Analyzing GDP Growth Trend In Australia Between 2005 And 2015

GDP Growth Trend Analysis

Question:

Analyse the Growth trend of GDP in Australia.

The objective of the given exercise is to analyse the growth trend in GDP which has been apparent in Australia between 2005 and 2015. In order to achieve the same, the GDP growth rate has been captured in the form of the following graph.

From the above graph, it is apparent that the highest growth by the economy has been witnessed during 2006-2007 especially from Q3 2006 tom Q2 2007. The de-growth in GDP or negative GDP growth has been witnessed only in two quarters namely in Q42008 and Q12011. For other quarters in the period, the GDP growth has been positive even though at times it has been below 1%.  Further, the growth pattern does not show any major trend as periods of growth and decline have been scattered rather intermittently. However, considering annual GDP growth rate, it would be fair to opine that 2005-2007 period witnessed quite robust growth with 2008-2009 being challenging during which the GDP growth rate declined.

However, the recovery of the growth rate in the economy was visible from 2010 onwards when growth started picking up which was especially visible from Q2 2011 onwards. But after a recovery in the growth, it is apparent that growth in the recent years has not been robust and there seems to be slowdown that is being observed in the economy. This is also represented by the high volatility in the quarterly GDP growth which during a stable period must indicate a consistent growth which seems lacking. Therefore, for summarising the above growth trend, it would be appropriate to comment that the growth trend has lacked consistency and has been quite choppy with a particular broad pattern being visible for only couple of years. Also, high variation in the quarterly growth rates is visible.

One of the key factors which accounts for the variation in growth rate of Australia during the concerned period is the rapid growth of China in the 21^st century and the resultant mining boom that Australian has witnessed.  The rapid growth witnessed by China fuelled by the boom of the manufacturing sector meant that China required incremental natural resources particularly in the form of iron ore and coal so that more steel can be produced which can then be used for the manufacturing industry. Due to unprecedented double digit growth rate witnessed in China, there was a significant uptrend in the demand for various raw materials which led to a surge in the commodity markets (Holmes, 2012). As a result, from 2004 onwards, there has been a significant increase in the mining related investment which has been a man driver of growth for the Australian economy as is apparent from the following graph (Tulip, 2013).

Mining Industry and its Impact on GDP Growth Trend

It is apparent from the above graph that during the period from 2005-2008, there were robust investments in the mining sector backed by the firm commodity prices which began surging on account of the Chinese demand. There was a minor decrease in the investments during 2008-2009 owing to global financial crisis which adversely impacted commodity prices owing to slowing demand of products from the West leading to lower production in China and consequently lower demand for various commodities. However, the Chinese economy showed resilience against the global financial crisis and hence the surge in commodity prices continues from 2010 onwards which led to increase in investments in mining. These investments peaked in 2012-2013 post which there has been a decline as signs of slowdown are visible in China owing to which the commodity demand is slowing and hence caused the commodity prices to crash. This explains the lacklustre growth witnessed from mid-2013 onwards as the contribution of the mining industry to the GDP is quite substantial (Tulip, 2013).

As a result of the investments in mining, development has been brought in far flung areas in Australia due to enhancement of mining activities. Also, there have been major changes in the trade pattern which China emerging as the most significant trade partner leaving behind Japan in 2007-2008.  The growth importance of China in relation to the exports from Australia is also apparent from the following graph (MR, 2017).

The above graph clearly indicates that from 2005 onwards till 2014, the exports to China has become five times or an increase of nearly 400%. This has been a pivotal factor for the growth witnessed in Australia. Also, this has led to the creation of a trade surplus which is highlighted in the following graph (OEC, 2016).

It is apparent from post 2005 there is a surge in exports which is led by the mining boom which is responsible for the trade surplus. Additionally, due to robust economic growth, there was a currency appreciation of AUD before 2008 which favoured imports particularly in manufacturing which was catered to by China considering the low labour cost. Also, in order to further boost the trade with China, a FTA or Free Trade Agreement was enacted between Australia and China (Tulip, 2013). The decreasing exports observed from 2014 onwards above also can be explained on the basis of end of mining boom due to lower demand from China (Towers, 2017). Hence, it is apparent from the above discussion that one of the main reasons for variation in growth rate has been the rise and fall of the mining boom. In the aftermath of this mining boom end, the government has enhanced the focus on the services sector along with other primary products which also tend to have a competitive advantage over other nations. However, manufacturing owing to the higher labour costs is not a sector which can drive exports.

Trade with China and its Impact on GDP Growth Trend

Another key aspect that merits discussion is the Global Financial Crisis (GFC) and the underlying impact on Australia.  The impact of the recession was felt in Australia also with an adverse impact on the savings of the consumers as the equity markets were hit leading to fall in share prices. Also, there was lowered spending from consumers owing to low confidence which adversely impacted the private spending in the form of investments. Further, the ongoing capacity utilisation was also adversely impacted leading to higher unemployment and lower disposable incomes. Besides, there was a correction in the commodity prices as the demand of various commodities lowered due to which the net exports of the nation were adversely impacted. Clearly, this led to reduced aggregate demand which resulted in lowered inflation along with lowering of the GDP growth rate (ABS, 2010).

However, the impact of GFC was rather limited on Australia in comparison to other developed countries primarily because of two main factors. One was the strong fiscal situation of the country going into the crisis. The fiscal deficits owing to the trade surpluses were quite lower in comparison to other nations. Also, the sovereign debt was maintained at a much lower level which provided the government with higher flexibility in providing higher economic stimulus (Pickering, 2014). Further, the banking system of Australia was quite robust due to which there was no need for the government to provide fiscal stimulus and hence the government could instead focus on the economy as a whole rather than a sector in particular.  The second factor was the quick recovery of China which was responsible for the high growth observed from Q2 in 2010 to Q1 2011 (Alexander, 2013).

The response of the government to the crisis was measured and the government aimed to maintain a balance between inflation and the downside risks posed by the GFC. As a result, the government proposed a 2008-2009 budget which had a projected surplus of A$ 20 billion so that the future ability to avert the crisis is not jeopardised. Further, a slew of measures were taken to provide confidence to the financial sector. This included government guarantees in relation to the deposits, wholesale funding, purchase of mortgage based securities to the extent of A$8 billion and also banning short sales in certain financial instruments. This ensured that the confidence of the people in the financial sector did not dwindle and also there were not any financial defaults in this regards (Kennedy, 2009).

Impact of Global Financial Crisis on Australian Economy

Further, measures were undertaken to enhance the overall consumer confidence so as to enhance the demand from consumers and thereby ensure that economic growth is maintained. This included payment of $ 4.9 billion to pensioners along with $ 3.9 billion to families belonging to low and middle income group so that they can continue their purchases of basic necessities. Further, the traditional monetary policy tools and fiscal stimulus was also observed. The policy rates were lowered so as to ensure that liquidity remains in the system and also the loan rates are low. Also, fiscal stimulus to ailing businesses in the form of tax rebates was extended so that they can witness the difficult times. Overall, the financial policies exhibited by the government during the crisis were quite effective and free from excesses which ensured quick recovery unlike other western nations (Australian Government, 2009).

While the Australian economy remained quite unscathed in relative terms during the GFC, however, a bigger crisis seems to be looming at the present for the Australian economy. The major reason for the same is the temporary end in mining boom and the need to find alternatives to fill the gap which is pivotal considering the cyclical fluctuations in price of various commodities. Since finding alternative customers to China is next to impossible, hence the policymakers feel that there is a strong case for diversifying the economy lowering the dependence on mining. However, this is easier said than done.

One of the major challenges in this regard is the ailing manufacturing industry which over the decade has largely been overrun by Chinese goods due to which the industry has further dwindled Owing to the FTA with China, the trade barriers have been practically nullified which has led to surge in imports of textile and electronic goods particularly computed. Also, the car industry is at the verge of closing down with the government not willing to extend financial support any longer. Also, considering the low population of Australia coupled with the geographical isolation, it is apparent that the manufacturing industry would find it difficult to thrive without government support. The economies to scale are difficult to achieve and hence companies worried about costs set their plants in Asia while the high end manufacturing happens in US and Europe where market availability is plenty (Tulip, 2013).

Coming to services, the local markets seem quite saturated and the potential source of growth seems to be only foreign markets. Again penetration in the foreign markets (both developed and developing world) is quite difficult owing to the existence of a number of players. One service where Australia has an edge is education which needs to be promoted further but it is unlikely that would bring in so huge gains that the economy can be transformed. Also, considering the geographical isolation, the export of services would involve migration of trained manpower to far off countries with significant differences in culture and history. The primary sector with livestock products also has potential but owing to the increasing changes in climate, this is increasingly a challenge as there is inconsistency in the production. Further, there are alternate players from the developed and developing world from which Australia has to be face fierce competition coupled with higher logistics cost which leaves the Australia exporters at a disadvantage.

Hence, on the basis of the above discussion, it is apparent that while GFC has been averted by the economy but going forward there is a need to diversify the economy which is quite difficult. The local demand remains saturated owing to limited population and the geographical isolation of the countries implies that tapping the export markets is a challenge. Going forward, the policy makers would have to work out sustainable solutions to these issues so as to push the Australian economy forward and reduce their inherent dependence on mining and China.

References

ABS (2010) FEATURES ARTICLE: THEGLOBAL FINANCIAL CRISES ANDITS IMPACT ON AUSTRALIA.  Retrieved on October 22, 2017 from https://www.abs.gov.au/AUSSTATS/[email protected]/Lookup/1301.0Chapter27092009%E2%80%9310

Alexander, D. (2013) How Australia weathered the global financial crisis while Europe failed. Retrieved on October 22, 2017 from https://www.theguardian.com/commentisfree/2013/aug/28/australia-global-economic-crisis

Australian Government, (2009) PART 2: THE GOVERNMENT’S RESPONSE TO THE GLOBAL FINANCIAL CRISIS.  Retrieved on October 22, 2017 from https://www.budget.gov.au/2008-09/content/myefo/html/part_2.htm

Holmes, A. (2012) Australia’s economic relationships with China. Retrieved on October 22, 2017 from https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/China

Kennedy, S. (2009) AUSTRALIA’S RESPONSE TO THE GLOBAL FINANCIAL CRISIS. Retrieved on October 22, 2017 from https://static.treasury.gov.au/uploads/sites/1/2017/06/Australia_Israel_Leadership_Forum.pdf

 M.R. (2017) How Australia has gone 25 years without a recession. Retrieved on October 22, 2017 from https://www.economist.com/blogs/economist-explains/2017/03/economist-explains-11

OEC, (2016) Australia.  Retrieved on October 22, 2017 from https://atlas.media.mit.edu/en/profile/country/aus/

Pickering, C. (2014) Lessons for Australia from the GFC. Retrieved on October 22, 2017 from https://www.theaustralian.com.au/business/business-spectator/lessons-for-australia-from-the-gfc/news-story/f6a0682272988717ad5b5d7c919190d7

Towers, C. (2017) The end of a mining boom leaves Australia’s economy surprisingly intact. Retrieved on October 22, 2017 from https://www.economist.com/news/asia/21718521-investment-mines-dries-up-property-takes-up-slack-end-mining-boom-leaves

Tulip, P. (2013) The effect of the mining boom on the Australian Economy. Retrieved on October 22, 2017 from https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-3.pdf