Australia's Economic Growth

Factors that contribute to Australia's economic growth

Discuss about the Australia’s Economic Growth.

Australia’s Economic Growth

After two long decades of continuous economic growth, low inflation, a vibrant financial system, and reduced government debt, Australia entered 2016 facing a range of constraints. By and large, the reduced growth was predominantly driven by a sharp decline in the global prices of the economy’s key export products (Murphy 2016). As a result, the economy contracted unexpectedly in 2016 (Janda 2016). Notably, this was the first contraction to be experienced in the country since 2011’s March quarter. Regardless, the economy of Australia is expected to experience an increase in its economic growth in the near future.

It is crucial to note that in June 2016, the country brought up a historical and unique economic record of economic growth. As at that time, the country had experienced 25 years of uninterrupted economic growth (Scutt 2016). In the same year, the level of GDP growth rate was recorded as 3.3 percent. Notably, this is the fastest level of growth experienced in the country over the last four years (Hutchen 2016). It is a remarkable achievement, given that the country is going through an economic transition. At the time, the country’s economic growth was only second to that of the Netherlands (Scutt 2016).

It is worth noting that various factors contributed to the remarkable economic growth experienced in the country in the last few years. A robust growth in the country’s population led to a significant boost in the level of economic activity in the aggregate economy. Particularly, this brought about a significant increase in the country’s aggregate demand.  In addition, the rise of the Chinese economy and past economic reforms in the country were a significant factor in enhancing the country’s GDP. Today, the Australian economy has unlimited potential to expand.

Economic growth in 2016

Typically, economic growth pertains to the increase in an economy’s capacity to produces services and goods from one period to another. Basically, it is the increase in a country’s aggregate productivity. It is measured either in real terms or in nominal terms. Traditionally, this indicator is measured in the form of the GDP or the GNP. An increase in the country’s economic growth brought about by efficient use of inputs is called intensive growth. On the other hand, growth caused by an increase in the amount of inputs available for use is referred to as extensive growth.  

Trends in Australia's economic growth

In the third quarter of last year, the Australian economy experienced a contraction of 0.5 percent. It is worth noting that this contraction was unanticipated given the past performance of the economy. The June quarter had achieved a 0.6 percent growth. It missed the market consensus by about 0.3 percent (“Australia GDP” 2017).  Thus, it was expected that the level of growth would continue for the rest of the year. Markedly, this decline in growth was the first the second quarter of 2011. It was also the fastest decline since the 2008’s December period (“Australia GDP” 2017). Consequently, this reduced the level of investment and net trade in the country.

Throughout the year, the economy slowed sharply from a 3.3 percent expansion in the June quarter. During this period, it grew by a mere 1.8 percent yet forecasts had estimated a 2.5 percent growth. From 1959 until 2016, the average rate of economic growth in the country is estimated at 0.85 percent. During this period, the highest level of growth was attained in 1976, at a record high of 4.40 percent (“Australia GDP” 2017). In contrast, the lowest level was experienced in 1974 at -2.10 percent in the second quarter (“Australia GDP” 2017).

Last year, the gross fixed capital formation declined by about 2.7 percent. In turn, this led to a decline in the level of growth by 0.7 percent. In the same way, the degree of private investments in the economy dropped by 0.8 percent. Primarily, this is attributed to the 1.4 percent drop in dwelling constructions, a 1.3 percent fall in non-dwelling construction and a 4.9 percent decline in ownership transfer costs. In addition, there was a 0.3 percent decline in the level of GDP growth caused by a massive fall in private investments in the building sector. Likewise, new and used dwellings, and new engineering reduced the GDP growth by about 0.1 and 0.2 percent in that order (“Australia GDP” 2017). In turn, this reduced the overall rate of economic growth in the country.

Just like private investments, public investments in the economy also declined. Particularly, private investments dropped by 10.4 percent. Consequently, this detracted 0.2 percent points the country’s GDP growth. In the same period, the state and local general government’s investments fell by 13. 0 percent, while the national and general government’s investments dropped by approximately 16.8 percent (“Australia GDP” 2017). Therefore, the level of economic growth in the country was strained, thereby leading to contractions in growth during the third quarter.

Challenges to Australia's economic growth

Regardless, the level of export services and goods from the country rose by 0.3 percent. Imports grew faster at around 1.3 percent. For this reason, the net exports contracted, thereby reducing the country’s GDP growth by 0.2 percentage points. There was also a change in the total inventories by AUD 1503 million. Markedly, this is a significant increase compared to the previous quarter. Subsequently, this contributed about 0.1 percent to the country’s GDP (“Australia GDP” 2017). Predominantly, the increase was brought about by an upsurge in retail inventories and wholesale trade in the country.

The September quarter of last year saw an increase in the level of final consumption expenditure by 0.3 percent (“Australia GDP” 2017).  As such, household spending picked up by 0.4 percent. Mainly, this is attributed to the fact that there has been an increase in the number of cafes, restaurants, and hotels in the country. In addition, the economy realized a 2.2 percent upsurge in the level of insurance services in the economy. Financial services in the economy also increased by 1.3 percent (“Australia GDP” 2017). On the other hand, government expenditure also declined.

With regard to industry, mining activities reduced by 0.8 percent. Primarily, this occurred because of the reduction in mining support services and exploration in the economy. Thus, coal mining dropped by 0.5 percent, oil and gas by 1.3 percent and other mining activities by 3.1 percent. Similarly, the construction industry declined by 3.6 percent. Retail trade and the real estate services fell by 0.8 and 2.4 percent respectively. Despite the declines in these industries, the fishing, forestry and agricultural sector realized a 7.5 percent growth. Primarily, this was driven by increases in cotton, grains and livestock output. There was also an increase in information media and telecommunications in the economy.

The real net disposable income rose by 0.8 percent in the third quarter.  This was an upsurge from the June quarter 0.5 percent growth. By a large extent, this was supported by the 4.5 percent rise in Australia’s terms of trade. Notably, the terms of trade increased consecutively for the first time since the September quarter 2011. It is the combination of these components that brought about the 1.8 percent growth in GDP in the last quarter of 2016, down from a 3.3 percent expansion in the preceding quarter (ABS 2017).

Economic growth over the last few years

It is imperative to note that the Australian economy has performed relatively well compared to many other advanced countries since the global financial crisis. As such, the nation emerged out of the 2008 crisis better than other economies (Ong 2016). Notably, the country has gone through 25 years without experiencing the effects of an economic recession. Its economic growth rates are higher than most OECD countries. Now, the country has reached a transition phase where its terms of trade are influenced by the peak of the mining investments boom. Thus, the economy is operating under the production and export phase (Ong 2016). Its economic growth rates are higher than most OECD countries.

Overview of Australia's economic growth in 2016

The service sector is one of the biggest contributors to the country’s GDP. Approximately, it accounts for about 70 percent of the GDP. It also accounts for 75 percent of the jobs in the Australian economy (Ong 2016). In the recent past, the country benefitted from a massive increase in its terms of trade. However, the trend has been reduced following the decline in global commodity prices. The country’s abundance and a rich endowment of natural resources encourages foreign investments. Besides, the country is an open market with minimal regulations on imports of products and services (Murphy 2016). This has led to significant economic growth in the country.

From 2011, the rate of economic growth in Australia has been interchanging between expansions and contractions. In 2011, the level of economic growth in the country was estimated at 2.7 percent of the GDP. The subsequent year realized a significant increase in the level of economic growth estimated at 3.6 percent. However, in 2013, this figure dropped to 2.0 percent, after which it rose sharply to 2.7 percent in 2014. Notably, this figure dropped again in 2015 to about 2.4 percent (“GDP in Australia” 2015).

The GDP purchasing power parity has constantly been increasing since 2014. Specifically, the country’s PPP rose from about $1.128 trillion in 2014 to $1.156 trillion in 2015. Last year, the value further increased and was estimated at $1.189 trillion. When compared to the rest of the world, Australia is ranked at position 20 in terms of the GDP PPP (Westcott 2016). On the other hand, the real growth rate has been experiencing ups and downs since 2014. In 2014, real growth was approximated as 2.7 percent. However, in the succeeding year, the figure dropped to about 2.4 percent. It later increased to around 2.9 percent last year (CIA 2017). In terms of real growth, the country is ranked at position 102 globally.

Additionally, the country has been experiencing substantial growth in the level of GDP per capita over the past few years. As at 2014, Australia’s GDP per capita was estimated as $47, 800. Remarkably, the value increased in the following year to $48300. Last year the estimated per capita increased further to $48800 (CIA 2017). Indeed, the continuous increase the level of per capita income indicates substantial increases in the level of economic activity and economic growth in the country. Today, Australia is ranked 26^th globally with respect to the level of per capita.

Economic growth over the last few years

It is also important to point out the fact that Australia’s gross national savings have reduced significantly over the past 3 years. According to the CIA, the level of gross national saving as at 2014 was approximately 23.7 percent of the GDP (CIA 2017). However, this component saw a significant decline in the following year. Specifically, the level of national saving decreased to 22.1 percent of the GDP in 2015. What is more, the value further dropped in 2016 to about 21.7 percent of the GDP (CIA 2017).

Regardless, the economy experienced a decline in the level of unemployment rate between 2015 and 2016. Unemployment in Australia dropped from 6.1 percent to 5.8 percent (CIA 2017). In the same way, the level of inflation declined between the two years. In 2015, the inflation rates were estimated at 1.5 percent. However, last year, the inflation rate dropped slightly by 0.1 percent. Remarkably, the level of imports decreased between this period from about $207.7 billion to 203.1 billion. Similarly, the exports from the country also decreased from $188.3 to $184.3 billion (RBA 2016).

Exchange rates in the country have seen a steady increase since the beginning of 2012. In 2012, the exchange rate level was recorded at 0.97 Australian dollars per every 1 US dollar. The rate further increased to 1.1094 Australian dollars per US dollar in 2013. The trend continued steadily, with the value increasing to 1.3291 in 2014. Notably, in the following year, the exchange rate between the country’s dollar and the US dollar remained constant. Last year, the rate dropped slightly to 1.352 AUD per US dollar (CIA 2017).

Effects of Economic Growth

Economic growth within the country has various effects both socially and economically. By and large, economic growth in Australia has brought about various positive effects for the people of Australia. However, there are also negative effects associated with it.

Positive Effects

Typically, economic growth in Australia has brought about an increase in the level of average income among members of the society. In turn, this has enabled the consumers to enjoy more services and goods. It has also led to improved standards of living among the Australians. Also, economic growth has led to a rise in the level of employment opportunities in the country. Higher output and economic growth encourage firms to employ more workers. For this reason, the unemployment rate in the country has gone down significantly. Low unemployment translates to reduced poverty levels in the country.  Consequently, this means improved quality of life of the Australian people.

Additionally, high economic growth in the country has led to a decline in government borrowing. Particularly, this is because economic growth leads to higher tax revenues. Thus, there is less need for the government to spend on social benefits like unemployment benefits. Besides, the government has less need to borrow money, thus lower government debt. Instead, the increases in revenues are used by the government to improve its provision of public services. The availability of more revenue facilitates the provision of education, health, and old age care home services, among others.

What is more, economic growth in the country has facilitated the government to dedicate resources to the protection of the environment. The higher real GDP has allowed the government to promote recycling and the use of renewable sources of energy in the country. It has also allowed the government to instigate and implement various anti-pollution laws to discourage environmental pollution in the country. Aside from that, economic growth in the country has encouraged investments activities in the country. In turn, this has led to a continuous cycle of economic growth as experienced in the last 25 years.

Economic growth in the country has also facilitated a wider choice for services and goods offered in the country. Mainly, this is because people have more money to spend on services and goods in the country. Consequently, this increases the aggregate demand, encouraging suppliers to produce more services and goods to meet the demand of the consumers. In this regard, an increase in the level of economic growth in Australia has benefitted both the consumers, suppliers and the society in general.

Negative Impacts

Despite the various benefits associated with economic growth, there are numerous negative outcomes that arise in the process. As such, economic growth in the country has brought about various environmental and social problems. Economic growth is as a result of an increase in the level of economic activity in the aggregate economy. Thus, as more output is produced by firms and as consumption for the output increases, more waste is produced. In addition, the level of emissions from industries has increased over the years, causing significant environmental pollution.  Notably, such externalities reduce the social welfare of the society.

The economy has also witnessed a sharp rise in property prices as a result of the continuous economic growth. Houses in regions like Melbourne, Sydney and other major cities have become unaffordable over time. The rising housing prices following the property boom in Australia has made it difficult for first time home buyers to afford and acquire housing units. In turn, affording decent housing in the country has become a significant problem that the government has to address in the near future.

Australia has also experienced a rapid growth in urban areas as a consequence of high economic growth. The urban areas have grown in size, and people have moved to the areas. Over time, this has led to an increase in traffic jams, chaos, and urban sprawls. In addition, the level of crime in the regions have increased as a result. Besides, there is also inflation risk associated with economic growth (Smyth 2016). Sometimes, the level of demand exceeds the level of supply in the economy. Consequently, this brings about inflationary pressures in the economy.

High economic growth in the country is also associated with an increase in income inequality among the members of the society. By and large, economic growth results in the widening of the gap between the poor and the rich in the society. Predominantly, this is brought about by the increased dispersion of income distribution within the economy. As a result,  the rich in the society become richer as the poor become poorer. Various health challenges may also arise due to increases in economic growth in the country. Today, the society is facing sophisticated heath challenges due to new pressures caused by the increase in the occurrence of chronic illnesses and the aging populations.  

Conclusion

For a long time now, the Australian economy has been performing relatively well. The economy has been experiencing increased economic growth for over 25 years. Economic recessions are unheard of in the country. However, the third quarter of 2016 saw the economy contract.  By and large, this performance was largely unexpected. Regardless, the economy has great prospects for expansion in the future. The high economic growth in the country has brought about various benefits for the economy. For instance, it has led to an increase in the average income level of the people and a reduction in unemployment rates. It has also reduced the level of government debt over time. Importantly, this has led to improved living standards for the people of Australia.

Regardless, the high levels of economic growth in the country are linked to various social and economic ills. There is increased pollution, a significant rise in property prices in the economy, increased traffic jams, and urban sprawls. High economic growth in the country is also linked to increased crime rate in the urban areas. There is also increased income inequality between the haves and the have-nots of the society. Even so, it is worth noting that the negative effects associated with high economic growth are much better than those connected to low economic growth. For this reason, it is vital that the level of economic growth in Australia continues.

Reference List

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