Measuring Economic Uncertainty And Its Effects

Analysis of the Variations in the Growth Rates

Discuss About The Measuring Economic Uncertainty Its Efects?

The GDP is considered the main measurement of economic performance. The growth rate of the GDP could be used to monitor the economic performance of Australia over the last decade. The business cycle of the Australian economy passed through five phases that represent the economic situations. Firstly: the expansion phase, as the GDP level rises in a fast way recording (3-3.5) % per year. This phase is associated with high level of spending and low unemployment rates. Secondly: the boom phase, where the GDP reaches its maximum level and the rate of growth starts to ease. Inflation rates rise rapidly, and unemployment rates are decreasing to the lowest levels. Between the years (2006-2008) the Australian economy witnessed its boom, then it started to ease between 2010 and 2011. Thirdly: the slowdown phase, where the growth rates start to grow slowly as a result of low national spending, rising unemployment rates, and low inflation rates. Fourthly: the recession phase, which occurs as a result of low production and represent six months of recession. The Australian economy witnessed the recession in 2008 and 2009, which resulted in high levels of unemployment rates, and low inflation rates. Fifth: the domestic economic stability phase, which represents the ideal position of the economy, where the national spending and the growth rate are not increasing or decreasing rapidly. The Australian economy seeks to achieve sustainability by creating (3-3.5) % annual growth rates.

The figure (1) shows that the Australian economy witnessed the cyclical economic performance between 2002/2003 and 2013/2014 (The World Bank Group, 2017). During (2009-2012) the economy witnessed a strong recovery after the global financial crisis. Followed by a slow in the growth rate during (2012-2013) which resulted in high unemployment rates. The slow is followed by high and sustainable growth rate of 3% per year (Wong, 2016). In 2016, the growth rate shows sustainability despite the decline in investments. The domestic demand drives the economic growth supported by low interest rates, low inflation rates and low pressure from the global market (Property Industry Research, 2016). These indicators show the good position of the Australian economy.

Part 2: Analysis of the variations in the growth rates

China is considered a global leader, although it still an emerging country. The economic conditions in China potentially affect the economic conditions in Australia, especially the demand for Australian exports. The growth rate of China recorded a level below 7% in 2015. The slowdown of the Chinese economy is mainly affected by the rapid development in the real estate sector, which resulted in volatility and created fears of losses among homeowners and investors. Also, the economy is affected by the high growth in the China' stock market, which lately created uncertainty due to the fall in equity values by about one third its value. Sharp corrective actions resulted in lowering the growth rate to 6.3 % in 2016 (Australian government- department of industry, innovation and science, 2015). Australia is a trading partner of China and it pays a high concern to changes in its economic indicators (Roberts & White, 2015). As the two countries have business objectives, tariff elimination has an impact on their economies considering the unemployment rates and the domestic income. The economic cooperation between the two countries enhanced the foreign investments, including the regulations and processes (Australian government- department of industry, innovation and science, 2005). Accordingly the two economies highly connected with each other.

The Rise of China and the Mining Boom

The global financial crisis affected the Australian economy in a negative way, as the Australian prospect is factor of the external economic events in the other world countries. The global events offer opportunities as well as threats, what is important is that decision makers take the right decision at the right time (Victoria state government, 2017). Expecting and responding to external events is highly important to protect the economy from external shocks.

The Australian economy witnessed a recession due to the global financial crisis (GFC), although, it could repair and grow strongly immediately after the GFC. On average, the economy grew slower than the two decades before the GFC. The rise of resources' prices contributed to the growth rate in Australia. Also, investments grew rapidly in an unexpected way. The Australian economy could benefit from the GFC. Recently, inflation rates recorded low rates associated with lower investment growth, and negative domestic demand (Rees, Smith, & Hall, 2015). This analysis shows that the economic decision making could create an opportunity from the GFC and attract investments.

Over the last decade that witnessed the GFC, the Australian economy gained from mining exports, which recorded triple their prices. The investments in the mining sector increased to 8% of the GDP, up from 2% only. This is called the mining boom, which caused increases in the standard of living. The per capita household disposable income increased by 13% in 2013, the unemployment rate was lowered by 1.24%, and the real wages increased by 6%. The Australian dollar witnessed a high appreciation (Downes et al., 2014). Accordingly, the mining boom resulted in significant economic growth in the Australian economy.

China the Australian trade partner, witnessed a large economic expansion, which positively affected the Australian economy. China imports mining and non-mining goods and services from Australia. The decline in the China growth rate is expected to affect the Australian economy, although the China's economy is now double its size a decade ago recording 552 Bn. US $ in additional nominal output in 2015. The annual growth rate of the service sector in China remained above 10%, which affected the imports of goods from Australia negatively due to deterioration in the manufacturing sector (Shineway , 2016). Regardless of the economic slowdown in China, its trade relations with Australia is still strong and it remains its dominant trade partner.

The stock volatility is associated with falls in the stock prices. This issue is highly connected to the economic activity, as economic uncertainty may lead to the fall in stock prices (Moore, 2016). The GFC led countries to take the best economic decision to lower the impact of the crisis on their domestic economies.

The Global Financial Crisis (GFC) and Its Impact on the Australian Economy

The Australian government could make combinations between the monetary and financial policies. The response to the GFC includes interest rate cuts, bank guarantees, and introduction of large stimulus packages. The strength of the economy represented in the surplus budget, effective regulations, and low rates of debt helped the economy to overcome the negative consequences of the GFC ( Tiernan, 2010). Australian banks conducted the policy of lowering the exposure to low return assets and to provide flexible liquidity levels. Certain issues, including, asset management industry and financial technology are taking place (Reserve bank of Australia, 2017). In Australia, due to vulnerabilities in the household debt and the expansion in the housing market, the Australian Securities and Investments Commission took actions that ensure appropriate level of interests for borrowers to manage the financial distress, and to avoid any probable future crisis (Simon & Stone, 2017). Home owners are becoming more mature than before the GFC in making decisions regarding their investments in the housing market, as they tend to secure their investments to be able to pay back their loans. 

In order to manage the challenges that faces the economy, policy makers tend to make trade-offs when taking the economic decision. The Australian economy faces many challenges, including the quantity of material goods and services, which differ from one person to the other and affect the quality of life (Wong, 2016). The Australian economy achieved its sustainability since 2014. In 2015, it could produce 1.6 trillion $. The mining boom finished and the mining sector focused on production. Although, it needs to attract investments in the non-mining sectors to sustain its productivity growth and improve the standard of living. The construction activity started o decrease in 2015 due to the low interest rates, which could not substitute the needs of the engineering construction, noting that the low interest rates encouraged people to own homes but the construction sector could not sustain its rate of growth (Wong, 2016). The economy also faces the challenge of managing the CO2 emissions, although the government imposed a carbon tax in 2012/2013, but the tax had a negative impact on certain population segments. After repealing the tax in the mid of 2014, it is noticed that the steady decreasing rate of CO2 emissions during (2008- mid 2014) did not significantly affect the GDP per capita (Bond et al., 2015). Regarding the foreign trade challenges, Australia faces the challenge of responding to bound rates of tariffs and the non-tariff barriers. Due to the protection policies conducted by different world countries, the G20 decided that the tariff rate should be increased by 15% in all countries (Australian governmnet - Productivity commission, 2017). The last challenges sheds the light on the possibility of repeating the events of the great depression, accordingly, Australia has to adopt the appropriate economic policies that matches the overall slow-down in its foreign trade and the slowdown of the Chinese economy.

References

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Downes, P., Hanslow, K., & Tulip, P. (2014). The effect of the mining boom on the Australian economy. Australia: Reserve bank of Australia.

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