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Macroeconomic analysis of Australian Economy
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9/13/2017

Introduction:

In this report we are going to analyze the GDP growth rates in Australia and the possible reasons for The varying growth rates in the last 10 years. There are both challenges and positive aspects of growth in the economy which are being analyze in this report. The first section analyses the macroeconomic indicators of GDP growth rate and unemployment rate in economy. second section deals with the various reasons underlying the variations in growth rates and III section points out the major challenges facing the Australian economy.

Growth rate of the Australian economy:

GDP growth rate of Australia has been fluctuating around 2% - 4% over the past 15 years as shown in the following figure. We can see that the Australian economy has been growing even after the global financial crisis unlike other advanced economies. This has been particularly attributed to the growth in mining sector boom that was prevalent in the Australian sector over the years till the last few years. Australian GDP growth rate did fall from 3.75% in the year 2008 to nearly 1.75% in the year 2009. However it soon picked up on its growth from the very next year to reach its highest during 2012 at 3.6% after which it has been hovering around 2.5%.

When compared with advanced economies like US and Canada, Australia has been doing better in terms of GDP growth rate particularly after the global financial crisis. This is shown in the following graph which is taken from the world bank website.

From the above graph, one can see that Australia has never touched a negative growth rate in GDP in the last twenty five years. This has been attributed to the sound monetary and fiscal policies in the country. But even with this positive growth rate in GDP over the years, there has been increasing unemployment rate in the country as shown in the following graph and there has been a continuous increase in the structural unemployment where there is a mismatch between the employers needs in the various sectors and the skills of the potential employees which has led to the increase in the unemployment rate in the country (Focus_Economics, 2017).

From the year 2011, the unemployment rate has been increasing from lower than 5% to nearly more than 6% in the year 2015 which signifies that decline in the mining sector has resulted in the increase in the unemployment rate.

Reasons for variations in growth rate:

Growing trade

The factors that are responsible for the growth rates of GDP in Australia has been mainly attributed to the trade with China where China has emerged as the largest trading partner of Australia over the past ten to fifteen years. In terms of both location and also the composition of exports China has been of importance to the variations in the GDP growth rates in Australia (Hermansen & Röhn, 2017). Although the other trading partners in South Asia along with Japan have been facing subdued economic growth which has resulted in decreased trade with these countries however, the volume of trade over the years has been on an increasing trend as shown in the following graph.

In the above graph Blue line represents exports from Australia and Red line indicates the imports and we can see the volume of trade in USD had seen a tremendous increase over the last ten years. This has also been a important factor of GDP growth rate in Australia.

Degree of flexibility:

Another important factor that has kept the GDP growth on the positive side has been the degree of flexibility which has been more intense than it was during the 1980s. During the 1990s and the years after, there was greater flexibility which made the economy more resilient to the shocks that happened externally all over the world like the Asian crisis, the dot com bubble and even the global financial crisis that affected most of the advanced economies all over the world(Bernanke, Antonovics, & Frank, 2015). But Australia was not as much affected by the GFC. This flexibility has been possible mainly due to the floating exchange rate which has played an counter cyclical role in fluctuating in response to these external events occurring across the world, which otherwise would have left the economy to destabilization . This was evident during the various external events where Australian Dollar decreased sharply in value in response to the deteriorating conditions around the world and helped in insulating the Australian economy towards external shocks.

Exchange rate flexibility can also be noted during the recent years particularly during the global financial crisis value of Australian dollar increase as there was a increase in the commodity prices and this prevented the overheating of the economy by dissipating pressures. Family during the financial crisis, there was a sharp all in the exchange rate which cushioned the economy against going into a recession.(Goodwin, Nelson, Harris, Torras, & Roach, 2013)

Dollar exchange rate flexibility has been considered as important economic reform that has protected the Australian economy since 1983 when the Australian Dollar was floated; there are also other reforms that played important role in preventing the economy from going into a negative GDP growth rate over the last 25 years. The main among those reforms are

· A varied range of reforms regarding competition and industrial policies that I have been implemented over the years I have made the business sector More competitive and outward looking

· There were also labour market reforms That gave the flexibility to the labour market to respond to the economic conditions that were changing without producing unemployment swings or unsustainable pressures in wage rate.

· there were also various reforms in the financial system has taken up by the RBA i which helped in giving greater capacity in meeting the financial needs of the country and also to make it more attractive to foreign Investments.

These reforms have led to substantial increases in output during the 1990s and during the last decade. However This productivity has declined over the last few years and there is a large shift in the composition of output produced by different sectors in Australia (Battellino, 2010).

The GDP growth rate over the years has been primarily due to increase in household consumption and trade from the economy between various countries. This can be seen from the figure below where we can see that during the years 2005 to 2008 and again between 2010 -2012 the net exports component of the GDP was negative. However the business investment component has turned negative over the last three to four years while the GDP growth has been sustained at nearly 3% due to increases in household consumption and trade with the outside world(OECD, 2017)

However in the recent years, there has been large decrease in the resource sector investments which was 9% of the GDP earlier has halved to 4.5% recently and there has also been fall in the resource sector employment due to many reasons namely the huge multiyear construction projects are nearing completion and there has also been a fall in the mining sector developments. The decline in the global commodity prices particularly that of iron ore and coal from what it was in 2011 has curtailed new investments in the mining sector and many producer have adopted to cost cutting in the recent times. As the business sentiments are weak, Australia now faces the low growth trap where there are lackluster investments by the private sector in various industries mainly due to weakening of global trade and also because of pessimistic attitudes of the business sector in the country (Mankiw, 2014).

Major issues facing Australian economy:

Though the Australian economy has been facing considerable success particularly after the 1990s that reflects strong policies both fiscal and monetary, the structural reforms and the commodity boom in the world market; this has led to the living standards and wellbeing to get higher, along with increasing gender gaps, increasing greenhouse gas contributions that intensifies its climatic problems and also ageing populations. There is a mix-up of both positives and negatives in the economy which calls for strengthening of the non-mining sector. There are various issues facing the Australian economy right from the declining investment expenditure, to the downward trend in the mining sector, to the increasing inequalities between the indigenous and non-indigenous people in Australia. Though the low interest rates in the economy have supported to increase the aggregate demand which increases both GDP and employment, it has also been ramping business investments and drives up the housing prices very rapidly(Fall & Fournier, 2015).

Interest rates being lower, have increased the house prices tremendously and it has Created substantial mortgage borrowing. The banking sector in the Australian economy remains highly concentrated compromising the competitive forces in the sector which will ultimately lead Australia to be vulnerable to various monetary risks. Regarding the fiscal reforms Global commodities swings are having its large budgetary effects on Australian public Debt. however low growth in public expenditure as created various challenges with regard to maintaining of quality in the provision of public services. There is a weak collaboration between the research and business activities which has made the innovation system fragmented; the business framework conditions have to be more supported by research and development search that it better supports the absorption and creation of innovations across various sectors. this can be done through improvisation in the competition law; increasing the labor productivity and mobility through development of education and training programs; encouraging the entry by innovative business through combating resistance by incumbents and through adjustments in the business sector regulations as soon as new firms emerge in any sector.

Inclusiveness is being eroded in the economy With Gini coefficient increasing up and those in the income brackets have benefited disproportionately from the GDP growth of Australia over the past 25 years. the real income of the top quintile of the population has grown more than 40% between the last 10 years well those in the lowest quintile saw a real income growthOnly by 25%. There are several risk and uncertainty in the trade related sectors of Australia this is because the Global demand and prices for iron ore and coal which are very important component of trade from Australia has been very volatile in the recent years. the aggregate demand in other trading partners of Australia particularly China is very important for Australia trade in services And this is particularly because tourism in Australia as increased Due to the increasing population in China’s middle class are travelling to Australia both as tourists and as foreign investors. Indicators have pointed out that there are several potential destabilizing Events that Maybe a threat to overheating of the economy’s output and inflation. macro financial indicators point out the fact that there are underlying threat for the housing market with increasing housing prices house indebtedness that has been continuously vulnerable in the recent years (Battellino, 2010).

Another important point to be noted about the increasing unemployment in the economy is that the mining sector as face increase in unemployment 3 times more than the national average in the non mining sector. Points out to the fact that Australian Exports and the growth rate in GDP are more dependent on this sector than the other manufacturing sectors it has led to the increasing unemployment rate in the recent years. in fact the growth in employment in manufacturing sector as become negative it signifies the fact that Australia is more dependent on tourism and education and other services sectors for its GDP growth rate in the recent years. structural reforms are required to turn the productivity in the manufacturing sector and more investments are required in the manufacturing sector. the income gaps between the indigenous and non indigenous populations of Australia has been widening it has led to Gini coefficient in the economy(OECD, 2017).

Conclusion:

From the above analysis we can say that Australia has been Facing Both positive aspects of GDP growth and declining productivity in some sectors of the economy. economist fear that the Australian economy is heading for a low growth trap with investments in the business sectors Declining and more growth in the service sectors is visible in the recent years. the GDP growth rate in the economy is more dependent on global trade than on internal growthWhich makes it more vulnerable to external shocks in the global economy.

References:

Battellino, R. (2010). Twenty Years of Economic Growth, 1–10. Retrieved from https://www.rba.gov.au/publications/bulletin/2010/sep/pdf/bu-0910-13.pdf

Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics.

Fall, F., & Fournier, J. (2015). Macroeconomic uncertainties, prudent debt targets and fiscal rules. Retrieved from http://www.oecd-ilibrary.org/economics/macroeconomic-uncertainties-prudent-debt-targets-and-fiscal-rules_5jrxv0bf2vmx-en

Focus_Economics. (2017). Australia GDP - Australia Economy Forecast & Outlook. Retrieved September 13, 2017, from https://www.focus-economics.com/country-indicator/australia/gdp

Goodwin, N., Nelson, J., Harris, J., Torras, M., & Roach, B. (2013). Macroeconomics in context. Retrieved from https://books.google.co.in/books?hl=en&lr=&id=xJhIAgAAQBAJ&oi=fnd&pg=PP1&dq=macroeconomics+&ots=oHLBsE6PvC&sig=OvDVjsnhUYZ3H8DbtAh5g66ynPc

Hermansen, M., & Röhn, O. (2017). Economic resilience: The usefulness of early warning indicators in OECD countries. OECD Journal: Economic Studies. Retrieved from http://www.oecd-ilibrary.org/economics/economic-resilience-the-usefulness-of-early-warning-indicators-in-oecd-countries_eco_studies-2016-5jg2ppjrd6r3

Mankiw, N. (2014). Principles of macroeconomics. Retrieved from https://books.google.co.in/books?hl=en&lr=&id=AObKAgAAQBAJ&oi=fnd&pg=PR6&dq=macroeconomics+&ots=-N9eoSuPQd&sig=z4emE37M7WOOl7neuqXImy1Xj7s

OECD. (2017). OECD Economic Surveys Australia www.oecd.org/eco/surveys/economic-survey-australia.htm. Retrieved from https://www.oecd.org/eco/surveys/Australia-2017-OECD-economic-survey-overview.pdf

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