economic growth of Australia has been influenced by mining investment over the past ten years.

Now, the economy is transitioning from the mining boom stage to the production stage. (Battelino 2010, Battelino 2010).

Australia’s exports have been of significant importance to the Asian market for some time. This is evident since the country increased its production of iron and coal.

In the past five years, Australia’s GDP has grown to include other sectors like mining and finance.

The country has seen a decline in manufacturing output.

The economy has shifted to mining and the production of services, at the expense or producing goods.

The financial sector has successfully replaced manufacturing as Australia’s leading industry.

GDP measures the country’s economic performance over a period of time (usually a year) (Marcu and Marian 2015.

The Australian Bureau of Statistics (ABS), produces Australia’s GDP data, known as National Accounts. These are derived from the System of National Accounts 2008 (SNA).

The methods of production, income and expenditure are used to calculate the GDP.

The production approach provides figures for the total value added of all producers.

This is basically the sum of the output and the immediate spending, minus the subsidies.

The expenditure approach provides a total of all the spending on final products.

This includes final consumption expenses incurred both by households and government, as well capital formation and net exports. The difference between imports and exports is the net exports.

The income approach calculates Australia’s income as the compensation workers’ sum, gross mix income, gross operating surplus, taxes, and subsidies, while deducting import subsidies.

Volume estimates are calculated using current price estimates and deflation with the expenditure approach’s cost deflator (King 2016,).

The three methods should produce close to equal, if not identical, GDP results.

If the measures are calculated using different data sources, there can be a significant difference in GDP results.

The ABS balances the estimates annually by using the supply and usage tables.

The three methods are identical, so the estimates can be compared.

Analysis of Australia’s Economic Growth

Australia is a safe environment that offers low risk and minimal risk for businesses. This is due to its recent record of economic resilience, adaptability, and steady growth.

The country is currently in 26 years of consecutive annual economic growth. This is reflected in strong institutions, a functioning service sector, and the ability to adapt to global changes.

It currently ranks 13th in the world. Over the next five years, it is expected to achieve a 2.90% average annual real gross domestic product growth. This would make it the first of the top economies.

High productivity is evident by the fact that 15 of its 20 industry sectors are rated higher than the global average (Rees and Hall 2016,).

The labor force of the country is multilingual, educated and multicultural. 2.10 million people speak an Asian language, while 1.30 million are fluent in a European language.

Because of the high quality education system, scientific research institutions and special training services, the workers are highly skilled.

Politically, the country is stable thanks to a transparent regulatory system as well as good governance.

Its strategic location near the Asian market is another reason it is favored.

It provides a strong trade and development platform for businesses doing business in Asia.

Its trade agreements enable smooth flow of goods and services with large economies in Asia, Europe, and North America (Gali 2015).

Australia’s service sector dominates the economy, but its abundant agricultural and mineral resources are key to economic success.

65 percent of Australia’s economy is made up of services, 13.5 percent goes to mining, 11 percent goes to manufacturing, and 9.5 percent go to construction. Agriculture accounts for 2 percent of the country’s total GDP.

The economy experienced a 1.1% growth in the December quarter 2016.

In 2017, the March quarter saw a 0.30% increase, which was more than the expected 0.2 percent growth.

This was the second consecutive month of quarterly growth.

The economy grew by 1.70% in the first quarter, which was slower than the 2.40 percent growth recorded in the previous quarter, but still beat the consensus of 1.50 percent (Bishop and Lancaster 2013, respectively).

In comparison to the 0.50% decrease in September quarter, which was expected to be 0.7 percent, the economy saw an increase of 1.10% during the fourth quarter 2016.

This was the strongest expansion since the March quarter 2016.

The strong expansion in 2016 was fueled by household spending, net trade and investment.

The economy of Australia contracted by 0.5 percent during the third quarter 2016. This was in contrast to the 0.6 per cent growth recorded in the June quarter, which was well below the consensus of a market expansion of 0.3 percent.

This was the first contraction since March quarter 2011, and the largest decline since December quarter 2008, which was hampered by net trade and investment.

The economy experienced a decline of 1.0 percent from the previous quarter and a partial drop in growth to 0.5 percent according to the market consensus (Bishop and Lancaster 2013, respectively).

It was the lowest growth rate since 2015’s second quarter. This was due to net trade, which saw investment stagnant and consumption maintaining a steady flow.

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According to reports, Australia has experienced a remarkable growth cycle. Its GDP was worth 1339.54 Billion US Dollars in 2015. This is almost 21.6 percent of global economic activity.

The last five years have seen tremendous growth and prosperity.

Gregory and Smith (2016) further suggest that the 2012 June quarter saw the strongest expansion, resulting in an annual growth rate of 2.9 percent. This is growth that has not been accompanied by recession.

The fall in commodity prices, the accelerating unemployment rate, investments, and significant improvements in other sectors have all slowed the economy’s growth.

ABS reported that the unemployment rate was 5.72 percent, which is considered a significant factor in economic decline.

Long-term unemployment can lead to serious economic and social problems in the country.

Unemployment directly impacts the economy’s growth.

This is also due to people with low purchasing power, which lowers their spending, which in turn reduces the demand for goods or services and leads to a decrease in economic growth (Argy & Nevile 2016,).

Australia’s economy grew at an even faster rate in the fourth quarter of last year, which is remarkable considering that Australia has been in recession for 25 years.

After the rise in news GDP to 3.3% in the year ended June, the local dollar was stable at $0.7662. This is an increase of around 2.9 percent from the quarter before.

The output increased by 1 percentage point, while the value of all commodities rose by 0.5 percent compared to the first quarter.

This growth was due to an increase in government spending prior to the election, as well as beneficial household expenditures.

This was a factor in the steep decline in mining investment, which has been a major detriment to the economy for more than three years.

The growth was greatly influenced by international trade. Hundreds of billions of dollars were spent on mining projects that exported a lot of resources.

Trade contributed 2.2 percentage point of growth during the year to June.

Exports were strong, but domestic final demand rose by 1.2 per cent in the same year that household spending increased by 1.6 per cent (Kelly 2014).

These same reports also showed that the economy wasn’t strong enough to combat inflation, as the main GDP price indicator for the year was only 0.3 percent.

When the Reserve Bank of Australia reduced interest rates in August to achieve a record low of 1.5 percent, it expressed its desire for stronger growth.

The Australian Bureau of Statistics estimates that Australia’s annual GDP is $1.65 trillion, or $68929 per Australian citizen.

The Australian economy grew at 1.2 percent annually, 1.6 percent in Europe, 2.2 percent in Australia, and even better than the 3.1 percent rate in Germany (Kelly, 2014).

After many years of declining commodity prices, Australia’s terms of trade improved.

The quarter saw a 1.3 percent increase in nominal GDP, which is the highest rate of growth since 2013.

According to ABS figures, Australia’s GDP grew 1.1 percent over the first three months 2016.

The results are contradictory due to the growing gap between the wealthy corporate elite and the majority of workers.

Although output increased by 3.1 percent in the year to March 2013, real national disposable income per person fell to 2.6 percent.

Gulati and Satija (2014) have shown that income statistics, which indicate living standards, have dropped for eight consecutive quarters. This shows that there has been a prolonged decline in living standards for most Australian citizens.

Income recession refers to falling real wages, reduced working hours, and lower taxes revenues.

In March quarter, the cost of labor fell for employees. This was the second consecutive quarter. It is a sign that workers’ incomes have been falling at an accelerating pace.

This results in a decline in average prices, which causes consumers and companies to delay spending (Battelino 2010, Battelino).

The March quarter’s growth was almost entirely due to higher export volumes, mainly from finished iron ore and liquefied gas projects.

Even with the current global slump and fall in prices, large mining and resource companies are increasing production.

Transnational corporations and finance houses enjoy the benefits, not the workers who were fired from construction sites and mines in the last two years (Rees and Hall 2016,).

The largest mining companies make the most of their profits since almost 15% of the workforce has been retrenched in the past four years.

Sharp fluctuations in world demand are responsible for the drop in mining exports following a three-month decline.

This makes Australian capitalism more vulnerable to global shocks, especially in the face of volatility in China, which is the largest export market.

Contrary to the export rush consumer and business spending, measured by domestic final demands, grew by 0.1% in the March quarter (Plumb & Bishop 2013, 2013).

Fairfax Media received a report from SGS Economics & Planning. It showed that the economy has declined in 30 of Australia’s 150 parliamentary constituencies since 2014.

In the inner suburbs of Sydney and Melbourne, economic activity grew by more than 5 percent annually between 2014-15.

In the working class Southern Brisbane and Western Brisbane, where there are coal mining communities in Central Queensland, more than 1 percent of the annual declines in economic activity occurred. These areas are connected to Perth and rural South Australia, which have seen major nine closings that has added to the impact of the Adelaide plant closures.

Recent studies show that business investment fell sharply in the March quarter.

According to the ABS, private sector capital expenditures on buildings, equipments and plant and machinery fell to 5.2 percent in March, while it was seasonally adjusted, which dragged it down 15.4 per cent annually.

In March 2010, mining investment fell by 12 percent and manufacturing declined above 10 percent (Battelino 2010).

However, there was only a 1.8% increase in capital expenditures.

This suggested that Australia is currently transitioning from mining to an unspecified new economy.

Since mid-2012, the sum of business investments has been falling in real terms. It is currently at a low point of more than 25% over the four-year period.

This means that there will be plant closings, job losses and reductions in working hours soon.

Notable is the fact that March’s GDP was supported by a drop in capital equipment imports.

This shows the gap between official growth data and reality.

International financial institutions continue to warn about the Australian economy’s dependence on debt and property bubble.

According to the Organization for Economic Cooperation and Development, (OECD), the property boom may fail.

Australia’s vulnerability to Chinese markets remains a major source of uncertainty.

The triple-digit growth in federal and state debt over the past ten year is now being overtaken by private debt, which is now at around 160 percent of GDP.

Australia’s household debt ratio has exceeded the limits in other countries that experienced housing bubbles, such as Spain, Ireland and the United States.

Because of the high leverage in the housing market, even a slight decrease in residential land prices could have serious consequences (Stevens 2013,).

The US investment bank has warned that Australia’s total household, corporate, and government debt has reached 243 percent of its GDP. This has increased Australia’s vulnerability to severe recession.

The nominal GDP fell to 2.4 percent per year in the same time period, compared to its average of 6 percent post-1996.

Moody’s Investor Services also warned that Australia’s AAA rating may be lowered after the election, unless the government makes a drastic cut to the annual deficit of 40 billion dollars.

Summary of Growth and Future Prediction

Australia’s economy ended 2016 positive, despite a slowdown in the middle of 2016, which was a result of the July Federal elections.

After a September decrease of 0.5 percent, real output rose by 1.1 percent during the December quarter.

After a 32% decline in September, the terms of trade rose by 16 percent.

An additional 5 percent rise is expected in 2017, but this will only be temporary due to higher commodity prices and lower demand conditions in China.

However, 2016’s annual GDP growth was disappointingly at 2.4 percent.

2017 looks promising.

The December 2017 forecasted real GDP is 3.0 percent, which slightly exceeds 2.75 percent.

The declining terms of trade problem is being addressed.

Now, the drag in mining investment is being moderated from a direct subtract of 0.9ppts for 2016, to a forecast of -0.5ppts for 2017 and -0.1ppts for 2018.

Future performance will be enhanced by a lower dollar and improved exports. This will also help with high public demand, which is catapulted through an increase in investment in transport projects.

Weak wage incomes, which have been detrimental to consumer spending, are the only remaining risk.

The negative spillover effects on household spending and employment will have a significant impact on growth in 2018. In 2018, there will be a decrease in home construction activity.

The forecasted 2.5 percent real GDP growth for the year ending December 2018 will be below the trend.

The trend is higher for non-mining industries, but investment will improve. However, it is still expected that the trend will rise by 4 percent.

The growth in non-residential building activity should be almost 10 percent.

The outlook for equipment spending, which is 40 percent of total investment in non-mining, will likely remain uncertain.

Exports contributed 1.8ppts directly to the annual GDP growth in 2016.

The increase in resource exports was 1.2ppts, with 0.5ppts coming from fuels. Service exports were 0.35ppts.

As new projects are started, resource exports will rise.

Exports indicate a bright spot and are expected to stay constant or increase by 2017.

They should contribute 1.6ppts to the growth, while net exports should increase by 0.8ppts.

Conclusion

Australia’s economy offers many opportunities for long-term growth and success.

This is due to a skilled and creative workforce, a growing population, and well-structured institutions.

It is close to the fastest growing and most developed countries in the world.

The government’s earlier reforms have left Australia with a flexible labor market and labor markets that are more competitive than ever. This helps them get closer to the technological frontier.

The Central Bank of Australia expects a gradual increase in the economy over the next few years. It has also been developing appropriate monetary policies to encourage growth-related ventures.

It has been beneficial to see the exchange rate decline.

Forecasting can be difficult as there are so many unknowns. This doesn’t mean that better growth is guaranteed.

It is expected that the country will continue to see strong growth in the service sector, which has a high level of employment.

While resource production and exports are less intense in terms of employment, a substantial investment in this sector will prove to be beneficial over the next several years.

A lower exchange rate will support the demand for output from the many firms that are located in sectors where trade is dominant.

Refer to

Top of FormBottom Of

Nevile, J.

The Theory, Experience and Policy Making of Inflation and Unemployment.

The Australian economy and mining booms.

RBA Bulletin, March. pp.63-69.

Bishop, J., Gill T., and Lancaster D.

GDP revisions: Measurement, implications.

RBA Bulletin, pages 11-22.

2015. Monetary policy and inflation: An introduction to the Keynesian framework.

Princeton University Press.

Gregory, R.G.

15 Australian Policies on Unemployment, Inflation, and Job Creation.

The Theory, Experience, and Policy Making of Inflation and unemployment, p.325.

Gulati, A. Jain, S., and Satija N., 2014.

Journal of Land and Rural Studies 2(2), pp. 261-286.

Kelly, G. and La Cava G. (2014). International trade costs, global supply chain and value-added trade.

Reserve Bank of Australia.

Fiscal tiers: Economics of multi-level government.

Marian, S., 2015.

An analysis of GDP correlation with structural elementsof added value.

Procedia Economics and Finance 22, pp. 282-286.

Plumb, M., Kent C., and Bishop J., 2013.

Strong growth in Asia has implications for Australia’s economy.

Reserve Bank of Australia.

Rees D.M. Smith, P., and Hall, J. (2016).

The Australian Economy: A Multi-sector Model.

Economic Record, 92(298). pp.374-408.

The booms and economic policy.

Address to The Anika Foundation Luncheon in Sydney, 30,

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