Using the data in the table provided, comment on the relative performance of the Australian economy. Express your comments in terms of the indicators shown in the table.

• Each economy’s position of the business cycle is dependant on the change in percentage of GDP
• But other factors have to be taken into account as well, such as if the economy is emerging from a trough or falling from a peak
• Australia, USA, Germany and Japan are all in a downswing cycle but are all at different positions of the downswing

Australia

• Australia is currently in the early downswing stage.
• Inflation rates are slowing, interest rates are high, CAD is starting to fall as a percentage of the GDP, AD growth is slowing as consumption slows as well as investment falling and employment growth slows
• Australia although more stable than other economies as there is a global downturn, Australia has been affected to
• But Australia has shown that its economic growth is strong and stable at times of crisis and is performing better than other countries around the world
• Thus Australia is heading into the early stages of a downswing
• The first graph below shows Australia’s GDP over the last three months, and the second graph shows Australia’s GDP over the last decade
• Observing the both graphs it is clear that Australia is just coming out of a peak and heading into the early stages of a downswing
• This has been due to the global downturn from the war in Iraq and terrorism

United States of America

• The US is also in a downswing cycle, further into the downswing than Australia, probably leaving the early downswing cycles to the late downswing cycle
• Inflation declines, interest rates are declining, CAD declines as imports falls, AD falls as consumption and investment decline thus unemployment increases and all forms of investment also fall
• Consumer confidence in the US has been particularly low due to the war in Iraq and terrorism attacks
• These two factors have been the main cause for America’s downswing as many consumers have loss confidence in the American economy
• As the confidence it at a low inventories rise, demand factors, employment, output and income all will fall, thus the economy contracting
• The first graph below shows America’s GDP over the last three months, and the second graph shows America’s GDP over the last decade
• Observing the both graphs it is clear that America is on a downswing whether it can recover will greatly depend on the regain of confidence of the American consumers

Germany

• Germany is situated in the late downswing stage
• Germany is deeper into the downswing than the US and possibly going into a recession in the near future
• Inflation declines, interest rates are declining, CAD declines as imports falls, AD falls as consumption and investment decline thus unemployment increases and all forms of investment also fall
• Germany is experiencing both a lack of consumer confidence and investor confidence
• Consumes in Germany are not willing to buy unnecessary goods and services, thus their retail spending is negative
• This lack of consumer confidence will cause inventories to rise, demand factors, employment, output and income all will fall, thus the economy contracting
• As for the lack of investor confidence this could lead to high unemployment which will then worsen the effect of the consumer confidence
• Therefore unless Germany can turn around their economic problems they are looking at a possible recession in the near future

Japan

• As for Japan they are in a deep recession.
• Unemployment is high, interest rate and inflation are low, CAD declines as imports decline, GDP is at a low, idle capacity reached and lowest demand for goods and services occurs.
• Similar to Germany, Japan’s consumer confidence is also at a low thus inventories rise, demand factors, employment, output and income all will fall, thus the economy contracting
• Although Japan is still producing goods and services for exports due to the unstable status of the economy present, economies are now less inclined to import foreign goods.
• As Japan relies on their exports, presently Japan will have trouble to increase consumer confidence back into the Japanese economy
• Japan has had serious troubles with their banks causing erosion in consumer sentiment in the policies than Japan has put in place, thus they are in a recession
• Until Japan can sort out their troubles with their financial sector they will remain in recession, they have been in this position for over a decade

Australia in the future

• Australia over the next 6 to 12 months will be looking at an upswing and possible boom.
• As the trend goes downswing, upswing, downswing, upswing etc after this slight downswing Australia will rally and head towards an upswing.
• As Australia has proven to be extremely stable in tough times (crisis), due to the consumer sentiment in Australia, its stability will be able to get Australia through this time of great uncertainty in the global market.
• Both its sound monetary and fiscal policies and the structural reforms in the past has created a stable economic growth which will help in recovering from this downswing
• It is only a matter of time before the global economies bounce back from their downswings, as consumer confidence will grow at the conclusion of the war
• Therefore after the war, Australia will bounce back from this downswing and Australians will rally strongly to boost Australia’s economic growth and GDP.  
• Thus over the next 6 to 12 months it is likely that Australia will reach a peak or at least be on in  an upswing trend

c)        Explain clearly and in detail, the relationship between employment, economic growth and the business cycle

• Employment, economic growth and the business cycle are all interrelated to each other
• Employment directly effects economic growth which in turn alters the economy’s GDP, thus altering the state in which the economy is situated in the business cycle
• If employment is high this indicates that the economy is willing and able to employ a greater proportion of the workforce
• When employment is high the employees will have a larger income to spend on both goods and services, thus consumption increases
• With this increase in consumption this leads to producers able to make a larger profit thus inventories will fall, output, demand factors, employment and income will rise
• The increase in employment will fuel the economy as the firms will be able to produce more goods and services, thus creating a greater profit to employ more employees

• As GDP = C + I + G + (X – M) a change in any of the factors will change the GDP – C = consumption, I = investment, G = government spending, X = exports, M = imports and (X – M) = net exports
• Thus a rise or fall in employment will trigger a rise or fall in consumption thus increasing or decreasing the GDP, thus the economic growth will alter
• Employment thus affects the economic growth (GDP) as it is a factor which alters the GDP equation, either raising or lowering the GDP due to the rise or fall of employment respectively

• As for the business cycle which relates directly to the GDP of the economy
• If the GDP is at a high it will be at a peak, GDP at a low it will be at a trough, GDP rising it will be on an upswing and GDP falling it will be on a downswing
• Once again as the level of employment effects GDP, through consumption, a change in employment will change the GDP thus changing the situation of the economy in the business cycle
• Therefore when employment is high, economic growth will be high thus the economy will be situated either on an upswing or at a peak.
• The rate of employment effects the GDP which in turns effects the state at which the economy is situated on the business cycle
• A conclusion can be made that if a factor in the GDP equation alters, eg consumption due to a change in employment, then this will trigger a change in economic growth and thus a change in the business cycle
• This goes to say that not only employment will effect the economic growth and business cycle, any one of the factors will alter the GDP, eg inflation

• Improved living standards, increased employment opportunities, increase leisure time, increase assistance to less developed countries, growth is cumulative and self generation, increase participation in international trade, increased social welfare, improved economic and social mobility

d)        “Indeed, the latest OECD report on Australia, release overnight stresses the economy’s underlying strength.  The doges pursuits of structural reforms across a very broad front, … and prudent macroeconomic policies have combines to make Australia one of the best performers in the OECD” (AFR, 4/3/03)

How would you explain Australia’s economic growth record over the past decade?

OECD

• OECD = Organisation for Economic Co-operation and Development
• The OECD is and international organisation which helps governments tackle the economic, social and governance challenges of a globalised economy
• The OECD was established in 1961, consisting of over 20 countries, including most of the highly developed western nations.
• Australia joined the OECD in 1971
• The OECD formulates, co-ordinates and promote policies to encourage economic growth and maintain financial stability in member countries
• The OECD stimulates and harmonises its members’ efforts regarding the provisions of financial and technical aid for developing countries
• The OECD also contributes to the expansion of multilateral trade conducted on a non-discriminatory basis
• The activities of the OECD are carried out by specialise committees and working parties which work within an international secretarial to review specific issues and formulate policy recommendation relating to such things as economic development, technical co-operation, international trade, energy and the environment
• It publishes a comprehensive set of statical reports individual surveys of economic activity, trends and forecasts in member countries

OECD’s statement of Australia

• Thus the statement made by the OECD indicates that Australia’s economic growth over the past decade is extremely stable and strong
• Although Australia has had troubles with structural reforms and macroeconomic policies, Australia has been able to come out of these stronger and more stable than before
• The statement illustrates that Australia is one of the most stable and consistent performer in economic growth over the past decade
• The indication that Australia is one of the best performers according to the OECD shows that Australia has a high economic growth rate compared to the global economies
• This is a good sign for Australian investors is that since of the stability of the Australian economy at times of crisis, such as the current war in Iraq, the Australian economy will fall but not fall as much as other economies
• Thus the stability of the economic growth of the economy allows investors to be more confident in investing into the Australian market
• As consumer confidence is high this will lead to an expansion in the Australian economy thus creating a stronger and more stable economy that before

Reasons for Australia’s stable economic growth

• Australia owes its past success due to the sound monetary and fiscal policies establish and the structural reforms which raised productivity growth and made the economy better in adjusting to shocks
• Productive growth has averaged 2.7% over the past decade
• Structural reforms of the past two decades include the shift from centralised wage fixing to local enterprise bargaining, the introduction to flexible work practices, lowering of trade barriers and deregulation of product markets and the financial system

Hawke & Keating reign

• The Hawke-Keating was responsible for the micro and macro reforms
• In 1983 the Australian dollar was floated
• Initially (84-86) the dollar fell 40% against the currencies of Australia’s major trading partners
• Australia had to allow real wages to fall to set off currency depreciation
• Thus union cuts were used to convert nominal depreciation into real depreciation
• To cut unemployment the Accord was established – real wages would fall 7% in 5 years but labour costs would fall by 11% and unemployment would fall from a peak of 10.4% in 1983 to 5.6% in 1989
• With both the float of the dollar and the Accord dramatic growth occurred in mid 1990’s
• Tariff reforms and in 1988 and 1991 and also move to enterprise bargaining
• Productivity increased thus greater profits in firms
• International competitiveness rose and Australians with their entrepreneurship began to export to overseas nations

• Microeconomic reform improves product & factor market responsiveness to market signals
• Greater economic flexibility, improved international competitiveness, reduced CAD and lower foreign debt
• Technical – competition thus producing output at the least cost, productivity rises.  Through structural reform in the firm or industry
• Allocative efficiency – competition in factor & product markets, resources allocated to their most valued use
• Dynamic efficiency – competitive, changing patterns of consumer demand & technological change

• Macroeconomic reform done through tax, tariff, competition, transport, telecommunications, financial deregulation, privatisation and corporatisation of government owned business and labour market

• Australia’s economy peaked in 1989-90
• Tight monetary policy (cash rate hit 18%) reduced AD till the economy crashed into recessions in 1990-91
• Australia recovered slowly in 91-92 and 92-93 was held back by a recessed world economy
• Recovery picked up in 1994 through fiscal and monetary stimulus from early 1990 to late 1994
• The recovery was also helped along by the global recovery
• Strong growth in late 1994 (6% yr to Sep) raised cash rate from 4.75% to 7.5%
• Fiscal tightening in budget 1996-97 to focus on fiscal consolidation (reducing the structural budget deficit) through sharing roles of FP and MP
• Tightening the FP when economy was slowing, offset by loosening MP
• Fiscal tightening responsible for the decline in interest rates
• Austral’s economy grew strongly over 1999-2000 thus MP tightening

e)        Australia’s economic growth has had its negative consequences, some of which present major challenges for the present and the future.  Explain.

• Australia’s economic growth possibly might cause major challenges for the present and the future
• But due to this strong economic growth this could lead to either lead to high inflation, an asset bubble forming, environmental effects and a decrease in international competitiveness

Inflation

• As Australia’s consumer sentiment is reasonably strong, thus the stability of the economic growth, this could lead to high inflation.
• Demand pull will drive up the prices of goods and services and raise inflation due to strong economic growth
• With the increase in inflation the consumer confidence will diminish thus Australia will possibly go into a downswing or even a trough in the future.
• Therefore due to Australia’s strong economic growth if the proper precautions are not taken through either the RBA or the government, Australia’s economic growth will become volatile due to an increase in inflation

Housing bubble, asset bubble

• Another scenario that could form is due to the high level of consumer spending as well
• If consumers are confident about investing into the Australian market this could lead to a bubble forming and possibly bursting
• A housing bubble, stock market bubble or any asset bubble may form
• As consumers are willing to take out loans to invest into an asset if a bubble is formed and it “bursts” consumer confidence will be shattered
• The consumers that have taken out loans to invest will find it difficult to repay the loan to the banks if a bubble bursts.
• The value of the assets will fall but the loan will remain the same thus consumers will be unable to sell their investments off to repay their loans
• This will effect both consumer confidence and economic growth of Australia and could possibly cause Australia to go into a downswing and possibly a trough in the future
• The main concern for Australia is definitely the housing bubble
• A high burden due to mortgages to Australians who are withdrawing from their savings
• If the housing bubble bursts it would be similar to the American stock exchange “tech” bubble bursting, causing America to go into a downswing

Environmental

• Another aspect that has been caused from the strong economic growth is the environmental factor
• Over time Australia has used many resources such as iron, nickel and various other resources which may have lead to the strong economic growth, thru international trade
• The environmental effect can have dramatic effects on the future of the economic growth of Australia
• The salinity article is an example of the negative environmental effect caused from the surges in production in the past
• Thus as the salinity of the soil has increased, future crop growers will find it difficult to produce the same quality and quantity of the crop
• Other environmental effects include water & air pollution, over-logging and degradation of natural resources
• Thus due to the previous environmental tolls on Australia the future of resources might be in jeopardy

Australia’s dollar and international competitiveness

• The rise in the Australian dollar against the American dollar has increased
• Australia’s dollar is the most undervalued rich-country currency
• The undervaluations and economic growth could cause large capital inflows thus pushing the currency up
• If the Australian dollar raises exports will decrease due to the less competitiveness for overseas importers, thus less profits in Australia
• Thus the CAD will rise causing foreign debt to rise as well
• A possibility of the Australian dollar becoming overvalued due to the large capital inflows

Bibliography

King, D. 2001, Tee Study Guide Economics, 4th edition, Academic Associates, Australia

Parry, G & Kemp, S. 2000, Exploring Macroeconomics, 5th edition, Tactic publications, Western Australia

“Economic reform a barrel of thrills and spills” by Alan Mitchell – The Australian Financial Review, 3rd March 2003

“Economics focus | The lucky country” – The Economist, 8th March 2003

“A long climb to the top” by Cherelle Murphy - The Australian Financial Review, 12th March 2003

“RBA: household debt risk to economy” by Morgan Mellish - The Australian Financial Review, 4th April 2003