Overview of Gross Domestic Product
Discuss about the Trend Growth Rate Of Australia Over The Past Five Years.
Macroeconomic performance of a nation depends on several indicators. Gross Domestic Product is considered as one composite measure of overall output of an economy. It gives an overview overall performance and considered as a gross index of measuring social and economic well-being (Mankiw 2014). The economic growth of a nation is measured as a percentage change in GDP. In this essay, the trend growth rate of Australia over the past five years has been discussed. Australia is a developed nation accounting a historically stable growth rate for a considerable long period. Like most other developed nation, service sector is the biggest contributor of GDP followed by industrial and agricultural sector. In terms of GDP, Australia ranked 12th in the world. Australia successfully maintained its strong position in the international market even in the phase of global financial crisis of 2008. The economy of Australia remained relatively less harmed during global recessionary shocks. Recently, the economy however is going through a continuous phase of economic downturn. The recent slowdown in economic growth has resulted from a number of internal and external factors. Among the internal factors instability in housing market and continuous decline in mining investment are the two primary factors (Thorpe and Leitao 2014). External forces include deteriorating terms of trade flowing slowing growth in China and depreciation of Australian dollar. The slow growth however is less likely to put the nation in any future economic recession because of faster growth in service and non-mining sectors. The paper aims to provide important insight about past and future prospect economic growth of Australia.
Australia is counted as one of the fastest growing nations in the developed world. The recent growth rate of Australia is however below the 50 years’ average growth rate of 3.2% or even lower than the average growth rate of 20th century. The comfort news for Australia is that there are developed nations in the world that records a slower growth rate than that Australia does and also faced with problems like increasing level of national debt, burden of high taxation, large deficit in government budget and excessive legislation.
Australia is a modern having a large mix of different industries and services. The different industries make enough contribution in terms of value added to maintain a stable growth track. The figure below shows existing economic sectors in Australia along with their respective share.
Trends in Economic Growth of Australia
Like most other developed nations, Australia do have a mixed service dominated economies. The contribution of manufacturing in GDP is projected to fall to 5%. The share of manufacturing in early 1960s was almost 29%. The rising standard of living however confirms that manufacturing has replaced by some other wealth generating nations (Powell, Ryan and Lamb 2017). The two figure below compares growth contribution of different sectors in most recent year with that of the last five years.
The goods producing industries contributing to economic growth include mining and construction. In the last five years, most losses in output has been realized in manufacturing sector. Mining though has experienced a drastic fall in prices but volume of output from the sector continues to grow. In the past five years, more than 70% of GDP was contributed by different service industries.
The last recorded growth rate of Australia is 2.4%. The growth rate is below the expected growth rate and that of market consensus rate. The economy has experienced a decline in the growth rate since third quarter of 2016. Growth however slightly recovered since 2017. The positive outlook toward consumption spending helps to make an upward revision of growth. Downward pressure on growth is coming from contraction of construction sectors and a downturn in net export. Household consumption had recorded a growth rate of 0.6 percentage (tradingeconomics.com 2018). Household consumption is one of important factor that contributes to Australian GDP. Besides household consumption the other two components of GDP include government spending and investment. Government spending in recent year rose by 0.3 percentage point. Public and private investment together constitute gross investment. Public investment recorded an increase by 0.2 percent. The private investment grew by 0.1 percent in forms of spending on machinery and equipment (Powell, Ryan and Lamb 2017). In contrast to growth of some components of GDP, economic growth was dragged by poor performance of construction sector and worsening condition of net export.
The private investment went down by 2.2 percent leading to a contraction of gross fixed capital formation by 1.2 percent. The non-dwelling construction investment was lowered by 8.0 percent. The decline in dwelling investment is however smaller than that of the non-dwelling investment. There was shift in assets from non-profitable public sector to a profitable private sector one. Total public investment rose by 2.9%. Of this investment, local and state government accounted for 1.9 percent. Spending on machinery and equipment was increased by 3.3 percent. Along with this, total inventory investment rose by AUD 14 million as against a recorded decline in investment by AUD 93 million in the previous quarter (tradingeconomics.com 2018). The inventor investment grew mainly due to an increase in mining inventories. The growth of mining inventories however was outweighed by a decline in inventories in farm and retail trade. In all, household expenditure has grown by 1.1 percent. In the increased household spending, health expenditure occupies a significant share. The health expenses rose by 3.4 percent. This was followed by an increase in spending on cafes and restaurant by 2.9 percent, recreation, and culture by 2 percent. Spending on the other hand was dropped for gas and fuels, electricity and food. Among these, the biggest drop has been observed for fuel spending accounting a decline by 3.1 percent as against a 0.7 percent decline in food (tradingeconomics.com 2018). Total government expenditure has documented an increase by 1.7 percent. The growth in government spending gas contributed from a growth of national government by 3.1 percent and that of local and state government by 1.7 percent.
Economic Sectors in Australia
Net export is another important factor that contributes to GDP outlook of a nation. net export is obtained as value of export less the value of import. In recent years, following an increase in value of import along with a decline in value of export put a downward pressure on net export and hence, on GDP growth. Both rural and non-rural export marked a steady decline. Non-rural export declined by a lesser extent as compared to rural export. As against the fall in export, import of both consumption and intermediary goods increased with a respective growth percentage of 4.7 and 4.1. The service export however went down by 2.7 percent. Coming to sector wise growth, overall mining output rose by 1.3 percent. The small expansion of mining industry is mainly contributed from coal mining and iron ore mining. The oil and gas extraction sector was contracted by 1.8 percent. Construction sector expanded only by 0.3 percent. Construction of building rose by 0.9 percent. In the service industry, telecommunication accounted a growth rate of 3.5 percent. Financial service though contributed a significant portion of GDP but in recent years had recorded a slow growth rate with financial and insurance service grew only by 0.2 percent. The growing attention on private and public health spending, healthcare and social assistance system advanced by 1.9 percent (Kramer 2016). The primary sector including fishery, forestry and agriculture contracted by 2.7 percent. The manufacturing output declined by 1 percent. Following a fall in water supply and associated water services, a marked declined has been observed in waste and water services. The electricity and gas supply on contracted by 0.2 percent and 1.1 percent respectively.
Over the past five years, Australia thus has accounted a low to moderate growth rate with rate of growth moving around 2 to 3 percent. Expansion of public investment and consumption spending makes some positive contribution to economic growth. This however has more than offset by tight condition in housing market and a drastic fall in goods export along with an increase in volume of import. With a persistent decline in real GDP growth rate, output has gone below the potential output. Australia now accounted a per capita growth rate of only 0.8%. The figure forbore capita GDP growth is much lower than other developed nations. The potential threat on the domestic economy include a lower average price of houses, decline in construction growth, a declining and uncertain growth of consumption spending, decline in mining investment and a depreciation of Australian dollar. Mining and construction are the two pillar industries of Australia. The fast growth of China benefitted Australia from an increase in export demand of mineral used as primary raw materials in different industries of China (Kramer 2016). The recent slowdown of China’s growth worsens terms of trade for Australia indicating an end of mining boom. The mining sector is expected to experience a decline in investment by 15% in the next few years. The fast growth of construction sector had significant contribution in Australia’s growth. With an unstable condition of housing market, the construction sector has accounted a contraction. The lower inflation expectation hurt the expected wage growth. Even the relatively strong Australian dollar failed to revise inflation expectation.
Growth Contribution of Different Sectors
Despite the slow economic growth there is still hope that Australian economy will be successful in avoiding any recessionary pressure. The declining phase of mining investment has reached close to its end. Five years ago, mining investment in Australia accelerated to almost 7% of GDP and then has started falling. The investment has declined at a rate of 1.5 percent per annum. The pace of declining has however lowered from 1.5% of GDP to 2% of GDP and now it is 0.3% of GDP reaching almost to bottom line (theconversation.com 2018).
Investment has been booming in non-mining sectors. The business investment declined by 3% this year but is expected to increases by the same magnitude in 2018-19 (Rahman, Shahbaz and Farooq2015). The non-mining investment was at its best in 2013. The estimate for non-mining investment excluding the mining sector revealed a gain in investment by 8%.
The steady increases in public investment reflects an increase in infrastructural spending. The trade balance is likely to improve following a growth in global demand of resources and growth of service export especially for higher education and tourism. Additionally, rising profit of some companies provide a positive direction to business investment (Thorpe and Leitao 2014). These factors are expected to overcome the slowing growth pace soon.
Continuous slow economic growth hinders future growth prospects. Slow growth leading to contraction of productive activities increases unemployment in the nation Government needs to take policy initiatives to ensure a stable growth of the economy. The framework of monetary and fiscal policy can be used promote growth. Australian government uses both monetary and fiscal policy to stabilize economic growth. Government realizes that the nation is currently trapped in a situation of weak productivity, low wage growth, low inflation and experienced a lower than expected growth rate. The Reserve Bank of Australia designs and executes monetary policy. Using the instrument of interest rate policymakers maintain the internal balance of economy with a low inflation and low unemployment. The RBA kept a hard interest rate after global financial crisis of 2008 and put back the interest rate to the previous level once the recessionary shock overs. In response to weak mining driven growth, RBA began to cut the cash rate reaching to a historically low level of 2.5 percent in 2013. In 2015 again, RBA cut its cash rate and this time cash rate reached to a level as low as 1.5 percent. In the past few years, cash rate thus recorded a total fall of 3.75 percent since November 2011. Despite easing monetary policy, the economy continued to record a below trend growth rate. This reflects the ineffectiveness of monetary policy easing to restore economic growth. An alternative policy measure is to use the instrument of fiscal policy (Mankiw 2014). Government has designed a medium term fiscal strategy to maintain a surplus in budget along the objective of economic growth. Fiscal policy tools works using tools of government spending and taxes. In order to increase productivity government has raise its spending on human capital. To strengthen the human capital base government has raised its spending on education (theconversation.com 2018). To maintain a budget surplus government has increase the tax rate that has detrimental effect on productivity. However, while implementing taxes government should shift the tax burden the areas that are less directly related to productivity. Additionally, government needs to raise spending on innovation and advanced technology to enhance productivity.
The essay summarizes Australian growth history in the last five years. The Australian economy is well-known for maintaining a steady growth rate over a long period. Recently, the economic growth in Austral has slowed down with a decline in investment in dwelling and non-dwelling housing and mining. The worsening terms of trade following a depreciation of Australian dollar and decline demand exported goods dragged the economy’s growth rate. Despite period of slow growth, the economy is expected to avoid future recessionary pressure. Slowing mining investment has almost come to its last stage. Investment in non-mining sector on the other hand is increasing making a positive contribution to growth. The public investment has increased improving the infrastructure of the economy. Government uses monetary and fiscal instrument to revive economic growth. The policy of monetary easing however is unable to bring back the economic growth to its earlier level. Under fiscal policy measures government raise its spending in different areas to improve productivity. More measures however needs to be taken the ensure a moderate and stable growth in future.
References
Australia GDP Growth Rate | 1959-2018 | Data | Chart | Calendar | Forecast. (2018). Retrieved from https://tradingeconomics.com/australia/gdp-growth
Kramer, T., 2016. Economic issues arising from the mining boom. Ecodate, 30(4), p.3.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.
Powell, R., Ryan, M. and Lamb, S., 2017. The impact of the mining boom on the dining industry in Western Australia. Australasian Journal of Regional Studies, 23(2), p.243.
Rahman, M.M., Shahbaz, M. and Farooq, A., 2015. Financial development, international trade, and economic growth in Australia: new evidence from multivariate framework analysis. Journal of Asia-Pacific Business, 16(1), pp.21-43.
Ruthven, P. (2018). Australia’s Growth Industries : Media Centre. Retrieved from https://www.ibisworld.com.au/media/2016/08/10/australias-growth-industries/
The Conversation. (2018). Does government spending on education promote economic growth?. [online] Available at: https://theconversation.com/does-government-spending-on-education-promote-economic-growth-60229 [Accessed 18 May 2018].
Thorpe, M. and Leitão, N.C., 2014. Economic growth in Australia: Globalisation, trade and foreign direct investment. Global Business and Economics Review, 16(1), pp.75-86.
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