Analysis Of The Current State Of The Australian Economy Compared To August 2017

GDP growth of Australia

The Sydney Morning Herald has published an article in 2017 where many economists have discussed, analysed and predicted about the economic condition of Australia since 2016. Through observing the trend of national income or gross domestic product of this country, many of them have predicted that national income of this country can increase by 2018, as the Reserve Bank of Australia has increased its interest rates by applying monetary policy (Meyer 2018). However, other economists have contradicted this statement and stated that Australia has not experienced any economic growth between 2016 and 2017, as the rate of real GDP growth of this country has remained same between these two years. This has happened because of the tax cut of the RBA (Reserve Bank of Australia 2018). Consequently, the country is not going to experience a fall in investment sector due to slow consumption expenditure and restricted construction of houses.

To analyse this argument, the report intends to observe Australia’s economic performance in recent years, which is, August and September of 2018 and that of August 2017 for comparing the economic performance of this country. The entire discussion will consider four macroeconomic indicators, which are, real GDP growth, unemployment, along with inflation as well as trade of Australia.

According to the RBA, the global economy is going to face robust growth in coming years, though other macroeconomic factors like inflation or interest rate may remain almost same. Australia’s performance during its first quarter of 2018 has remained better compare to previous year and consequently the annual rate of GDP growth has become 3.4% in this year. In this context, huge investment in non-mining sectors, public expenditure as well as housing market has influenced Australia’s aggregate demand to develop significantly in recent year.  Furthermore, strong labour market as well as monetary policies of the RBA has helped the consumption expenditure and income in both public and private sectors to increase and this in turn has improved aggregate demand of this country (Hutchens 2018). Hence, the country has enough potentiality to stimulate its economic performance that further can develop annual GDP growth of Australia. In the last year, the annual growth of this country has accounted as 2.4 percent and specifically this rate has accounted as 2.8 percent during August. In 2016, the annual growth of Australia accounted 2.4 percent and this supported the statement that annual GDP growth of Australia did not change between 2016 and 2017 (Kyophilavong, Ogawa Kim and Nouansavanh 2018). An appropriate statistical diagram can explain this trend of annual GDP growth of Australia accurately.

Unemployment

Figure 1: Annual growth rate of Australian GDP

Source: (Tradingeconomics.com 2018)

Figure 1 has represented annual GDP growth of Australia since the 1^st quarter of 2017. During first and second quarters of this year, annual GDP growth rate Australia has remained 1.9 percent while this increased in third quarter and became 2.7 percent. In the next quarter, the annual GDP growth of Australia again declined to 2.4 percent. Thus, the average growth rate of Australia has accounted 2.6 percent during the last year. However, this growth rate has increased drastically during the 1^st quarter of 2018 and has become 3.2 percent (Tradingeconomics.com 2018). The annual growth has increased by 0.9 percent during April, May and June of precent year. Hence, according this trend it can be stated that the economy of Australia has performed better in recent year compare to previous year and this turn has helped the country to increase its household consumption as well as demand in Australian market.

According to the report of World Bank, unemployment rate in Australia has decreased over the time through creating more job opportunities. However, this rate has decreased from 62.20 percent in June to 62.10 percent in July. Through increasing wages as well as salaries by 0.7 percent in June quarter, Australia has improved its labour market condition. Consequently, wages and salaries of this country have been accounted 4.5 percent in 2018 and this in turn has increased its employment percentage above 4.8 percent (Berg and Mark 2018). Instead of this, some economists have argued that wages in Australia have remained comparatively low than its expected level and for this the real growth rate of wages has improved by 0.3 percent in recent year (Tradingeconomics.com 2018). As a result, the demand for labour in Australian labour market has developed small proportion though the total number of employed level in 2017 has remained comparatively high. In this context, it needs to mention that total number of employment in Australian labour market has remained comparatively high over the year. In addition to this, participation rate of workers in the county’s labour force has increased since the last year. However, the unemployment rate has remained above 5 percent in recent year.

Figure 2: Employment rate in Australia

Source: (Tradingeconomics.com 2018)

The above figure has represented employment rate of Australia since 2017. According to this figure, total number of employment in this country has increased continuously since the January quarter of 2017. However, this rate has decreased in the second quarter of 2018 due to weak wage and salary growth. In July quarter, this rate has increased again focusing that unemployment rate of Australia has decreased over the year.

Inflation

As of third quarter, 2018, inflation rate has remained at a higher level in Australia (Choi and Cook 2018). The economy has experienced inflation rate at 1.5 percent in June quarter of recent year while the nominal wages of workers have increased by 1.8 percent (Tradingeconomics.com 2018). Thus, the real wage has increased only by 0.3 percent.

Figure 3: Inflation rate

Source: (Tradingeconomics.com 2018))

The above figure has represented that the inflation rate has remained around 2 percent in July quarter of 2017 while this rate has become 2.1 percent in during the same quarter of next year (Tradingeconomics.com 2018). This price level has increased due to increasing prices for energy resources like gas and electricity in international market as well as in domestic market.

Australia chiefly exports agricultural products to China, the U.S.A and other western countries. The country has huge probability to increase its exports of liquefied natural gas (LNG) and other energy resources to other countries, as the production of these products have increased in Australia (Aghlmand et al. 2018). Thus, the country’s terms of trade has developed noticeably and consequently Australia has faced a positive terms of trade.

Figure 4: Australia’s terms of Trade

Source: (Tradingeconomics.com 2018))

Figure 4 has represented Australia’s terms of trade (TOT), which has decreased since the first of quarter of 2017. After the last phase of July quarter, this TOT has started to improve by small proportion and it has reached at 89.10 Index points in the first quarter of recent year (Tradingeconomics.com 2018). However, terms of trade has decreased in July quarter due to increase in prices of natural gases in international market (Elijah, Kenyon, Hussey and van der Eng 2017). Instead of this positive TOT, the country has experienced deficit in its current account balance. This means that the surplus in trade balance of Australia has decreased by significant amount in recent year. Moreover, the government of Australia has experienced public debt by large amount in recent year and according to some economists, this rate can increase in coming years. This public debt has been contained with international and national debt. The Australian value has been deprecated over the year (Abelson and Dalton 2018). This in turn can increase the burden of public debt on Australian government.

After discussing the present economic condition of Australia and comparing it with previous year, three major points can be pointed out. Based on this, the report can further predict Australia’s economic condition for the next 12 months. The RBA has predicted that the inflation will increase in future by 2.4 percent (Tradingeconomics.com 2018). However, this rate of inflation growth can be stabled in future. Moreover, global inflation can affect the country while increase in GDP of this country can further depreciate the value of Australian currency. As a result, Australia’s current account balance can experience deficit in coming year (Forbes, Hjortsoe and Nenova 2017). Thus, the RBA can implement suitable monetary as well as fiscal policies to reduce inflation rate further that can further control current account balance of this economy (McFarlane, Blackwell and Mounter 2018). Moreover, increasing amount of public debt and comparatively lower wages can also hamper Australian economy adversely in future.

Conclusion:

Thus, after discussion the entire paper, it can be described that the Australian economy has performed in recent year compare to previous one. The annual GDP growth of this country has increased over the year while the number of unemployed people has reduced, as the economy has offered wages due to increasing demand in labour market. On the contrary, inflation rate of Australia has reduced and the RBA has predicted that in can reduce further in future. The TOT has also fluctuated over the year indicating that export of this country has reduced at present. From this, the paper has derived three major problems that the Australian economy can experience in coming months, related to these before mentioned macroeconomic indicators.

References:

Abelson, P. and Dalton, T., 2018. Choosing the Social Discount Rate for Australia. Australian Economic Review, 51(1), pp.52-67.

Aghlmand, S., Rahimi, B., Farrokh-Eslamlou, H., Nabilou, B. and Yusefzadeh, H., 2018. Determinants of Iran’s bilateral intra-industry trade in pharmaceutical industry. Iranian journal of pharmaceutical research: IJPR, 17(2), p.822.

Berg, K.A. and Mark, N.C., 2018. Global macro risks in currency excess returns. Journal of Empirical Finance, 45, pp.300-315.

Choi, W.G. and Cook, M.D., 2018. Policy conflicts and inflation targeting: the role of credit markets. International Monetary Fund.

Elijah, A., Kenyon, D., Hussey, K. and van der Eng, P. eds., 2017. Australia, the European Union and the New Trade Agenda. ANU Press.

Forbes, K., Hjortsoe, I. and Nenova, T., 2017. Current account deficits during heightened risk: menacing or mitigating?. The Economic Journal, 127(601), pp.571-623.

Hutchens, G. 2018. Australia’s GDP growth jumps to 3.1% on back of mining exports. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/jun/06/australias-gdp-growth-jumps-to-31-on-back-of-mining-exports [Accessed 11 Sep. 2018].

Kyophilavong, P., Ogawa, K., Kim, B. and Nouansavanh, K., 2018. Does Education Promote Economic Growth in Lao PDR?: Evidence From Cointegration And Granger Causality Approaches. The Journal of Developing Areas, 52(2), pp.1-11.

McFarlane, J., Blackwell, B. and Mounter, S., 2018. Good Gardening for a Perennial Economy: What’s the Optimal Growth Path for a Regional Economy?. The Journal of Developing Areas, 52(1), pp.29-44.

Meyer, J. 2018. Economists deeply divided over Australia’s economic path in 2017. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/markets/economists-deeply-divided-over-australias-economic-path-in-2017-20170207-gu72ev.html [Accessed 11 Sep. 2018]. – The main article

Reserve Bank of Australia 2018. Economic Outlook | Statement on Monetary Policy – August 2018 | RBA. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/publications/smp/2018/aug/economic-outlook.html [Accessed 11 Sep. 2018].

Tradingeconomics.com 2018. Australia – Economic Indicators. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/indicators [Accessed 11 Sep. 2018].