Current State Of The Australian Economy And Comparison With August 2016

Current Economic Performance of Australia

 The study highlights on the current economic performance of Australia. The Australian economy is one of the biggest mixed market nations in the globe. It has been ranked as the 12^th biggest national economy as measured by nominal GDP and 19^th largest as accounted by purchasing power parity (PPP) (Heijdra, 2017). This nation is mainly governed by the service sector that comprises of 73% of the gross domestic product (GDP). In addition, this nation is hugely reliant on the mining as well as the agricultural sector as compared to the other developed nations. The Australian Securities exchange is the biggest stock exchange in the nation and ranks 14th in the globe as measured by market capitalization (Tinkler and Woods 2013). The economic state of Australia is also compared between the second quarter (Q2) of year 2016 and first quarter (Q1) of year 2017.  Moreover, this study also elucidates on the major issues that this nation faces over the next 12 months.

The present economic health of Australia has been determined with the help of various macroeconomic indicators including GDP growth rate, inflation, unemployment and trade. The transition of Australia to post-mining economy’s boom prolongs to be sluggish and difficult. It is forecasted that although the lower currency rates will help the nation to recover from the sluggish growth, negative shocks and structural change will influence the progress of the economy (Mankiw 2014). The GDP growth rate of the economy has been volatile and is forecasted to grow to an average rate of 2.5% over the next few years. Even the employment growth rate increases in this year and is predicted to rise at an average rate of around 1% in future. In addition, unemployment rate declined by about 0.2% points in 2017 (Burda and Wyplosz 2013). However, conditions of the labor market in Australia remains mixed in the present situation.

GDP- GDP is considered as the primary macroeconomic indicators that are used to measure the economic performance of the country (Baker et al. 2016). In the first quarter of 2017, the GDP growth rate of Australia records to around 1.7%. Household consumption expands to 0.5% that adds to 0.3% growth rate of GDP in 2017. In addition, government consumption also grows by about 0.2% in Q1of 2017. The overall investment contributes to 0.4% to the GDP growth rate while savings of the households reduces to 4.7%. The government pursues to target on implementing proper fiscal strategy for improving growth.

Unemployment- The rate of unemployment estimates the total number of unemployed laborers with respect to total population (Baumohl 2012). In Q1 of 2017, the participation rate of the labor market increases to 65.1% and hence the unemployment rate declines to 5.6%. However, the government target to flexible the labor markets and change the tax structure in order to reduce unemployment rate.

Inflation- Inflation signifies the rate at which the prices of the commodities increase leading to decline in purchasing power. Consumer price Index (CPI) index is basically used by Australian Bureau of Statistics (ABS) for measuring inflation rate of the country (Wray 2015). The rate of inflation of this economy records to 0.64%, which reflects increase in CPI of 2.1 % in the Q1 of 2017. However, RBA targets to cut interest rates in order to stabilize inflation.

Discussion

Trade- Australia’s terms of trade (TOT) rises to 109.7 points in Q1 of 2017. This nation records surplus in trade for few years owing to increase in exports as well to imports (Morrison 2012). Moreover, it  is predicted that net export of Australia will improve with export of energy and resource value.

The GDP growth rate of this economy expands to 0.3% in the Q1 of 2017 in comparison with the Q2of 2016 that records to around 0.5%. Domestic demand for the products makes positive contributions and inventory changes were unable to counterbalance net trade and investment decline.  In addition, final consumption spending increases to 0.6% in this quarter (Klinger and Rothe 2012). Meanwhile, the gross capital formation and public investment reduced by 0.6% and 2.7% respectively. Furthermore, change in inventories also rises to AUD 2069 million that is mainly driven by mining sector and retail trade.

Graph 1:  Comparing GDP growth rate of Australia between the year 2016 and 2017

Source: (Authors creation)

The rate of unemployment in Australia in Q1 2017 inches down to 5.6% as compared to the Q2 of 2016 that accounted to 5.7%. Increase in part time job leads to decline in unemployment rate in this quarter (Boons et al. 2013). As a result, total number of employed persons rises to near about 26,200 in this July 2017. The rate of participation remained stable over these two years at 64.9%. Though the unemployment rate reduced in this quarter, it remains above the target level of 5%. Some of the major causes that raises this rate in Australia are:

• Reduction in spending on infrastructure during difficult economic situations shifts workers from the nation.
• Advancement of technology moves some workers out of job.
• Recession also increased the rate of unemployment in this nation.

Graph 2: Australia’s unemployment rate in Q2 of 2016 and Q1 of 2017

Source: (Authors creation)

In the Q2 of 2016, inflation rate recorded to 1.0% that was lower than the Q1 of 2017 that accounts to 1.9%. In Q1 of 2017, the consumer prices of this nation rise owing to increase in prices of foods and beverages, transport, non-alcoholic beverages, housing and education sector.

Graph 3: Australia’s inflation rate in the year 2016 and 2017

Source: (Authors creation)

 Australia’s Terms of Trade (TOT) increases by about 109.7 points in the Q1 of 2017 due to increase in export prices and fall in import prices. Export prices of the commodities contribute to $24.21 billion whereas services import contributes to $6.27billion in the balance of trade in this quarter. In the Q2 of 2016, the value of Australian trade accounted to 89.9 index points that was quite low as compared to current year.

Graph 4: Australia’s trade in Q2 of 2016 and Q1 of 2017

Source: (Authors creation)

Three main issues that this nation might face over the next 12 months are:

• Ageing population might put noteworthy pressures on the overall spending of the consumers mainly in the areas such as persons health, aged care (Dijkstra et al. 2013). Escalating cost of health that associates with enhancement of technologies such as medicines and good quality service required by the customers increases fiscal pressures.
• Tax system imposed by the Australian government will also influence the economy of the nation over the next 12 months. Tax systems of Australia play a crucial role in the overall productivity and nation competitiveness (Evans and Honkapohja 2012). Implementation of modern tax system is the major issue that the economy faces in future while maintaining living standards of the people in Australia. As taxation settings influence the incentives for getting job, improper settings will decrease workforce participation rate.
• Infrastructure and investment in capital also affects the Australian economy over the next months. With the increase in total population, this economy needs large infrastructure investment as well as capacity building for longer term (Hatfield-Dodds et al. 2015). However, more investment is required for development of roads, rails etc. However, as Australian economy faces huge competition from the other countries in terms of limited capital availability for big projects, less capital investment on infrastructure will adversely influence the Australian economy.

Conclusion

All the indicators show that the present health of the economy improved in Q1 of 2017 as compared to Q2 of 2016. The growth of the economy is forecasted to rise gradually by around 3% by 2018. It is predicted that RBA will start expanding the rate of policy towards the ending of this year, as GDP improves and inflation rate rises to 2-3% target band. Moreover, as monetary policy adopted by the RBA remains supportive at policy rate 1.5% since Q2 2016, this aids the economy to progress at faster rate. Moreover, the major issues that the economy will face in the next 12 months will also influence the growth of the nation.

References

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