Contributions to GDP by Sector
Discuss about the Structural Change In The Australian Economy.
The goods and services produced in a nation in a given year is measured with the Gross Domestic Product. It is the monetary value of all the produced goods and services in a nation. In order to find out market values of goods and services quantity of produced goods and services are multiplied with respective market prices. The market price can either be current year market price or market price of a pre-determined base year. GDP presented with current year market price is called nominal GDP presented with base year market price is known as real GDP. GDP is considered as a single composite measure of well-being (Uribe and Schmitt-Grohé 2017). An overtime increase in GDP indicates growth of a nation. Rate of change in GDP is a proxy measure of economic growth.
The paper examines trend in Australian GDP in the last five years. GDP of Australia is dominated by service sector with contribution of service sector being more than 60% in GDP (Rieber 2017). After discussing trend growth rate, the paper tries to find possible factors explaining the concerned trend. Government policy often plays a key role in determining economic growth. In this context, policies undertaken by Australian government to promote growth is discussed.
Primary, secondary and tertiary sectors are the three main contributor of gross domestic product. For a developed economy like Australia, service sector has the dominating share in GDP. The service sector contributed nearly 69.4% of GDP (rba.gov.au 2018). Among different sub sectors in the service sector, the most vital sector is finance and insurance. Four big banks of Australia namely Commonwealth Bank, Westpac, ANZ and NAB belong to the list of world’s fifty safest bank. After finance and insurance, the other important services of Australia include professional and technical service, education, tourism, ownership dwellings, media and communication, tourism and such others. Secondary of industrial sector having a contribution of 26.6% is the second largest contributor of GDP (Nielsen 2017). Among different industries, the two major industries of Australia economy are construction and mining. Mining industry alone contributes 8.8% of GDP with more than 50% of the coal exported to different nations. The contribution of manufacturing is 5.9%. Followed by mining, the next important industry is construction with the share GDP being 7.7% (Yu et al. 2017). The smallest contribution in GDP has come from agriculture. Contribution of agriculture in Australian GDP is only 4%. Despite having relatively small contribution in GDP, the sector is important both for the internal and external economy.
Trend in GDP Over the Past Five Years
The figure below shows the GDP of Australia in the last five years. GDP being a representative measure of economy’s aggregate output, analysis of GDP over the last five years reveals the economic performance of Australia.
The trend in GDP shows a sharp fall after 2013. GDP in 2013 was recorded as 1567.18 USD billions. In 2014, GDP declined to 1459.6 in 2014. The declining trend in GDP was followed by a fall in GDP in the next two consecutive years of 2015 and 2016. GDP declined to 1204.62 USD billion in 2016 (Anderson 2017). The sudden decline in GDP is quite surprising for a nation like Australia, as it experienced long period of a stable and rising GDP. Dynamics of the trend in GDP can be understood from the trend growth rate GDP.
Trend in GDP growth rate in the last five years showed a considerable fluctuation in the GDP growth rate. The fluctuation point represents period of peak or trough. After 2016, the economy experienced a trough, which pushes the economy towards a recession. The economy recovers slightly in July 2017, with rate of growth being around 2%. In the last quarter of 2017, the accounted GDP growth rate was 2.9 percent. In the beginning of 2018, economic growth fell to 2.4% (tradingeconomics.com 2018).
The recent growth rate of Australia is below the estimated growth rate. The economy is now facing some major growth constraints. The falling price of exported commodities in the world market is one of the major factors driving down growth of the nation. Energy sector is one important contributor of Australia GDP growth. Demand for energy and resource from Asia particularly that would be derived from China has slowed down. Household consumption, public and private investment and support from government expenditure have tried to recover economic growth of Australia (abc.net.au 2017). Mining and construction on the other hand continued to experience a downturn in investment. In the service sector, growth of financial service has remained stagnant while social assistance and health care service has recorded an increase.
Australia over the last five years is consistently accounting a slow growth rate. The growth rate of Australia has hardly reached to 3% and remained mostly around 2%. Some positive sign in economic growth has been observed from increases in public investment and slow recovery of household consumption. Two of the most important industries in Australia are construction and mining. Both the sectors are now going through a slump. Mining has long been a major driving force for economic growth of Australia and helped the nation to maintain its strong growth position. The collapse in global commodity prices has however taken the Australia to a costly readjustment. The recent slowdown in China’s growth phase is another factor that led the economy towards a transition (Taylor and Tyers 2017). The turmoil condition in housing market was contributed from an instability in the housing price. Australia’s trade balance has worsened from a decline in export along with an increase in import. The decline in export mainly resulted from a gain in AUD/USD exchange rate. The average wage growth in Australia is below the expected growth rate. As a consequence of slow wage growth, household spending lowers (Bishop and Cassidy 2017). The low inflationary pressure attributed from low wage growth and a historically low cash rate further slows down economic growth.
Possible Factors Affecting Trend
Economic growth is defined as the rate at which output or economic activity expands overtime. Aggregate output and economic activity is measured in terms of goods and services produced in the economy. As the value of goods and services are quantified with the aggregate measure of GDP, rate of change in GDP is taken as a representative measure of economic growth. The percentage change in GDP is computed to measure economic growth of a nation (Mankiw and Reis 2018). The GDP might shows a steady increase but rate of change in GDP growth rate might be fluctuating following fluctuation in economic activities. Fluctuation in economic growth is associated with different phases of business cycle.
Government by influencing economic activity influences economic growth. Fiscal and monetary policy are the two government tools that can alter economic growth. In times of recession, policies taken by government are expansionary in nature. Under expansionary fiscal policy government either cuts the tax rate or provides spending stimulus. This by raising aggregate demand stimulates economic growth. The monetary policy works with the adjustment through bank rate. With expansionary monetary policy, central bank cuts the bank rate. With ease of lending investment increases (Walsh 2017). During high inflation, contractionary policies are taken by government. The contractionary fiscal policy works either through an increase in tax rate or through a reduction in government spending. The contractionary monetary policy is undertaken increasing the bank rate. This tightens the money market and reduce investment. The effectiveness of fiscal and monetary policy however depends on the internal structure of the economy and corresponding multiplier effect.
Support from government and stable policy framework s one factor responsible for a sustainable economic growth rate of Australia. Government of Australia always focuses on designing a robust policy creating favorable condition for economic growth (Fatás and Summers 2017). Despite the fact that, the economy in recent years is experiencing a slowdown in its growth rate, growth however is still higher than many other developed countries of the world.
The government policy framework has a significant contribution towards this end. Both fiscal and monetary policy are used in the nation to maintain a stable internal economic structure. These policies provide the economy necessary stimulus to overcome sudden shock or recessionary pressure. The policy of automatic stabilization is used to make timely adjustment with the pace of economic activity. One prominent example of stable policy framework in Australia as compared to the rest of the world is in time of Global financial crisis (Hochrainer-Stigle et al. 2017) The sub-prime mortgage crisis of United State in 2008 had an adverse effect on most of the developed economies of world. Australia however had remained relatively less reluctant following a string financial sector and adaption of stabilization policy by government. Economic policies of the nation designed in such a way that support interest of small and medium sized enterprises. Australia is a highly liberalized nation supporting expansion of foreign trade and investment. Following liberalization policy of the government, there is a considerable flow of foreign funds. A primary driver of growth is productivity. Presence of high unemployment, productivity of the economy goes down along with a decline in growth rate. Policies are taken to generate considerable growth rate. With the objective of reducing employment to increase productivity government has created more than 300,000 new jobs in the nation last year (Dizioli et al. 2017). Attention has also been given on raising skills of the labor for to make them trained with advanced technology.
Government Policy and Economic Growth
Government follows both medium and long-term fiscal strategy. Objective of the medium terms fiscal strategy is to achieve an economic growth through sensible government expenditure and a growth in government revenue as outcome of a good policy rather than raising tax. The medium terms fiscal strategy of government has four components. First, directing government expenditure towards productive investment to raise productivity and employment growth. Second, maintaining a strong fiscal position by cutting unnecessary government spending and shifting economic resources towards private sector (Kataryniuk and Vallés 2017). During this phase, the GDP to debt ratio gradually falls resulting in economic stabilization and contributing to an overtime decline in net debt. Third, support government revenue growth by adapting policies that drive up earning along with economic growth. Fourth, improvement of net financial worth to strengthen balance sheet. This version of fiscal strategy though implemented in 2016 but it was in place since global financial crisis.
In the spending structure, government follows the strategy of deficit exit. The strategy refers to the policy of holding government expenditure to a nominal rate of 2% until surplus is achieved. In order to finance deficit, government makes time-to-time alteration of existing tax rates. The counter cyclical fiscal policy has conducted to achieve the twin objectives of long-term economic growth along with economic stability. There is strong link between cyclical stability and fiscal policy framework. The contribution of counter cyclical fiscal policy in Australia cannot be overlooked. A stable economy by encouraging investment contributes to an increase in growth potential of the nation. Stability in fiscal policy also has positive consequences on consumption smoothing leading to an increase in social and individual welfare. A counter cyclical fiscal policy also has the potential benefits in terms of reducing exposure to low income groups to economic recession.
Australia is projected to grow at a faster pace in the coming years. Investment other than mining and housing construction will gain momentum contributing to an upsurge in growth. Export is expected to boost in response to increasing capacity of new resource sector. Projection has been made that central bank will reduce the cash rate in the second half of 2018. The tight monetary policy in combination with other prudential measures will stabilize the housing market. Fiscal position of the government is sound and it is expected to close the budget deficit soon (Collins 2017). With an economic downturn, fiscal policy of the government should remain active and protect the interest of the most vulnerable groups of the society.
Fiscal and Monetary Policy
The relative strong position in terms and resource based export growth have contributed to an increases in income and a resulted increase in tax revenues. There is a gloomy outlook for mining investment. The positive influence on growth has been attributed from an increases in capacity utilization and increased business confidence. This point toward economic expansion outside housing and mining. The labor market has strengthened with employment growth arising from increasing number of job vacancies (Alexander, Rutherford and Floyd 2018). The growing underemployment along with a stable wage and inflation growth. The slow wage growth along with indebtedness of household show signs of cooling house market. This will keep consumer spending relatively soft. Still growth in household spending has remained subdued.
The monetary policy Reserve Bank of Australia remains supportive with cash rate remained at the level of 1.5 percent third quarter of 2016. Tight monetary policy can be employed from the middle of 2018 as wage growth and inflation picked up. The ratio of public debt to GDP though has risen but it still remains low and is expected to decrease following budgetary objective of the government to reduce deficit to a significantly low level in the upcoming years (uow.edu.au 2017). A favorable business environment and policy measures taken to counter social exclusion will facilitate benefit from broad economic growth and trade. Production of liquefied natural gas contributes add to export growth. The rebalance of economic state through increasing investment in non-mining sector will stimulate overall economic activity. Following a moderate slowdown in global economic growth especially that of China will drag economic growth slightly in 2019.
Conclusion
Australia despite being one of most stable nation in world is facing some economic fluctuation in recent years. The finding from last five years GDP and growth indicates a below average growth rate for the decade. Collapse of global commodity prices, slow growth of China, slump in construction and mining and worsening condition of trade balance are the some of the factors responsible for economic slump. Government of a nation is always in a position to influence economic growth. Australia received significant support from Commonwealth and State government to promote growth. Government makes investment to improve infrastructure of a nation. Existence of high unemployment dragged economic growth. Government therefore takes policies to generate employment along with enhancing education and skills. While raising expenditure, government also focuses on maintaining a balance in budget. In order to support economic growth RBA has kept the official cash rate to a considerable low level. The slow growth in Australia however is unlikely to be converted to a recession. With export expansion from new resource sectors and growth of non-mining and different service industries Australia is expected to recover the slow growth soon ensuring a stable growth in future.
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