Exchange Rate Movements And The Australian Economy

Composition of GDP

Gross Domestic Product is a well-known estimator for aggregate output of a nation. By definition, GDP is measure capturing the monetary values of goods and services that a nation produces in a given year. With the objective of computing monetary values of goods and services, the produced quantity needs to be multiplied with respective market prices. There are two types market price that be used in the estimation of GDP (1). One way is to use current year market price and another way is to select one year as the base year and then use the base year price to compute GDP of the particular year. When current year market price is used to compute GDP, nominal GDP is obtained. GDP obtained using market price of the fixed base year is known as real GDP. GDP by representing aggregate output of a nation gives an overview of economic performance of the nation. GDP growth which is the percentage change in GDP between two consecutive years is used as a measure of economic growth. Trend in GDP growth infers the trend of economic performance. An upward rising trend in GDP is a healthy sign for an economy (2). The essay evaluate components and trend in economic growth of Australia in the last ten years.

The Australian economy holds an important position in the list of OECD nations for its steady growth for a considerable long time period. The economy remained resilient even during the phase of global financial crisis that affected most of world economies severely. In 2017, the Australian economy grew at a rate of 2.2 percent (3). Slowing construction and mining sector contributed to the recent slowdown of economic growth. The sluggish growth of wage affects consumption expenditure of the economy. The essay discusses Australia’s economic growth with relevant explanation of growth trend and associated government measure.

Gross Domestic Product involve contribution of different sectors of the economy. Agriculture, industrial and service are the three main sector that contribute to GDP of a nation. Australia possesses structure of a modern economy goes by its industry mix. The share of agriculture in Australian economy is only 4 percent. The share of agricultural value added however increases to 12% after inclusion of primary products and food processing industry. The sector is a significant contributor of export from Australia (4). More than 60 percent of Australia’s agricultural produce are exported to different nations. Fishery and Forestry are the two important industries of Australia. The sector offers employment to a significant section of the labor force. The share of industrial sector in the Australian economy is 26.6 percent. In the industrial sector, the most important industry is mining. Mining alone accounts 8.8 percent of GDP. The three states engaged in coal mining are Queensland, Victoria and New South Wales. Coal is one of the important exportable from Australia with Australia exporting 54 percent of the coal mined. Coal are mainly exported to different nations of East Asia. 5.9 percent of the GDP share is accounted by manufacturing sector. Construction, wholesales and retails are the other important industries of Australia. Service sector is the highest contributing sector in the GDP with the share being 69.4 percent. Finance and insurance is the most important sub sector of the service. This sector contributes 8.8 percent of GDP (5). The Australian big four banks are counted in the list of top 50 safest banks in the world. Tourism, media, education, rental, hiring, real estate service, technical and professional services are other important subsectors of service.

Trend in GDP and economic growth of Australia

Australian economy grew at a rate of 0.4 percent in the fourth quarter of the last year. The 0.4 percent growth rate is lower than the market projected growth rate. Economic growth reached to a considerably low level after 2008. The slow economic growth was resulted due to the hit if global financial crisis. Given economic resilience and corrective measures of government, economic growth recovered. Economic growth again started to fall since 2012. The Australian economy in the last five years has gone through a significant slowdown. In the September quarter of 2017, the recorded economic growth was 0.7 percent (6). With this the economy reached to the slowest rate of growth. There are some factors that made a positive contribution to the economic growth. Household consumption expenditure is the biggest contributor of economic growth. Economic growth however has been put towards a downward direction by lowers than expected growth rate non-dwelling construction and net export (7). Investment (both private and public) and government expenditure are the positive contributor of economic growth. Household consumption grew at rate of 0.3 percent. The accounted growth rate of private investment is 0.1 percent. Public investment grew at a faster rate compared to private investment with growth being 0.3 percent. Economic growth has been dragged down by a relative slows down in ne trade and non-dwelling construction sector. The growth rate for net trade and non-dwelling construction sector recorded a negative growth rate with growth rate being -5.5 percent. Not only these two sector, decline in the growth rate has also been realized for dwelling investment. The dwelling construction slowed down by 0.1 percentage point.

After experiencing few years of sluggish growth, consumption spending in the household in this year has grown by 1 percentage point. The recovery in household spending occurred following revived spending in some areas (8). The areas accounting higher spending include expenditure on health, restaurant, hotels, cafes, cultures and recreation. In contrast, spending has declined for several necessary goods such as food, electricity and fuels. In order to support economic growth government has increased spending in different areas. The government expenditure recorded to be increased by 1.7 percent considering all levels of government. Spending by national government raised by 3.1 percent. The recorded increase in expenditure by the government at the level of state and local government is 0.75 percent. Investment measured by gross fixed capital formation declined by 1.2 percent. Associated with this private investment lowered by 2.2 percent (9). Most of the decline in private investment recorded in the non-dwelling construction sector. Private investment in the non-dwelling construction contracted by nearly 8 percent. As against a decline in private investment, public investment has grown by 2.9 percent. Government is transferring assets from public sector to that of the private sector. Manufacturing investment has increased as shown from the increased investment for equipment and machinery. Investment in machinery and equipment grew by 3.3 percent.

Another area that contributed to an economic slowdown is the external sector. International trade plays an important role in economic growth of Australia. With a slowdown in external sector economic growth slowed down as well.  There is 1.8 percent decline in the export of all goods and services.  Australia is one of the biggest exporter of different services. The decline in service export exceeded that of goods export. The service export fell by 1.9 percent (6). Good export on the other hand decline by 1.7 percent.  Trade balance which is obtained as export less import is run with a deficit following a decline in export and corresponding increase in import. Import for both goods and services have increased (10). As import exceeded export there is considerably large trade deficit. Deficit in the trade balance adversely affected gross domestic product of Australia. Growth in the mining industry has recovered followed by the recovery in coal and iron mining.  The mining industry has grown by 1.3 percent. Telecommunication, information and media services have grown by 2.9 percent. The growth in telecommunication has dominated the growth in media and information services. The growth in telecommunication sector is 3.5percent while the recorded growth in the other two is 2.2 percent. The recorded growth for insurance and financial services is 0.1 percent. This is the slowest growth rate since the November quarter of 2014. For financial sector there has been no recorded growth. The insurance service grew by 0.2 percent. For healthcare service, both public and private healthcare services have advanced (11). The Manufacturing growth on the other hand slowed by 1 percent. In the December quarter of 2017, Australian economy grew by 2.4 percent.  Prior to his economic growth rate was 2.9 percent. The accounted growth rate is below the expected growth rate of 2.5 percent.

A discussed in the previous section, the economic growth rate in Australia has accounted a declining trend in the last few years. The growth rate in the last ten years mostly ranged from 2 to 4 percent with only exception in 2013 when growth rate exceeded above 4.5 percent. The mining boom is one significant factor contributing to a high growth rate in this year.  As a sharp contrast to this trend, the recorded economic growth in the last quarter of 2017 was 2.4 percent. Household consumption and public investment contributed to quarterly reviver of economic growth. The sluggish construction and business sectors however outweighed the positive contributing factor. The export sector especially the service export accounted a large contraction (12). Despite slow economic growth, policy makers believed that Australia is still in a position to resist any recessionary hit in the upcoming years. The economy though has not yet possessed any recessionary attack growth is economic growth rate is below its potential growth rate. Growth in per capita GDP has slowed down with per capita GDP is growing only at a rate of 0.8percent. The per capita GDP growth slower than that in most of developed nation.

Several factors are at play in lowering economic growth below the potential level. Construction sector is one of the important sector of the economy. The sector accounted strongest growth rate during 2013-2014. The sector in recent years however accounted a slower growth. As the growth in construction sector has faded away, economic growth has been adversely affected by this (13).  Fluctuation in housing prices is moving the economy towards a phase of housing crisis. After reaching to the peak level, housing price suddenly started to fall with expectation of further decline in prices in the upcoming years. The Reserve Bank of Australia has taken a wrong step. It has raised the bank rate. With absence of supply growth, high rate does nothing but only raises the unemployment rate in the economy. In Sydney and Melbourne, the fall in housing price ranged from5 percent to 10 percent. Another factor pushing the economy backward is the relatively slow growth in wages. The slow wage growth restricted household consumption. This gives a weak outlook for the economy’s future. Saving in the economy declined as consumption supported by rising wealth. The slow growth is however unlikely to persist in the long runwith the expectation of a decline in property prices in future. The slow and changing growth patter affected mining sector of Australia. With a decline in China’s import demand, investment in Australian mining continued to decline. The value of Australia dollars hiked to become USD 0.78 (14). This though indicates a strong position of Australian dollar but adversely affects the export growth by raising the relative price of Australian export. This worsened Australia’s trade balance. Having significantly large share in export agricultural and manufacturing sector bears the largest threat from a decline in export demand. The low inflationary pressure is yet another source of a slow economic growth. The expectation of a lower inflation hurts wage growth offsetting the impact of strong Australian dollar (15).

The continuous decline in economic growth affects the economy in various ways. It order to protect the economy from the potential threat of sow economic growth government of Australia has taken several measures. Government uses a stable framework of fiscal and monetary policy to ensure a stable growth rate for the economy (16). Government is well aware of the fact that Australia has now get stuck in a situation of low wage and productivity growth along with a low inflationary pressure and lower expected inflation. In the context of Australia economy, monetary policy is considered to be more effective as compared the fiscal policy framework. Monetary policy in Australia is designed and executed by Reserve Bank of Australia. The balance between a low inflation and low unemployment is maintained through the tool of interest rate. In the period after the global financial crisis in 2008, RBA eased the interest rate (17). The easy monetary policy helps the economy to recover economic growth by stimulating demand. Once the period of recession had passed RBA brought the interest rate back to the previous level. Again in response to declining investment in mining sector RBA lowered the interest rateto 2.5 percent in 2013. The second round revision in the cash rate occurred in 2015 with cash rate reached to the all-time lowest level of 1.5 percent (18). The monetary policy in recent year failed to provide necessary stimulus to the economy. Government thus is using fiscal policy as an alternative policy tool (19). A medium term fiscal strategy has developed to full the twin objectives of budget surplus and steady economic growth. The government focuses on raising productivity and to achieve this spending human capita has increase significantly. The increased spending on education is one major step toward increasing supply of human capital (20). In designing the tax policy, government needs to shift the tax burden from productive sector to a non-productive one.

Conclusion

The essay provides a brief summary of growth history of Australian economy for the last ten years. The economy of Australia holds a strong position in the world economy in terms of its stable historic growth for a long time. The economy however has recently documented a slower mainly contributed from sluggish growth in construction and mining sector. Australia’s teems of trade has declined due to depreciation of Australian dollar. This hurts both goods and services export of Australia. The service export ha hurt more severely than goods export. The trade deficit is another contributing factor for slower economic growth. Despite slow economic growth, no recession has yet not predicted for Australian economy. The decline in mining investment has almost come to an end. Additionally, investment in non-mining sector has increased which is likely to compensate for slow economic growth in mining sector. Growing public investment also provides a positive outlook for the economy. With the objective of recovering economic growth government takes fiscal and monetary and fiscal policy initiatives. Government has taken an ease monetary policy in form of lowering the cash rate to a considerably low level. On the fiscal policy stance, a medium term fiscal strategy is taken to maintain surplus in budget along with a stable economic growth.

References

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