Analytic Narratives On Economic Growth

Reasons for the variation in growth rates

Discuss About The Analytic Narratives On Economic Growth .

Australia is among the richest countries in Asia-Pacific with high rates of economic freedom and has enjoyed economic growth for a longer time period.

An important measure which may be used to measure the rate of growth for the economy of Australia is the rate at which the gross domestic product (GDP) increases. Gross domestic product indicates the final dollar value of all the final goods produced by a country within its borders over a specified period of time and thus helps gauge the economic performance of a country (Abbott & Loneragan, 2014, p.353). For the period of ten years just before the great recession, from the year 1999 to 2008, the gross domestic product of Australia grew by 3.4% per year on average basis. However the Australian economic growth rate decelerated in 2009 to 1.6% due to global financial turmoil. 2009 was the poor year for the Australian economy after the greatest recession in 1991, but the Australian economy still showed greater resilience towards the experienced global crisis (Arthur, Archer & Herd, 2014, p.361). Australia was among the few developed countries that posted a positive record of economic growth rate in 2009. The economic performance of Australia improved from 2009 in the following years and posted a gross domestic product growth rate of 2.7% on average from the year 2010 to 2017. The grow rates of the gross domestic product of Australia (Annual percentage Variation) for the last ten years was 2.6% in 2008, 1.7% in 2009, 2.4% in 2010, 2.6% in 2011, 3.6% in 2012, 2.1% in 2013, 2.8% in 2014, 2.4% in 2015, 2.5% in 2016 and 2.4% in 2017.

In conclusion, for the last ten years, since 2009, the economy of Australia has been growing but at a slow rate. This is clearly indicated by the rate of growth of the economy of Australia gross domestic product which is at 2.7% on average basis. The Australian economy was anticipated to grow at a higher rate this year with the Reserve Bank of Australia forecasting the gross domestic product growth rate to be between 2.75% and 3.75% early 2018.

In any economy, there is the likelihood of the economy to grow or deteriorate based on the prevailing economic conditions of the country. For the last ten years, the economy of Australia has been growing but at a slower rate. Based on the annual variation percentage rates, some of the years indicate a higher grow rate in the domestic product than the others.

Fluctuations in Interest Rates

During the year 2008, the economy of Australia was experiencing a better growth rate. It was at its fast pace of economic growth. The demand of the raw commodities has increased from developing countries. This led to rise in the prices of the global commodities and thus played a major role in improving the economy of Australian. The terms of trade were higher and this led to a rise in the purchasing power of the households’, increased commodity prices led to improvement in mining sector investment, majorly coal and iron. Investment in the mining sector being one of the major drivers of growth in Australian highly contributed towards positive economic growth. Iron and coal production capacity expanded leading to increased Australia’s exports to the Asian market (Barger & Southcott, 2015, p.167). The financial sector and mining sector rapidly expanded leading to a rise in the gross domestic product of Australia. The manufacturing output shrunk steadily. This made the larger part of the Australian economy shift to the mining bit of the economy and production of services. Manufacturing was replaced by the financial sector and it became the largest single industry in the economy of Australian. 

During the year 2009, the economy of Australia growth rate slowed down during the early three months of the year. This was as a result of bad weather which greatly affected the exports and homebuilding deceleration. This led to decreased annual growth. Gross domestic product growth rate was 0.3% in the first three months. This was a decrease from 1.1% in the previous quarter but it was expected as predicted from the economist’s point of view. As a result, the annual growth decreased to 1.7% from the previous year which had an annual growth rate of 2.6%. In accordance with the Australian Bureau of Statistics, this was the slowest growth rate ever. Bad weather was blamed for this sluggish economic growth and the economy was said to be resilient (Lowthian, Jolley, Curtis, Currell, Cameron, Stoelwinder & McNeil, 2011). The adverse weather conditions lowered the exports particularly the coal and iron in the west. As a result of this economic deterioration, the Australian dollar decreased its value by 0.4% to around $0.7537 according to the gross domestic product statistics.

During the year 2010, the economy of Australia grew by 1.2 per cent in the second quarter. This was an increase from 0.7 per cent grow rate reported for the first quarter. Gross domestic product had been forecasted to rise to 0.9% by the Economists for the second quarter. The annual gross domestic product growth rate was 3.3 per cent. Household expenditure measured from the final consumption contributed much towards the improved economic performance (Chapman, Cullen, Johnson & Beca, 2010, p.1071). The household spending contributed 0.9% to the total 1.2%increase. Trade also contributed towards the growth with net exports adding 0.4 percentage points. This was much improvement from the previous years’ trade results. Mining prices were the major factor to the change in the terms of trade of Australia. Terms of trade refers to the relative price of the goods and services that a country exports compared with its imports. Terms of trade improved by 12.5 per cent and raised the ratio to about 24.5 per cent compared to the previous year. The dollar of Australian cut off almost more than a third of the U.S. dollar. This made the investors raise their bets on continued increase in rates of interest. The Federal Reserve Bank of Australia increased rates of interest more than five times in order to bring the costs of lending closer to the expected long-term levels as the economy improved. The gross domestic product did very little to shift the near-term outlook for the rates of interest. Investors were still expecting the Reserve Bank of Australia to leave the rate of cash at 4.5%.

Movements in the Australian dollar

From the year 2011 up-to-date, the rate of Australian economic growth has not been varying so much. Some years have been experiencing a higher growth rate than others as explained.

Fluctuations in Interest Rates; interest rates refers to the rate at which money is lend to the borrowers by various money lending institutions in country (Renaud, Thinh, Lambrinidis & Parry, D.L., 2012, p.687). As interest rates vary across the years, the gross domestic product also varies. The years with low rates of interest have higher gross domestic product which is an indication that the economic performance is higher. This was the case with the year 2012 whereby the annual growth rate was 3.6%. Years with higher interest rates experience lower investments. This is due to the fact that, investors cannot acquire capital for investment at the higher interest rates. This means that the gross domestic product at the end of the year decreases and thus low the economic growth rate.

Movements in the Australian dollar; the economic growth rate of Australia is greatly determined by the rise or fall in the Australian dollar value (Renaud, Thinh, Lambrinidis & Parry, 2012, p.195). The fall in the value of the currency may be due to the reduction of the interest rates, although this may be muted by the reduction of interest rates in the other countries. The decline in the Australian dollar value reduces the terms of trade. The lower Australian dollar value leads to poor economic performance.  When the Australian dollar value is high, this improves the competition of the Australia’s exports and imports and thus raises the terms of trade. This in general leads to high economic performance increasing the growth rate in a given year. This was the case with 2009 economic results. The exchange rates had to be raised sharply to restore the economy back to its position.

Fluctuations in domestic expenditure; domestic expenditure also known as household spending is a major determinant of the success of any economy (Cullen, Eckard, Callow, Johnson, Chapman, Rawnsley, Garcia, White & Snow, 2014, p.761). During the rise of the household spending which may be brought about by the increased sales the gross domestic product increases. In circumstances low household spending, the gross domestic product is obvious low. During the year 2015 household spending contributed more than three-quarters towards the gross domestic product increase, with 0.4% points out of 0.6% increase. This spending by householders compensated the drop in mining sector investment and other Australian industries. Increased households spending were also the main reason behind the good performance of the economy during the years 2010, 2012 and 2016. Decline in the household spending led to the decline in the gross domestic product during the year 2011.The domestic expenditure has been assisting to keep the economic performance high. In the year2015, the private construction sector about 0.49% to GDP growth. However, construction of houses and apartments growth is inadequate to recover the fall in construction in other sectors.

In conclusion, the variation of rates of growth in the different years is due to fluctuations in various determinants of economic growth from year to year. These determinants include, the value of the Australian dollar, households spending, the level of interest rates, terms of trade, government spending and weather conditions.

Although Australia is among the better performing nations economically, it faces numerous challenges in a bid to improve its growth rates. For better understanding of these challenges, it is important to put performance of Australia into the context based in history.

Population Growth; Currently Australia is experiencing the challenge of maintaining population growth to match what has been achieved over the past decade (Beames, 2013). Sustained economic growth plays a major role in future success and opportunity in the economy. Successful economic growth must have population growth which is adequately sustained. This not only helps in provision of labour force but also is crucial when it comes to investment and productivity. Sustained population growth and provision of labour force actively is therefore an issue of major concern. Sustained population growth must have sustained immigration and enough efforts in order to cater for the decline in fertility. Considering the immigration composition, the Australian economy should provide skilled immigration in order to improve productivity and should be more consistent with higher labour force among the migrants. The Australian economy is faced with the challenge of providing a suitable environment that supports fertility. A review of factors which might better parenting among the employees should be done. Considering the population age, the older workers participating in the labour force should be adequately supported.

Taxation; international taxation system of Australia is reducing its capability to fully take part in the international economy (Forster, 2016, p.173). The Review of International Taxation System in order to foster the economic growth. The taxation of foreign source income should be lowered. Immediate improvement should be done in as much as taxation of non-residence labour force in Australia and Australians working abroad are concerned. The Australia’s international tax system is now viewed to be less competitive as compared to the world international tax regimes. The simplification of the international tax system will help attract foreign investment, increase the appeal of Australia as it is the headquarters for the regional international business, facilitate investment opportunities of Australian in foreign countries and improve the ability of Australia to attract and retain skilled, internationally labour force.

Industry Protection; Australian economy should reduce remaining business protection. Although industry protection has been reduced, it still remains significant with various protection measures put in place (Gillis, Perkins, Roemer & Snodgrass, 2012). Importing books has been banned and pharmacies have been restricted. Removing industry protection totally will help improve the quality in production and this will help the Australian economy to remain competitive internationally.

Decline in Education; the Australian education system is not producing better outcomes. The latest ranking has shown that the Australian education system is lagging OECD countries in some areas. A research has shown that a vast number of students are likely to drop out of school before acquiring at least twelve years of education (Wright & Westoby, 2010, p.97). This will drag behind the economy of Australia as there is the likelihood of experiencing unskilled labour force.   But as debated in order to reform the education system more funding is required. This means that greater private sector involvement, greater deregulation and higher fees must be incurred.

In conclusion, Australia is facing various challenges in the event of accomplishing its growth rates. These challenges include inability to sustain population growth, unfavorable taxation system, protectionism and poor education system. These challenges need to be addressed as soon as possible in order to improve the economic growth rate of Australia.

References

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