Decoupling Global Environmental Pressure – Discussion On Australia’s GDP And Economic Growth

Background

Discuss About The Decoupling Global Environmental Pressure?

Gross Domestic Product (GDP) is the most accurate way of measuring the growth rate of a country. It is the standard practice to calcite the GDP of a country and compares it with others to get the current economic position of that country. GDP is defined as the total sum of all the goods and services produced in the sovereignty of a particular country. This report is a discussion about the GDP rate of Australia dating back ten years from now. Since it covers all the aspects of economic system it becomes the most prominent indicator of the economy of a country. GDP data from Australia is displayed by National Accounts and is computed by Australian Bureau of Statistics which derives its data from System of National Accounts. GDP of Australia had a moderate growth rate before the economic crisis in 2008 (Al-mulali, Fereidouni and Sab 2013). Australia is known to be a free and robust market and has been like this since long. It has almost all the natural resources in abundance complemented by its government which looks after its economyin a vibrant manner. Presence of efficient legal system and well-structured bureaucracy has led to the entrepreneurial development of Australia which has kept its economy in a healthy and prosperous state. Australia has always been the favorite destination for investors for establishing business ventures and investing in projects of all kinds.As Australian industries are open to foreign competition and the workforce available in the country is adequately skilled. Australian government has reduced their interference in many sectors of economy which has made way for foreign investors to take part in the development of its economy. In the following report discussion about the GDP and economic growth of Australia is done with complete analysis.

Australia has a unique demography which has benefited it in more than one ways. It is a continent country surrounded by ocean from all its sides. It has been one of the most well-to-do economies in the entire Asia-Pacific region. It has expanded its economy continuously since last 25 years with some hindrances coming from the global financial crisis in 2008 (Plumb, Kent and Bishop 2013). But even in those troubled times it came out without much damage. Australian Labor Government has done some stimulus spending which has increased the deficit of the government. Australia is known to be a competitive global market with a stronghold on sectors such as technology, services and high-end products of manufacturing. Mining, livestock production and agriculture are the major modes of production in Australia and is done extensively. These factors are the major contributors to the economy of Australia and hence to its gross domestic product. In support of this, it has been observed that Australia has made significant economic progress in the last decade with the help of strong macroeconomic policy, strong development in commodity base and structural reforms of the government.The standard of living of the citizens of Australia has increased due to which economic challenges have tightened.

Computation of Australian GDP

There are three methods applied by the Australian Bureau of Statistics to calculate the GDP of Australia. The first one is approaches of income, thesecond one is the production and thelast one is expenditure. The approach for production contains all the values of produces and the difference between services rendered and values of goods produced in the country. It also adds the consumption and taxes on the goods produced such as mineral oil, tobacco and taxes imposed upon them (rba.gov.au 2017). Subsidies on the respective products are subtracted to give the final GDP. The expenditure method calculates the cost incurred on final consumption of the products which includes services as well as goods. This method also includes the final expenditure of households, total consumption expenditure of the government, formation of capital and next exports. Finally, the income method calculates the total revenue generated by the economy which includes compensation given by employees, thegross surplus in operations, mixed-income derived from taxes after deducting the subsidies on imports and production. 

Since the time of commodity boom, theeconomy of Australia is rebalancing itself with the help of currency depreciation and macroeconomic policies. Development of non-mining sectors of theeconomy has supported the growth to 3% and has even reduced the employment rate.Interest rates in the country have been low which has increased the aggregate demand and has allowed the investors to take risks (rba.gov.au 2017). This has resulted in price hikes in the mortgage and lending.

To sustain the growth in production there should be synchronization in the innovation and the manufacturing sectors. The Australian government has created frameworks for research and development which is linked directly to the sectors of theeconomy which requires constant upgradation to stay in the global competition. Innovation needs reforms in the labor market and capital market to introduce new business models. With the collaboration of business strategies and R&D, good amount of production growth can be achieved (rba.gov.au 2017). Australian government’s “National Innovation and Science Agenda” has given anew dimension to this approach. Funding for all these activities has been incorporated in the GDP calculated for one financial year. This has helped the GDP and economy of Australia to become robust.

In the last decade, Australia has been suffering from unemployment due to the end of thecommodity boom. There have been rising concerns about economic inequality in the country. A gap has been created between the indigenous community of Australia and other citizens regarding the socio-economic status and income groups. GDP of Australia provides funding for innovation to develop the skillset of its underprivileged people (rba.gov.au 2017). Restructuring of the payment systems can reduce the gender wage gap which has also developed in the last decade.

Rebalancing Commodity Prices with GDP

During the tough times of global economic crisis, the economy of Australia stood its ground due to its strong macroeconomic policy, buoyant financial system and high prices of thecommodity.The economic adjustments made in the super cycle of commodity prices has been a major part of the economic development in the last decade and has progressed very smoothly. Huge decline in the resource-sector has been observed from 9% of GDP to 4.5% of GDP and there has been a fall in resource sector employment as well as many large construction projects were in their completion phase (rba.gov.au 2017).The decline in global prices of coal and iron has been observed in 2011 due to which large investments were cut down by the investors to reduce the production costs. Subsequently, Australia suffered the risk of low growth and declining investments in private-sector due to doubtful investments and weak nature of global trade. To counterbalance these negative scenarios policy settings of flexible nature was deployed by the Australian government by setting up a helpful macroeconomic policy.

The economy also faced depreciation in the exchange rates resulting in export decline and scarce revenue from tourism industry which makes a good chunk of the GDP of Australia. Wage growth and CPI (Consumer Price inflation) remained passive in the last decade. CPI was observed to be low from the expected target range of 2 to 3 percent as stated by the Reserve Bank of Australia (rba.gov.au 2017). Nominal wage-growth has also remained low due to the lackluster condition of the labor market which also included part-time jobs. This decline in nominal GDP growth rate has taken a toll on the financial goals of the government which were not reached as per expectations. In the last decade, Australia experienced a substantial current account deficit which was expected to reduce in the coming years. But this risk posed by current account deficit does not bother Australian economy as ahuge piece of foreign debt was dominated by Australian dollar and the remaining debt was hedged against the fluctuations of the exchange rates.It was observed that Australian debt was increasing consistently however it was in the middle position when compared to other countries. Australian government issued only Australian dollar as the mode of exchange.

On the account of risk taken by the households and banks, some measure was announced by the Australian Prudential Regulation Authority in relation to the lending practices for the households. Some measures concentrated on:

• Increase high-risk mortgage lending and to the extent to which they went in terms of prices.
• The speed of growth in lending for household made by an investor.
• The buffer of interest rate and loan services assessment.

A recovery phase was observed in the non-mining sector, increasing the hopes of job growth and economic consolidation.Some indicators showed that there waspurchase of new machinery and investments were made to make the employees work for more hours. Private business was observed to expand by 1.1% every quarter after experiencing about 12 quarters of negative growth in the private sector investment (rba.gov.au 2017).

When compared to other countries of South-East Asia, theburden of tax, expenditure on public services, and public debt were low in the last decade. After the financial crisis is 2008, Australian government authorities extended proper support to keep its economy out of recession. The federal deficit was observed to be 2.4% of GDP which is way below 4.2% as it was recorded before the crisis (Lee 2013).The fiscal policy makes of Australia made a balanced budget. State governments do not have much part in budget preparation as their stance in this matter is very small. It was mostly decided that target of 1% surplus in GDP growth rate will be targeted for each year to keep out the burden of debt-GDP ratio.The analysis suggested that surplus of 1% will close the gap of debt-GDP ratio to 25% in 2025-26 and will zero the gap till 2040 (McLean 2012). Personal income tax onsets are not routinelyincorporated in Australia.This gives leverage for flexiblealteration of the tax schedule to be a portion of structural reforms.

The financial crisis of 2008 does not leave the banks of Australia in much troubled waters but attracted tighter regulations and practices.Banks changed their course of business from lending in short-term towards deposits (rba.gov.au 2017). According to the “Murray Inquiry” capital ratios had reached their lending limits as prescribed by the banking regulators. The Murray Inquiry highlighted that consolidation of bank pliability should also include new practices to curtail the expenses to the public on the occurrence of bank failure.The inquirysuggested the formation of a loss captivating and recapitalizationstructurein accordance with international scenarios to permitactualpurpose with reduced risk to taxpayer funds.The apprehensionofpower of banking directive has provoked efforts to recognize and removerewards for banks in regulatory procedures.

The financial position of Australia ended up being strong as it is right now. According to the recent survey conducted cross-country, debt can reduce the output growth by 70%-90% of GDP. This means that since Australia has gross debt of 44%, it can take fiscal blows and can still stimulate growth (Kubiszewski, Jackson and Aylmer 2013). Australia could route a significantly larger deficit for some period of time without flirting with the limits recommended above.When the risks due to weak fiscal positionemerge, the government should dynamically use fiscal policy to provision the economy, as they did in 2008-09. Since trade in Australia is moderately regulated the value of exports and imports compute to about 41% of the Australian GDP. This leaves the authorities with a cushion to tackle any fluctuations in the GDP growth rate. Growth was largely based on the amalgamation of robust public investment and net exports, restrained public consumption and household depletion and soft business speculation. It could have happened that GDP could increase to the Reserve Bank of Australia’s forecast of yearly growth of around 2.75% by the end of each year, but it would need large spending practices from consumers which were not probable then.

Increase in Household Income and Wealth

Australia is the only country in the group of OECD countries who have experienced the longest span of economic growth in spite of the threats made by Global Financial Crisis in 2008. Every other country in the group of 34 member countries in the Organization for Economic Co-operation and Development (OECD) have gone through at least one phase of two successive quarters of adverse GDP growth since 1991 (Dijk, Timbal and Viney 2013). Comparative growth statistics of Australia are based on the progress accounts collected by the OECD. These statsreflect that there are only two other countries who came close to corresponding Australia’s recent economic high the first one being Japan and the second is Netherlands. Economic supremacy of Australia over the past decade has been the cause of jealousy for many countries across the world. Australia cruised through the Global Economic Crisis of 2008 and outgrew every other peer country. Australia’s real GDP developed by yearly average of 2.7% between the years 2012 and 2016 which was well ahead of the economic giants such as U.S and U.K (rba.gov.au 2017). As of today, the economy of Australia is the largest mixed market, with a GDP of AUD $1.69 trillion (Cecchetti and Kharroubi 2012).

Australia is the second richest country in terms of wealth per adult. There are a number of economic rating agencies such as Standard & Poor who rate the economic condition of Australia as the most stable and favorable for establishing and expanding any kind of business. Being a mixed economy it has the potential to nurture and grow the business ventures (rba.gov.au 2017). Moreover, the government is also very supportive and is always concerned about the private players who are keen oninvesting in theAustralian economy. Such a smooth and congenial atmosphere for business is rewarded by strength and dynamism by large deep-pocketed investors that is why Australia has absorbed the crisis situation like a superior economy and has grown consistently since the last decade.

Conclusion

It can be concluded from the above report that Australia is endowed with all the natural resources which are necessary for a country to be self-sustainable and to prosper without the aid of any foreign entity. Australia is very rich in its business prospects and has a number of investors prying in the opportunity to invest in the economy of the country. To honor this feeling of trust in the economic competence of Australia, its government does a lot to keep the status-quo of the economy maintained. In the above report, economic growth and GDP growth of the country has been discussed in details. The report contains the analysis of policies applied by the Australian Government to tackle the global financial crisis and to come out of it without getting seriously inflicted by its damages. Australia has a robust service and banking sector which were likely to be affected by the crisis but it came out withflyingcolors.Australia is the only country in the group of some very resilient economies which has continued its streak of growth since last 25 years which is a very big thing to happen. As of now, Australia is in a much comfortable economic position with GDP growth rate more than superpower countries like the United States and the United Kingdom. 

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