An Evaluation Of Economic Growth In Australia Between 2012 And 2017

Economic Growth Indicators in Australia

Australia is a self-governing, established and culturally diverse country with a vastly experienced labor force as well as one of the best-performing economies globally. It is the globe’s twelfth biggest economy and a top performing country on nearly each measure of merit in areas like health, wealth, educational attainment, and ease of doing business (Department of Foreign Affairs and Trade, 2017). For the past twenty-five years, Australia had recorded a robust economic progress unmarred by the recession. The sound economic policies before and during the Global Financial Crisis (GFC) in 2008-09 played a central role in ensuring that this economy remained unhurt by the economic downturn. Although Australia is a far-away from chief world markets, it is well incorporated into international markets. The country’s top trading partners include China, United States, and Japan with iron ore, precious stones and metals, minerals fuels and oil being its top exports. The leading industries include mining, food processing, chemicals as well as transportation and industrial equipment (Globaledge, 2017). Furthermore, Australia has a mixed economic coordination in which the economy has an array of private freedom, combined with government regulation and centralized planning. The country’s trade and foreign policy uphold its security and long-term affluence. This paper evaluates the economic growth of Australia between 2012 and 2017. Key economic indicators such as GDP growth rate and inflation, as well as factors influencing economic growth are discussed.

Annual Real GDP Growth Rate

 

Figure 1: Source: The World Bank

The data from graph one above shows that for the past five years, Australia has recorded a robust economic growth. The economic expansion has been above 2 percent, and thus this economy can be categorized under the expansion phase of the business cycle. Such a remarkable economic growth is an indication that the government of Australia has put in place sound economic policies and structures that are favorable for the thriving of the economy.

Real GDP Per Capita

 

Figure 2: Source: The World Bank

Health economic growth of Australia is also supported by the rising levels of the real GDP per capita. From 2012 to 2016, the real GDP per capita of Australia has been increasing significantly. In 2012, the country’s real GDP per capita was 53,348.389 U.S Dollars. In 2016, this variable rose to 55670.924 U.S Dollars (The World bank, 2017). The rising levels of real GDP per capita denote that the living standards of Australians are increasing.

The Level of Unemployment

 

Figure 3: Source: The World Bank

The term unemployment refers to a scenario where able and willing to work persons fails to get a job to perform at the prevailing wage rate (Gillespie, 2014, p.59). Apart from the GDP growth rate and real GDP per capita, the level of unemployment is also another critical indicator of a health of an economy. High level of unemployment is a sign that the economy is deteriorating. Figures from graph three above demonstrate that unemployment in Australia is not out of control. Between 2012 and 2016, the unemployment level in this nation has been below 6 percent (The World Bank, 2017). Though unemployment increased in 2014 and 2015, it declined in 2016.

Annual Real GDP Growth Rate

Growth in Consumer Spending

The household performs an important function when it comes to providing the economy with sufficient expenditure for generating economic growth and development. The employer or the companies have the responsibility of paying the individuals livable wage for the services rendered. On the other hand, the financial organizations such as banks have the duty of lending out money to both firms and households for spending and investment purposes. Therefore, the critical sectors of the economy, that is, household, financial institutions, government, and firm, have to function properly for the wellbeing of the economy (Hubbard & O’Brien, 2013, p.54). In case the consumers cut their consumption, the economy is affected significantly. For instance, the tax revenue declines, firms scale back their production and finally result in an economic retard and an increase in unemployment levels.

Contribution of household spending to economic growth of Australia

 

Figure 4: Source: The World Bank

In the recent years, the contribution of consumer spending towards the economic growth of Australia has been increasing steadily. In 2012, the household contribution to the Gross Domestic Product was 53.71 percent. This figure rose to 56.56 percent in 2015 and 57.82% in 2016 (The Wolrd Bank, 2017).

Several factors are responsible for the growing levels of consumer spending in the Australian economy. The reduction in the cost of borrowing since the occurrence of Global Financial Crisis (GFC) in 2008/09 is one of the critical influences of consumer expenditure. The Reserve Bank of Australia (RBA) has been reducing the cash rate to enable Australian Banks to lend more funds to the individuals. The current cash rate stands at 1.5 percent (RESERVE BANK OF AUSTRALIA, 2017). The action of reducing the cash rate has made loans cheaper and hence an increase in consumer spending and economic progress.

 

Figure 5: Source: The Reserve Bank of Australia (RBA)

Moreover, the rise in consumer spending has resulted from a reduction in savings. The rate of saving has been slowly sliding lower in the past few years, permitting the individuals to increase their spending at a faster rate than the gains in the earnings.  The increases in population, as well as increase in incomes of persons, have also caused a growth in consumer expenditure (Robinson et al., 2015, p.12).

Figure 6: AS-AD Model

The impact of consumer spending on the Australian economy is illustrated in figure six above. The rise in household consumption causes the aggregate demand to grow. The expansion of the total demand is exhibited by the change in the aggregate demand curve rightward from AD₀ to AD₁. The change makes the real Gross Domestic Product increase, that is, change from Y0 to Y1 and also a rise in the overall prices in the economy from P0 to P1. As the economy grows, the employment rate will increase and further act as a boost to economic expansion.

Residential Property Boom

The investment in residential property has improved sharply in the past three to four years. The contraction is providing support to economic progress and at the same time addressing the undersupply of housing units in some areas. In the 2015-16 trading period, the investments in dwelling sector grew by 10.5% (Australian Government, 2017). This growth is said to be the highest recorded since the early 2000s.

Real GDP Per Capita

 

Figure 7: Source: The Government of Australia

After a decade of dull expansion in house construction, the real estate market encountered a substantial increase in housing investments since 2012. A considerable portion of this investment has been recorded in medium to high-density sector of the market.

The rise in housing investment has been driven by stronger demand for accommodation units being experienced in the main cities of Australia such as Melbourne and Sydney. The increase in investor activity especially from foreign countries such as China is among the factors that are driving the demand for houses in Australian real estate market (McLaren et al., 2016, p.40). The investors, both from Australia and international market, have been encouraged by some of the government policies like the tax concessions on the property as well as the negative gearing arrangements. In fact, there are incidences of speculative demand where the investors purchase dwellings and retain them, anticipating higher profits when the prices shoot up. This activity has amplified the demand for houses.

Moreover, increased access to credits and reduced cost of borrowing for homes have played a major in increasing the demand for homes. Other factors that have facilitated the demand for dwellings incorporate the growth in population and rise in the incomes of the Australians (Haslam McKenzie & Rowley, 2013, p.380). As a result of stronger demand for houses, the prices of homes have increased significantly and thus an increase in the housing investment. As more houses are being constructed, job creation has improved a situation that is contributing to economic growth and development.

Export Earnings

The exports of Australia are significantly affected by Australia’s competitiveness in the foreign market as well as trends in the international demand (Robinson et al., 2015, p.13). As a result, the export incomes often fluctuate from year to year depending on the circumstances in the foreign market. However, it should be noted that the exports contribute substantially to the economic growth of Australia.

The mining sector has played a vital role in protecting the economy of Australia from the impacts of harsh economic downturns encountered in the United States, Europe and other regions in the world during after Great Depression of 2009. The booms in energy and minerals have been essential to economic growth in Australia. Over the years, the increase in income from the mining sector has been driven by the surge in demand energy and for raw materials particular from India and China during their rapid economic growth periods. In 2015, mining industry contributed approximately 8.5% of Australia’s Gross Domestic Product and about 2% of the total employment (The Conversation, 2015).

 

Figure 8: Source: The Conversation

It is clear that the iron ore still plays a major role in Australia’s exports despite fluctuations from year to year. Also, the Liquefied Natural Gas (LNG) exports have been expanding gradually. The earnings from this resource are expected to grow due to the investments that are being initiated by the government. The long-term contracts Australia has entered into with major Asian trading partners like Japan, China, and South Korea to supply gas will cause the earning exports from the LNG to increase and thus contribute substantially to economic progress (The Conversation, 2015).

The Level of Unemployment

Australia’s robust economic growth has also been supported by a change in the direction of the exports in the international market. In response to faster economic expansion in emerging Asia, Australia has continued to shift its trade from traditional destinations like Europe and United States towards Asia. In the recent years, exports to China have overtaken other industrialized countries such as Japan and the United States (Australian Trade and Investment Commission, 2017). China’s growth in demand for Australian resource exports has been driven by its rapid urbanization and industrialization.  

 

Figure 9: Source: Australian Trade and Investment Commission

 The diversion of exports towards Asian countries like China has contributed to strong economic growth in Australia in two ways. Foremost, rapid economic growth in Asia has resulted in high demand for Australia’s exports particular iron ore and hence continued economic expansion. Furthermore, Australia has been in a position to minimize economic shocks that often result from the United States and Europe.

A conducive environment for businesses plays a critical role in enhancing economic growth and development of a country (Nils Gottfries; Palgrave Macmillan., 2013, p.58). Australia’s political firmness, appropriate governance frameworks, and transparent regulatory arrangement provide the business community the required support for growth and prosperity.

Australia has a strong rule of law which is essential to protecting the property rights as well as minimizing the levels of corruption in the economy. A stable political environment in this country is important to the businesses. When a country is encountering political instabilities characterized by civil clashes, wars, and coups, the economy suffers to a great extent. In such environment, the property is destroyed, and investors relocate to other countries leading to a rise in unemployment and economic downturn (Sloman et al., 2015, p.51). Therefore, the contribution of political stability to the economic growth of Australia cannot be overlooked.

When it comes to economic freedom, Australia is ranked five global (Australian Trade and Investment Commission, 2017). This scenario shows that Australia is providing the multinationals and other businesses secure and a safe business environment for conducting sales. Besides, the procedure involved in starting and operating a business in Australia has relatively straightforward and easy. These factors are playing an important role in attracting foreign direct investments in Australia.

The government often makes use of strategies to influence the business in the country. The selection of plans to be used in stabilizing economic growth should be considered carefully to avoid instances of misdiagnosing the economy. In Australia, the government has established sound regulatory frameworks and well-built economic fundamentals. The Australia’s triple-A credit rating is one of the signals that the government has sufficient policies in place.  The AAA rating has assisted Australia considerably in reducing the costs associated with public debts. This rating is also making it easier for Australia to obtain loans for financing various economic projects.

Low and moderately stable inflation is also as a result of prudent economic management. For the past five years, Australia inflation has not gone above 2.5 percent. The highest level was recorded in 2014, that is, 2.49 percent while the lowest rate was registered in 2016, 1.28 percent (The World Bank, 2017).

Factors behind Australia’s Economic Growth

 

Figure 10: Source: The World Bank

Low and relatively stable inflation has contributed to economic growth of Australia in many ways. For example, low inflation is a signal that the interest rates will be low to the advantage of both businesses and consumers. Low cost of borrowing has enabled Australians to increase their consumption levels. The surging demand for products such as homes partially results from low-interest rates (Australian Trade and Investment Commission, 2017). The high levels of consumption of provided the businesses with sufficient demand for the products. Businesses have therefore expanded the production and are hiring more people. With low-interest rates, the companies are in a position to secure funds for expanding their operations.

The government of Australia is continually putting in place several schemes intended to spur economic growth and development. For example, the government is has been making trade agreements with countries like Singapore and India. Such plans are vital increasing the export earnings of the country and also improve the balance of trade (Department of Foreign Affairs and Trade, 2017). Job creation is also another benefit of entering into trade agreements as the Australian companies will hire more people as the demand for their products increases.

In the recent years, the government has made changes to the taxation system to encourage investments. For instance, the government has reduced the corporate tax of small business from 28.5 percent to 27.5 percent. Furthermore, the government has since made proposals to reduce the corporate tax for all companies from 30 % to 25 % (Australian Taxation Office, 2016). The expansionary fiscal policies are going to play a significant role in steering the economy of Australia to prosperity.

In the long run, economic development is steered by influences that cause an increase in the long run aggregate supply. If there is no an improvement in the long run aggregate supply, then expansion in the total demand will be merely inflationary (Hubbard et al., 2016, p.67). The government of Australia is equally working on the variables meant to accelerate the long run aggregate supply. For instance, the government is investing to improve key infrastructures such as roads, electricity, and ports. The investment in education, research and development will help to improve labor productivity.

Figure 11: increase in the aggregate supply

Investment in infrastructure and education will result in a reduction in the cost of production as well as improvement in labor productivity. Consequently, the aggregate supply will increase as shown by the change in the aggregate supply curve from SRAS1 to SRAS2. This change will cause the real Gross Domestic Product to increase and a fall in the general prices.

Conclusion

In the last five years, Australia’s economic growth has been remarkable. The country has managed to maintain the annual economic growth of at least 2 percent. The real GDP per capita is increasing which is an indication of improvement in the living standards of Australia and economic development. Other economic variables like inflation and unemployment are also fairing on well. Unemployment declined in 2016 and inflation has been low and relatively stable. This economic progress has been influenced a multiple of factors. For instance, the boom in the housing market has generated more income and employment to the Australians. Increase in consumer consumption due to low inflation and cost of borrowing among other factors is also contributing to economic growth. Finally, the government is continually putting measures in place to ensure continued economic progress. Some of these plans include investment in education and vital infrastructure and forming trade agreements with other nations to boost export earnings.

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