Australian Economic Growth Performance 2005-2017: Major Factors And Challenges Ahead

For example for the Australian economy you could start by charting Australia’s growth performance over the period 2005-2017. This can be found in the excel file called 5204002 exp on gdp click on data1 at the bottom of the file and the series you need is highlighted in yellow, gross domestic product, chain volume measures percentage changes. Make sure that you include the source of your data.

Discuss the major developments which may be responsible for this performance, among other factors you may wish to discuss include:

The rise of China and the mining boom.

The global financial crisis (GFC) and its impact on the Australian economy.

The Australian policy response to the global financial crisis.

The end of the mining boom and the transition to the post mining economy.

The challenges ahead and the policy responses needed to generate higher growth rates.

Charting Australia's Growth Performance

Economic growth rate is computed as a percentage change in Gross Domestic Product from one year to the next. The economic growth thus measures output growth of a nation overtime (Goodwin et al., 2015). The figure below shows the trend growth of Australian economy for the period from 2005 to 2017.

The economic growth in Australia in the year 2005 was 3.2 percent. Economic growth declined by 0.4 percentage point in the year 2006 with accounted economic growth being 2.8 percent. GDP growth increased by 1 percentage point in 2007. The economy during this period grew at a rate of 3.8 percent. In the next year, economic growth declined by 0.1 percentage point. The recorded economic growth in the year 2008 was 3.7 percent. The trend growth path of Australia marked a sudden break after the hit of global financial crisis in the year 2008. Economic growth suddenly fell to 1.9 percent in the year 2009. The resilient nature and policy support of Australian government helped the economy to overcome economic shock. Growth recovered to 2.1 percent in 2009. The Australian economy continued to grow at an increasing rate till 2012. In 2012, economic growth reached to the highest level of 3.9 percent. Mining sector contributed to a significant portion of economic growth. China’s economic growth and resulted mining boom helped the economy to achieve the rapid economic growth during this phase (Allen & Day, 2014). The economic growth again started to slow down from 2013 onwards. GDP growth dropped to 2.6 percent in 2013 and remained at the same level in 2014.  Economic growth slightly improved in the year 2016. The record economic growth was 2.8 percent in the year 2016. GDP growth of Australia slipped to 2.0 percent in 2017 (Letts, 2018).

As indicated by the growth trend, the economy of Australia experienced some upturn and downturn in the trend growth path. Fluctuation in the economic growth resulted from economic incidence in the domestic and global economy. Some of the economic events significantly influencing economic growth of Australia include economic growth of China and mining boom in Australia, global financial crisis, end of mining boom and the like. The economic events and their influence on Australian economy is discussed below.

A major portion of economic growth trend in Australia in the last decade was explained by the growth of China and derived demand for Australian minerals. Economic growth in developing nation such as China helped Australia to explore its mineral resource to meet demand in these nations. Australia also export high ended goods and services (Syed et al., 2015). There exists complementary relation between net export of Australia and that in China. Manufacturing is the main export of China. In order to support manufacturing production China imports raw materials from different nations. Australia on the other hand exports raw material to the developing nations. The growing export demand especially from China helped to improve the position of Australian terms of trade. In the expansionary phase mineral export, price of Australian export experienced a steep increase in the relative export price. The growing resource demand of China increased export of cooking coal, steel and other necessary inputs used in the production of steel. The iron ore export experienced a rapid growth following a rising import demand from China and other developing countries (Allen & Day, 2014) The growing demand for mineral resource brought the phase of mining boom of Australia. During this time, the resource supply of Australia exceeded that of the global supply.

Major Developments Responsible for Economic Growth

In recent years however China has changed its growth strategy. Focus of the economy now has shifted from a manufacturing led growth to consumption led growth. As the resource demand from China declined, it affected Australian economy as well. Since 2012 economic growth in Australia started to decline. The export of iron ore from Australia declined significantly following a lower crude steel production in China. This lowered the terms of trade of Australia interrupting the competitive position of Australia in global market (Syed et al., 2015). China however gradually began to recover in economic growth and hence, Australian economy is expected to be moved positively by the improved economic scenario in China.

Origin of the global financial crisis was United State. Crisis of sub-prime mortgages that began to develop since the middle of 2007 reduced confidence of financial institutions in United State. The lower confidence of major financial institution in United State prepared the basis credit crunch in the year 2008. The disrupted credit supply hampered the liquidity flow in the economy weakening position of financial market. Bursting of housing bubble created significant problem for housing investors (Borio, 2014). During the period of crisis, business and household expenditure contracted creating a large gap in the interbank transaction. Spread explains the difference between the bank rate and expected federal fund rate. In the crisis phase, spread in United State reached to 4000 basis point. Unite State being one of leading world economies, economic crisis in United State trickled to several other nations (Balakrishnan, Watts & Zuo, 2016). The effect of financial crisis in less severe in Australia than other nations. The financial market of Australia though remained relatively resilient. However, interest rate differential with major US banks increased significantly. Consequently, borrowing cost increased significantly hampering domestic productivity in Australia.

The immediate impact of financial crisis was a steep decline in prices of equity. ASX200 declined almost by 1000 basis from middle of September to the same period in October. This was the time when ASX200 declined from 5000 to 4000 basis point. The decline in equity prices led to decline in household income and wealth. In Australian economy, household income declined by approximately 10 percent in 2009. Local and financial market did not have sufficient strength of to cope with the crisis. Economic growth declined by 1.8 percentage point between 2008 and 2009 (Kenourgios & Dimitriou, 2015). The economy growth as a result of global recession declined to 1.9 percent. Lower economic growth aggravates the unemployment problem in the economy with recorded unemployment increased to 5.75 percent in the last quarter of 2009.  With intensification of crisis, the Australian dollar depreciated.

In order to protect the economy from the global recession significant policy measures are taken by the Australian government.  The economy was stuck in a situation of low inflation, low economic growth and high rate of unemployment. The government initially adapted policy of automatic stabilizers and built a buffer stock with government surplus. This was intended to strengthen the financial position of the economy. Surplus in the government budget provided the economy a greater flexibility to adapt different policy action in future. Government supported the economy by cutting tax and increasing transfer payment to the pensioners (Morales & Andreosso-O'Callaghan, 2014). A sustainable economic growth along with financial stability was targeted by the Reserve Bank of Australia. After the hit of global recession there was a drastic change in macroeconomic outlook of Australia. In response to the changing scenario of economic condition and lower confidence of the investors, a proactive policy measure was needed to stimulate economic growth (Hooren, Kaasch & Starke, 2014). To recover confidence in the financial market, government decided to increase government securities with a maximum limit of $25 billion. Government’s cash surplus in Australia was $5.4 billion (Ciro, 2016). This was lower by $16.3 billion as against the estimated surplus for the period of 2008-09. Fiscal stimulus provided in the wake of crisis significantly reduced cash balance of the government. The stimulatory fiscal policy undertaken during year resulted in a large budget deficit for the government with size of the deficit being $54,494.

The Rise of China and Mining Boom

The transition that took place in China’s growth strategy influenced Australian economy. The process of transition is not a smooth one. In the new growth era, China’s economy has recorded below expected growth rate imposing a potential risk for the economy. The merchandise trade of Australia hampered significantly from slower growth in China. The terms of trade in Australia reached to the peak rate in 2011. Now it has slipped down by one third of its earlier position.  With a decline in growth of mining, there is an associated decline in prices of mining commodities. Consequently, the mining exporter faced a massive decline in their earnings. Australia however has successfully cope with the situation (Maxwell, 2018) With a series of exchange rate, interest rate policy and moderate growth in wages, the economy gradually has shifted its dependency from mining to service industry. After end of mining boom government supports the economy by raising spending in necessary areas.

The Australian economy is currently facing some challenges to recover its previous glory of economic growth. The first constrain to a faster economic growth is the ageing population of Australia. An ageing population means economic growth will be slower compared to that in the past 40 years. The per capita real GDP is projected to grow by 1.5 percent as against a growth rate of 1.9 percent in the past 40 years. Economic growth in the next 40 years is expected to slow down to 2.7 percent as compared to an average economic growth rate of 3.3 percent (Davies & James, 2016). The demographic change plays a significant role in a declining growth projection for future. Rate of growth in population will be slow and the population will be aged. The aged population means a decline in labor force participation. This in turn leads to a decline in average number of hours worked and increases proportion of dependent population. The labor participation is expected to lower to 61 percent compared to 65 percent at present.

The potential threat of climate change posse a significant threat to economic growth of Australian economy. Being one of the driest and hottest country in world, Australia will be hit the hardest following the fastest change in climate. An unmitigated change in climate is estimated to reduce GDP of Australia by 8 percent (treasury.gov.au, 2018). There are other risk and associated costs in non-market activity those are not included in official estimates.

Another challenge to a smooth economic growth in future is the pressure on government budget. An ageing population increases government expenditure burden on health, pensions and costs for aged care. The slowing economic growth on the other hand reduces capacity of the economy to fund the additional spending (Davies and James, 2016). Rising pressure from health care services is the greatest burden on Australian government.

The on-going fiscal strategy is far from achieving the expected economic and employment growth. Government needs to adapt some further reform in the fiscal policy. Tax reform should be taken in the form of shifting tax burden away from the activity that discourage productive work and investment. Reducing discount on capital gains to 25 percent and restricting negative gearing is expected to create more space for eliminating distorting tax (Daley & Wood, 2016). Stamp duties should be replaced by property tax.

Government needs to help people to stay in work. Female participation in the labor force in Australia is lower compare to most advanced nations. Government should focus on increasing labor force participation to enhance productivity growth in the economy.

Government should redundant existing regulatory barriers and focus on increasing flexibility of the economy. Regulatory barriers that restricts economic growth include occupational licensing, anti-dumping tariff and others. Innovation should be encouraged in the economy to increase productivity and economic growth (Minifie, 2018) The existing barriers in the path of smooth spread of global innovative technology such as cloud commuting and different peer to peer business model should be eliminated. Further, the government should undertake sector specific reform to spread the fruit of economic growth evenly across different sectors of the economy.

References:

abs.gov.au. (2018). 5204.0 - Australian System of National Accounts, 2016-17. Retrieved from https://www.abs.gov.au/AUSSTATS/[email protected]/DetailsPage/5204.02016-17?OpenDocument

Allen, C., & Day, G. (2014). Does China's demand boom curb Australian iron ore mining depletion? Australian journal of agricultural and resource economics, 58(2), 244-262.

Balakrishnan, K., Watts, R., & Zuo, L. (2016). The effect of accounting conservatism on corporate investment during the global financial crisis. Journal of Business Finance & Accounting, 43(5-6), 513-542.

Borio, C. (2014). The financial cycle and macroeconomics: What have we learnt?. Journal of Banking & Finance, 45, pp.182-198.

Ciro, T. (2016). The global financial crisis: Triggers, responses and aftermath. Routledge.

 Daley, J., & Wood, D. (2016). Fiscal challenges for Australia: The next decade and beyond. Asia & the Pacific Policy Studies, 3(3), 475-494.

Davies, A. & James, A. (2016). Geographies of ageing: Social processes and the spatial unevenness of population ageing. Routledge.

Goodwin, N., Harris, J. M., Nelson, J. A., Roach, B., & Torras, M. (2015). Macroeconomics in context. Routledge.

Hooren, F. V., Kaasch, A., & Starke, P. (2014). The shock routine: Economic crisis and the nature of social policy responses. Journal of European Public Policy, 21(4), 605-623.

Kenourgios, D., & Dimitriou, D. (2015). Contagion of the Global Financial Crisis and the real economy: A regional analysis. Economic Modelling, 44, 283-293.

Letts, S. (2018). Australia's economy grew by 2.4 per cent in 2017, below expectations. Retrieved from https://www.abc.net.au/news/2018-03-07/gdp-q4-2017/9522450

Maxwell, P. (2018). The end of the mining boom? A Western Australian perspective. Mineral Economics, 31(1-2), 153-170.

Minifie, J. (2018). What the government should do now: economic growth. Retrieved from https://theconversation.com/what-the-government-should-do-now-economic-growth-61517

Morales, L., & Andreosso-O'Callaghan, B. (2014). The global financial crisis: World market or regional contagion effects?. International Review of Economics & Finance, 29, 108-131.

Syed, A., Grafton, R. Q., Kalirajan, K., & Parham, D. (2015). Multifactor productivity growth and the Australian mining sector. Australian Journal of Agricultural and Resource Economics, 59(4), 549-570.

treasury.gov.au. (2018). Australia to 2050: future challenges. Retrieved from https://archive.treasury.gov.au/igr/igr2010/Overview/pdf/IGR_2010_Overview.pdf