In February 2017, the Sydney Morning Herald presented the views of some economists regarding the performance of the Australian economy in 2017 For Assignment 2 you are required to firstly read this article and to then prepare a report on the current state of the Australian economy and compare its performance with state of the economy in August 2017.
In completing your report it will be necessary to examine the latest figures and the August 2017 figures for the following four economic indicators - economic growth (GDP), unemployment, inflation and trade (including the terms of trade, the current account, net foreign debt and the value of the Australian dollar). In examining the performance of the Australian economy it will be useful to outline any expected target values that may exist for the economic indicators. Finally, given your analysis, you are asked to highlight three major issues you believe are facing the Australian economy over the next 12 months and why you perceive these as of concern.
Overview of Report
The purpose of this report is to analyze and compare the difference between Australia`s economic growth in the year 2017 with the growth in 2018. The report uses the four indicators of economic growth; namely growth in GDP, unemployment rate, inflation and trade (McLean, 2013). Data concerning the four aspects of economic growth is collected and analyzed with the aim of predicting the performance of the Australian economy over the next twelve months. The current performance of the economy is compared with the performance of the economy in the year 2017. The body of the report also describes three major issues that are likely to face the economy of Australia in the next one year. The final section of the report is a summary of the issues that have been discussed in the body of the report.
The GDP of Australia grew 3.3% by August 2018. This has surpassed expectations and it's more than 0.4% higher than what was forecast one year ago. This means that this is the fastest annual growth rate since September 2012. The economy grew 0.9% higher than it was expected in the previous quarter. The main contributor to the growth in GDP id the household sector. The sector has been previously struggling under low growth in wage and falling house prices. This sector accounted for 0.4 percent growth. Residential construction accounted for 0.2% growth while domestic consumption increased by 0.5 %. Comparing with the same period last year, the GDP of Australia grew by 0.6%. Between September 2017 and August 2018, household consumption increased by 3% while government consumption increased by 5.1% over the year. This growth can be attributed to big infrastructural projects undertaken by the government. Nominal GDP growth over this period was 4.7%. This was 1.9% more than the previous year`s forecast.
According to ("Historical Data | RBA", 2018), the unemployment rate stood at 5.3% in August 2018. This is the lowest unemployment rate recorded since 2015. Between the month of July and August 2018, employment increased by 26,900 to 12,581,600. Unemployment over this period of time decreased from 1,300 to 713,000. Over the year 2018, the unemployment rate has remained steady at 5.4%. Between the month of August 2017 and July 2018, unemployment averaged between 5.4% and 5.6%. The fact that the unemployment rate in Australia was steady throughout the year means that the economy is stable (Taylor & Kukutai, 2016). It means that there is a balance between the number of people who get employed and those who lose their job. It also means there is no recession in the economy which could be otherwise contributing to the massive loss of jobs. It also means that the economy is not booming. A booming economy would have contributed to an increase in job opportunities and hence reducing the unemployment rate (Okamoto& Ajia, 2010). The growth in GDP has therefore not significantly affected the unemployment rate. Seasonal fluctuations in some particular industries in the economy could also lead to an increase or decrease in the unemployment rate. Some industries may lay off some workers in particular periods and hire may in other seasons. The unemployment rate also increases in the season where there are many graduating students who are actively seeking employment. From the comparison of the 2017 data and the 2018 unemployment data, it can be concluded that there was no significant change in the employment rate in the country.
Comparison of Four Economic Indicators
Inflation is a very important measure of economic growth. Inflation is the rate at which the general prices of goods and services is increasing in an economy. Increase in inflation reduces the purchasing power of the currency (Griffrs,2011). According to data from the Australian Bureau of Statistics, consumer price inflation rose to 2.1 % throughout the year 2018. Between October and December 2017, inflation increased by 1.9%. This means that consumer price increased by 0.4% every quarter. This is slightly below the forecast 0.5%. Between June and August 2018, transport cost increased by 5.2%. This was a rise compared to a 2.9% increase recorded in the previous three months. During the period under review, inflation on food and non-alcoholic beverages reduced by 3%. Between Jan and March 2018, consumer prices in Australia rose by 1.9% throughout the three months. As at August 2017, the inflation rate was at 1.9%. Currently, the inflation rate is at 2.1%("Historical Data |RBA", 2018) This indicates a 0.2% increase in the rate of inflation over the 12 months. During this period, the price of automotive fuel, medical supplies, health services, and tobacco increased. Food prices reduced over this period of time.
Trade is a very important indicator of economic growth. Australia is heavily dependent on trade for its economic growth. The countries` exports amount to one-fifth of the GDP (Butlin, 2010). The terms of trade of a country are calculated as the ratio of export prices to import prices (Beer,2015). In August 2018, the import price of Australia was 110 index points. Between January and August 2018, the import price increased by 6.0%. Between August and December 2017, the price increased by 2.3%. This, therefore, indicates an overall increase of 8.3%. The increase in import prices over this period was mainly driven by higher prices for oil products. The increase in import price indicates that Australia is receiving more for exports. A decrease in import price means that the country is receiving less for its exports as compared to imports (Podger & Trewin, 2013). Australia`s exports are more valuable than its imports. This indicates a positive balance of trade on the part of Australia and hence a sign of economic growth over the period (Meredith & Dyster, 2012).
The value of the Australian dollar is a crucial indicator of economic growth. Most of the goods in the international market are bought and sold using the US dollar. Currently, the value of the Australian dollar versus the US dollar stands at 0.7188. The value of the currency keeps changing on a daily basis depending on the demand of the currency. In August 2017, the average value of the Australian dollar was 0.688 (Jakobson,2017). This shows that the value of the currency has increased and its an indication of positive economic growth. Australia`s foreign debt currently stands at $1.25 trillion. This is equivalent to 60% of Australia`s annual GDP. In August 2017, the foreign debt stood at 1.17 trillion.
Since the beginning of the year, the currency has been down by 1.76 %. The Australian dollar has been performing poorly throughout the year. This can mainly be attributed to the increase in commodity price and interest rates. Commodity price has a significant effect on the value of the currency. Australia is a major exporter of minerals whose prices have been recently declining in the international market. This affects the demand of the Australian dollar and hence making it weaker. The prices of mineral resources are not expected to increase for the next twelve months. This, therefore, means that the value of the currency may not increase in the near future. The global trade disputes among major economic superpowers could also make the value of the Australian dollar to decline further. This will have an effect on the economy since the country will not benefit much from foreign exchange (Enright & Petty, 2013).
Analysis of Australia's GDP Performance
Over the past one year, interest rates have been stable. The interest rates are currently low and this situation is likely to continue for the next one year. Low-interest rates encourage investment and hence resulting in a reduction in unemployment rates (Anderson, 2009). The fact that credit is cheap means that more people are willing to take loans to invest. This helps in the growth of the GDP of the country. Interest rates affect inflation and recession. If the interest rates increase further for the next one year, it means that there will be an economic recession and hence affecting economic growth. Further decrease in interest rates will lead to high levels of inflation and hence affecting people`s disposable income.
Despite the fall in the unemployment rates of the past year, not many full-time jobs have been created in Australia. This still means that there is a very large number of Australians out of work. Unemployment rates are expected to increase in the next one year. Some of the factors that are expected to result to increase in unemployment are the current trade wars between China and the US. This will affect Australia since it has close trade relations with both countries. Protectionism actions of the US and other countries will also result to increase in unemployment.
The report analyzes and compares the economic performance of Australia between August 2017 and August 2018. from the report, the Australia economy grew by 0.6 %. The growth is mainly attributed to growth in the construction sector as well as in domestic consumption. The rate of unemployment has been relatively steady over the past one year. This is an indication of a stable economy. From the report, it can also be concluded that the economy is relatively stable since the rate of inflation over the period has not been high. The three factors that are likely to affect the economy of Australia over the next twelve months include a decline in the value of the Australian dollar, interest rates, and unemployment.
Anderson, K. (2009). Australia's Economy in its International Context: The Joseph Fisher Lectures (vol. 2). S.L: University of Adelaide Press.
Beer, A. (2015). Structural adjustment programmes and regional development in Australia. Local Economy, 30(1), 21-40. doi: 10.1177/0269094214562171
Butlin, N. (2010). Forming a Colonial Economy. Cambridge, GBR: Cambridge University Press.
Enright, M. J., & Petty, R. (2013). Australia's Competitiveness: From Lucky Country to Competitive Country. Hoboken: Wiley.
Griffrs, M. (2011). Economics indicators for dummies. John Wiley.
Historical Data | RBA. (2018). Retrieved from https://www.rba.gov.au/statistics/historical-data.html
Historical Data | RBA. (2018). Retrieved from https://www.rba.gov.au/statistics/historical-data.html
Jakobson, l. I. N. D. A. G. I. L. L. B. A. T. E. S. (2017). CHINA MATTERS: Getting it right for Australia. S.l.: BLACK INC.
McLean, I. W. (2013). Why Australia Prospered: The shifting sources of economic growth. Princeton, NJ: Princeton University Press.
Meredith, D., & Dyster, B. (2012). Australia in the global economy: Continuity and change. New York: Cambridge University Press.
Podger, A., & Trewin, D. (2013). Measuring and promoting well-being: How important is economic growth? : essays in honor of Ian Castles AO and a selection of Castle's papers.
Taylor, J., In Kukutai, T., & Australian National University. (2016). Indigenous data sovereignty: Toward an agenda.
OECD, P., Organisation for Economic Co-operation and Development, & Organisation, . E. C.-D. (2010). Oecd Economic Surveys: Australia 2010.
Okamoto, J., Institute of Southeast Asian Studies., & Ajia Keizai Kenkyu?jo (Japan). (2010). Australia's foreign economic policy and ASEAN. Singapore: Institute of Southeast Asian Studies.
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