A country’s economy is measured based on its gross domestic product (GDP). Ten years prior to the great recession that took place around 1999-2008, Australia registered a growth of 3.4 percent averagely every year. The global financial turmoil that occurred in 2009 resulted to a decrease to 1.6 percent of economic growth. 2009 proved to be the toughest economic year in Australia following the recession (Kelly 2014). However, the country was resilient to the global crisis to an extent that it appeared in the list of the few developed countries whose growth statistics were positive in 2009. The country witnessed an economic improvement the following years as evidenced by the 2.7 percent average economic growth rate from 2010 to 2013.
Emerging countries since the early 2000s have had high demands for raw commodities which translated to an increase in global commodity prices which was a real contributor to the shape and structure of Australia’s economy. Higher terms of trade brought about an increase in the consumers’ purchasing power which led to an increase in commodity prices as well as an outburst in the investments related to mining of iron and coal. In the last ten years, mining investment proved dominant alongside other contributing factors to the economic growth of Australia. The economy is now in a transition period from the mining boom to the production stage (Battelino 2010). A notable importance of Australia’s exports to the Asian market has been clear for some time now after the country expanded its capacity to produce iron and coal. Other sectors such as mining and finance have become increasingly vital to the GDP of Australia in the last five years. However, the country has witnessed a shrink on the share contributed by manufacturing output. This has forced the majority part of the economy to revolve around mining and production of services at the expense of producing goods. Manufacturing is no longer the leading single industry in Australia having been successfully substituted by the financial sector.
Computation of GDP Figures
GDP is a measure of the economic performance of a country over a given period of time, usually a year (Marcu and Marian 2015). Australian Bureau of Statistics (ABS) produces Australia’s GDP data known as National Accounts (NA) derived from the System of National Accounts (SNA 2008). The GDP is computed based on the methods of production, expenditure and income. The production approach gives figures of the value added of all producers. This is basically the value of output and immediate spending added to the taxes while deducting the subsidies on products.
The expenditure approach gives the tally of the spending for the final use of products. This includes the final consumption expenses incurred by the households and the government as well as the capital formation and the net exports which are the difference between exports and imports. The income approach gives the income of Australia as the compensating workers’ sum, gross mixed income, gross operating surplus and taxes while deducting subsidies on the produce alongside imports. Volume estimates are arrived at the total Gross Domestic Product level by current price estimates deflation by means of expenditure approach’s price deflator (King 2016). It is expected that the three approaches should yield close if not equal results of GDP. However, a difference in GDP results is realized if the three measures are computed using different sources of data. The ABS manipulates the estimates by balancing them in the supply and use tables annually. This ensures that the estimates recorded from the three approaches are similar.
Analysis of Australia’s economic growth
Australia serves as a safe and low-risk environment for business following the recent show of its economic resilience, adaptability and record of steady growth. It is in its 26th year of consecutive yearly economic expansion which is underlined by strong institutions, a proper functioning service sector and the ability to respond to global changes (Stevens 2013). It is currently ranked 13 in the world and is expected to attain an average yearly real gross domestic product growth of 2.90% over the coming five years which should rank first in the leading economies. It records high productivity levels which are evidenced by the 15 of its 20 industries being rated above the global average (Rees and Hall 2016). Its labor force is educated, multicultural and multilingual where 2.10 million citizens speaking Asian language and 1.30 million speaking a European language.
The workers are highly skilled as a result of the country’s good education system, quality scientific research institutions as well as the special training services. The country is politically stable with a transparent regulatory system and good governance frameworks. It is also favored by its strategic location in proximity to the Asian market. It is thus a good trade and development base for companies doing business with Asia. Its trade agreements allow smooth flow of goods, services and investments with big economies across Asia, Europe and North America (Gali 2015).
The service sector is dominant in the economy of Australia but economic success is supported by its abundance if agricultural and mineral resources. The service sector forms 65 percent, mining covers 13.5 percent, manufacturing takes 11 percent, construction holds 9.5 percent as agriculture assumes a 2 percent of the total of the country’s GDP. In the December quarter of 2016, the economy recorded a 1.1 percent growth. An expansion of 0.30% was recorded in 2017 March quarter which was higher than the 0.2 percent expansion expected by the market. This was confirmed as the 2nd straight month where quarterly growth was realized. Up to the 1st quarter the economy grew by 1.70% slower than a 2.40 percent growth in the earlier quarter but beating a consensus of a 1.50 percent growth (Bishop and Lancaster 2013). The economy recorded an expansion of 1.10% in the 4th quarter of 2016 in comparison with the 0.50% shrinkage in the September quarter which exceeded the 0.7 percent growth expected by the market. This was recorded as the strongest expansion dating from the March quarter of 2016. Household spending, investment and net trade were the boosters of the strong expansion in 2016.
Unexpectedly, the economy of Australia shrank by 0.5 percent in the third quarter of 2016 compared to the 0.6 percent growth in the June quarter which was way below the 0.3 percent consensus of market expansion. It was recorded as the first contraction since the March quarter of 2011 and the fastest decline since the December quarter of 2008 which was derailed by investment and net trade. The economy grew to 0.5 percent in the June quarter of 2016 declining from a 1.0 percent growth in the previous quarter and partially lower than the 0.6 percent growth by the market consensus (Bishop and Lancaster 2013). It was recorded as the weakest growth since the second quarter of 2015 which was brought down by net trade as the investment was flat and consumption maintained a steady flow.
Reports indicate that Australia experienced a tremendous growth cycle and its GDP is worth 1339.54 billion US dollars in 2015 which is a reflection of almost 21.6 percent of the world economy. The past five years have been characterized by immense growth and prosperity. (Gregory and Smith 2016) suggest further that the year 2012 June quarter was deemed the strongest expansion which brought about an annual growth of 2.9 percent for 2015-2016 that is growing without recession. The economy’s growth has been delayed by the fall in prices of commodities, accelerating unemployment rate, investments and significant improvements in sectors other than the resource sector. ABS reported a 5.72 percent rate of unemployment which is considered as a major factor in economic decline. Long term unemployment translates into serious social and economic issues in the country. The more people are unemployed, the lower the income of citizens which has a direct negative effect on the economic growth. It is also connected to the people having low purchasing power thus lowering their expenditure which in turn lowers the demand for goods and services and the economic growth (Argy and Nevile 2016).
The economy of Australia expanded at a faster annual pace in four years last quarter which is remarkably, a run of 25 years without recession. The local dollar was constant at $0.7662 following the rise of news GDP to 3.3 percent in the year to June, up from around 2.9 percent the previous quarter. Output increased by 1 percent as the value of all commodities ascended by 0.5 percent in comparison with the first quarter. The said growth was boosted by an increase in government spending during pre-election mixed with beneficial household expenditures and home building. It was a contributing factor to a steep fall in mining investment which has been derailing the economy a period exceeding three years now. International trade contributed immensely to the growth as hundreds of billion dollars were allocated to fund mining projects that produced plenty of resource exports. Trade contributed 2.2 percentage points of growth in the year to June. The strength in exports portrayed a mixed picture in the country where domestic final demand rose by 1.2 percent in the year as household expenditure increased by 1.6 percent (Kelly 2014).
The same reports showed that the economy was not strong enough to counter the problem of inflation since the main GDP price indicator was only high by 0.3 percent for the year. The Reserve Bank of Australia expressed the need for a stronger growth when it reduced interest rates to realize a low record of 1.5 percent in August. Generally, the Australian Bureau of Statistics estimated annual GDP was worth $1.65 trillion or $68929 for each of Australia’s 24 million citizens. It was noted that the annual growth of Australian economy was ahead of 1.2 percent in the United States, 1.6 percent in the European Union, 2.2 percent in the UK and even beat the 3.1 percent in Germany (Kelly 2014). The terms of trade in Australia picked up well as prices of its major commodity exports rose after many years of constant decline. Consequently, the national income was lifted as nominal GDP increased by 1.3 percent in the quarter for its sterling record since the latter stages of 2013.
Other reports have emerged that Australia’s GDP grew by 1.1 percent in the first three months of 2016 according to the figures posted by the ABS. However, the results were contradicting as evidenced by the widening gap between the rich corporate elite and the vast majority of working people. While output rose by 3.1 percent over the year to March, real net national disposable income per capita declined to 2.6 percent. The income statistics which are indicators of the standards of living has now dropped for eight consecutive quarters which shows a protracted decline in the living conditions for majority of Australian citizens (Gulati and Satija 2014). The income recession encompasses declining real wages, reduction in working hours and lower revenues realized by the government in form of taxes. The costs of labor for employees fell in March quarter which was the second quarter in a row proving that the workers’ incomes are lowered in accelerating rate. This causes a deflation where average prices are falling thus translating to a trend of companies and consumers to delay spending (Battelino 2010).
Nearly the whole March quarter growth was produced by greater export volumes, majorly from the finished iron ore and liquefied natural gas projects. Large mining and resource companies are currently increasing their production even in the face of current fall and stagnation of global prices that is a consequence of the deep world slump. The benefits are enjoyed by transnational corporations and finance houses that fund projects not the many workers fired from mines and construction sites in the past two years (Rees and Hall 2016). Profits are pocketed by the largest companies in the mining industry as almost 15 percent of the labor force is retrenched since 2014. The drop in mining exports after a fall in the previous three months is considered a temporary factor due to sharp fluctuations in the world demand. This undermines the vulnerability of Australian capitalism to global shocks particularly the volatility in china which is its largest export market. Contrary to the export rush, consumer and business spending measured by domestic final demand grew by 0.1 percent in the March quarter (Plumb and Bishop 2013).
SGS Economics & Planning compiled a report for Fairfax Media where they showed that economic activity has been declining in 30 of Australia’s 150 parliamentary electorates since 2014. Economic activity in 2014-15 grew at more than 5 percent per annum in the inner parts of Sydney and Melbourne. More than 1 percent annual falls in economic activity were happening in working class Southern and Western Brisbane, the coal mining towns of Central Queensland, areas connected to Perth and rural South Australia where major nine closures have added to the effects of manufacturing plant shutdowns in Adelaide. The most recent studies indicate that business investment contracted sharply again in the March quarter. The ABS said that that the private sector capital spending on buildings, equipments, plant and machinery declined to 5.2 percent while seasonally adjusted dragging it down 15.4 percent yearly. Investment from mining fell 12 percent in the March quarter and manufacturing dropped above 10 percent (Battelino 2010.) On the other hand, only a 1.8 percent pick-up in capital expenditure was registered. This led to a suggested claim that Australia is now making a transition from mining to unspecified new economy.
The sum of investments in business has been declining in real terms since mid-2012 and is now low on more than 25 percent over that four year period. It means that plant closures and losses of jobs and working hours will soon be the order of the day. It is worth noting that the March GDP figure was supported by a subsequent drop in capital equipment imports. This is a highlight of the distance between the official growth data and the reality of the recessionary trends. International financial institutions are continuously sending warnings about Australian economy’s heavy reliance on debt and the property bubble. The Organization for Economic Cooperation and Development (OECD) issued a report saying that the property boom could fail. Australia’s exposure to Chinese markets also remains a vital of source of uncertainty and risk. Federal and state government debt which has shot to triple figures of about 34 percent of GDP over the past ten years is now overtaken by the double figures of private debt to about 160 percent of GDP in the last 20 years.
The household debt ratio in Australia has risen above the limits set in countries where housing bubbles formed and burst such as Ireland, Spain and the United States. The leverage is so extensive in the market for houses that even minute decrease in prices of residential land is likely to translate into serious effects (Stevens 2013). A warning has been issued by US investment bank that the total household, corporate and government debt of Australia has reached a 243 percent of GDP which increased the nation’s vulnerability to a severe recession. It was during the same period of time that the nominal GDP had fallen to 2.4 percent a year from its post-1996 average of 6 percent. Furthermore, Moody’s Investor Services has notified that it may be forced to downgrade Australia’s AAA rating after the election unless they make a deep cut in the 40 billion dollar annual budget deficit.
Summary of Growth and Future Prediction
The economy of Australia ended 2016 positively making a strong comeback from a mid-year slowdown as a result of the July Federal election. Real output increased by 1.1 percent in the December quarter following a 0.5 percent decrease in September. The terms of trade increased by 16 percent after a 32 percent fall over the previous 4 years. A further rise of 5 percent is expected in 2017 which will be temporary considering the higher commodity prices due to supply disruptions and demand conditions in China likely to drop next year. Still annual GDP growth for 2016 was a disappointing 2.4 percent. For 2017, the shape looks good. The forecasted annual real GDP for December 2017 remains 3.0 percent which slightly exceeds the trend of 2.75 percent. The problem of declining terms of trade is now being eliminated. The mining investment that was dragging is now moderating from a direct subtraction of 0.9ppts in 2016 to a forecast -0.5ppts in 2017 and -0.1ppts in 2018. The performance of activities in future will be aided by a lower dollar, improved exports, reduced interest rates, assisting housing and high public demand which is catapulted by a rise in investment built around transport projects. The only risk left is the weakness in wage incomes which has been detrimental to consumer spending.
In 2018, a reduction in home building activity and the negative spillover repercussions on employment and household spending will add some weight on growth. Real GDP growth in the year to December 2018 is expected to fall below the trend at a forecast of 2.5 percent. Investment by the non-mining sectors is expected to improve in 2017 but below the trend increased by a forecast 4 percent. Non-residential building activity is expected to expand totaling from almost a 10 percent turnaround. Equipment spending, which accounts for 40 percent of the total non-mining investment, will most probably remain shaky. In 2016, exports grew by 9 percent directly contributing 1.8ppts to annual GDP growth. Resource exports added 1.2ppts including 0.5ppts from fuels and service exports added 0.35ppts. Resource exports will trend higher as new projects are initiated. The exports are a sign of bright spot thus they are expected to remain constant or improve by the end of 2017. They are forecasted to bring along 1.6ppts to growth while net exports should add 0.8ppts.
The economy of Australia boasts many incentives for long term growth and success. It is aided by a properly-trained and creative workforce, increased growth of population and a well structured set of innovative institutions. It is also situated closely to a fast growing and developed section of the world economies. The earlier reforms that had been put in place by the government has left the nation with flexible and competitive product and labor markets which helps bring them closer to the technological frontier. The Central Bank of Australia is forecasting a gradual growth over the next couple of years and it has been designing proper monetary policies to support growth related ventures. The depreciation of the exchange rate has been helpful. However, forecasting is challenging as there are many uncertainties which doesn’t make better growth a guarantee. The country is likely to witness a continuation of trends like increased importance of the intensive employment service sector. Resource production and exports offer less intensity as far as employment is concerned but a significant investment in that sector will be beneficial for several years to come. Lowering the exchange rate will offer support for the demand for output of the many firms located in the sectors where trade dominates.
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