Annual GDP growth of Australia

In 2017, the Sydney Morning Herald, a leading newspaper of Australia, published an article stating that various economists have provided their different overviews regarding the economic performance of Australia in 2017 through considering economic activities of previous year (Meyer 2018). According to some economists, Australia’s gross domestic product (GDP) is expected to increase in coming year due to increasing interest rates of the Reserve Bank of Australia (RBA). However, some other economists have stated that the real GDP growth of Australia did not change between 2016 and 2017, as the RBA cut its interest rates (Tradingeconomics.com 2018). Supporting this statement, other economists have stated that investment in business sectors could be reduce further due to slow increase in consumption expenditure as well as limited housing construction, which further can happen due to weak labour market and small increment in wages.

Thus, to understand about the actual economic condition of Australia, this report focuses on economic performance of Australia on August and September, 2018 for comparing it with the same of August 2017. For doing so, the report will divide the ensure discussion under four headings, which are, annual GDP growth of Australia, unemployment, inflation and trade.

The RBA has forecasted that both international as well as national economy can experience significant economic growth in come years, while other macroeconomic factors may remain almost stagnant. During the 1^st quarter of this year, Australia’s economic growth has performed comparatively well than it was predicted. Through following this trend, the annual GDP growth of Australia becomes 3.4 percent during recent period (Hutchens 2018). In this context, strong labour market and favourable monetary policies have played significant role to influence income and consumption expenditure of this country to increase further. Moreover, investment in on-mining sectors along with housing market and public infrastructure has stimulated the aggregate demand of Australia in recent months of 2018. Thus, with the help of potential activities, the Australian economy is going to develop its economic performance further. The annual growth rate of Australian GDP n 2017 was around 2.4 percent while in third quarter, this rate was around 2.8 percent. Based on annual GDP growth of 2016 and 2017, t can be stated that the country did not experience any noticeable GDP growth rate. 

In above figure it can be seen that the economic growth of this country increased significantly during August 2017 and remained above 2.6 percent on an average (Tradingeconomics.com 2018). Hence, Australia has performed well to develop its economic growth over the year though increasing demand and household consumption in domestic market.

During the June quarter of this year, salaries and wages in Australia has increased by 0.7 percent and has remained around 4.5 percent over the year. this in turn has increased the employment rate of this country above 4.8 percent. However, according to some economists, wage rate has remained below the expected level and consequently real wages growth has increased by 0.3% only over the year (Reserve Bank of Australia 2018). In August 2018, labour market has developed by small proportion due to increasing demand for workers in domestic market while in previous year, employment level was comparatively high (Marks 2018). However, since the last year, employment level of Australia has remained higher than the country’s average growth rate of total work force (Qian and Xing 2018). Moreover, total participation rate workers within labour force have increased further though the unemployment rate has still remained above 5 percent during August and September 2018.  

Unemployment in Australian economy

Thus, the above figure has represented that the unemployment rate in August 2018 has remained comparatively low than the same month of previous year.

To understand the present economic activity of Australia, the report has considered another macroeconomic indicator, which is, inflation rate. The country has experienced higher inflation rate during present year (Choi and Cook 2018).  For instance, country’s nominal wages have increased by 1.8 percent during June quarter while inflation rate has remained at 1.5%. Thus, the wage growth rate in real terms has become only 0.3% (Reserve Bank of Australia 2018). However, the RBA has anticipated that the inflation rate can reduce further, as the country’s administrative sector is reducing prices for the services they provide to the citizens. As a result, inflation rate can remain around 1 ¾ percent for the current period of 2018 (Bernanke, Laubach, Mishkin and Posen 2018). However, in July, this rate has increased and become 2.1 percent. In August 2017, this rate was around 2 percent (Tradingeconomics.com 2018). The chief reason behind this increasing price level is increasing prices for gas and electricity in both domestic as well as in international markets. 

According to figure 3, inflation rate of Australia decreased in August 2017 and remained between 1.8 percent and 1.85 percent. After that, the rate became stagnant at 1.9 percent during the first quarter of 2018. However, it has started to increase significantly during since the March quarter. However, due to fall in service prices, this inflation rate is expected o reduce again.

Australia can increase its exports in recent months, especially, for the liquefied natural gas (LNG) due to its huge production. In addition to this, production of other agricultural products as well as mining industry, including iron ore and coal, can stimulate the country’s total exports by large extend (Qi and Zhang 2018). Hence, terms of trade for the country develop significantly. In 2017, the country also experienced positive terms of trade. 

According to figure 4, it can be stated that the terms of trade (ToT) of Australia decreased after the July quarter in 2017. After this phase, ToT has started to increase again and has reached 89.10 Index Points during the first phase of 2018. However, in the following quarter, this trend has started to fall again. And in July it has become 87.70 Index Points (Tradingeconomics.com 2018). However, the overall ToT has remained above 86 Index Points indicting that a positive environment for Australia to doing international trade.

Though the international trade of Australia has remained favorable over the year, the current account balance of this country has experienced deficit over the year. In the second quarter of 2018, the value of current account deficit has become AUD 13.47 billion while in the previous quarter has remained AUD 11.678 billion. This implies that the trade balance surplus on goods and services has reduced from AUD 532 billion to AUD 2.812 billion (Tradingeconomics.com 2018). In addition to this, Australian government has earned huge amount of public debt over the year, as the rate has increased steadily. In the first quarter of 2018, the country has obtained public debt above AUD 2000000 million. Moreover, it can be expected that the country’s gross external debt is going to increase further. The value of Australian dollar in terms of U.S dollar has decreased over the year. In the starting of September 2018, AUD 1 has become USD 0.72 while this exchange rate was high during 2017. Hence, decreasing value of Australian dollar in international market can create huge problems.

Inflation rate

The above discussion can point out three major issues that the Australian economy can experience in coming year. Moreover, the economic condition of the country for the next twelve months can also be described. The three major problems of this country are inflation, household debts and deficit in current account. According to the RBA, inflation rate is going to increase further by 2.4 percent (Hocquette et al. 2018). However, this growth could be stable in future. However, the economy can experience an uncertainty due to global inflation. This phenomenon as well as increasing GDP of Australia can cause value depreciation of Australian dollar in coming months (Ellis 2018). Moreover, increasing debt in both internal and external market along with depreciation of Australian dollar can lead the current account balance of Australia to reduce further (Forbes, Hjortsoe and Nenova 2017). Hence, it is essential for the policy makers of Australia to implement appropriate policies to control these adverse economic situations. Otherwise, the mortgage demand can increase further due to economic uncertainty and consequently the economy can experience lower rate of economic growth in future along with a higher amount of public debt.

Conclusion:

This section describes the entire economic activity of Australia briefly. The above analysis has represented that economic growth of Australia along with its unemployment level have increased over the year, since August 2017. Moreover, the country has also experienced a favorable terms of trade. This implies that the country has huge opportunities to trade with other countries in international market. On the contrary, increasing about of debt in international market along with currency depreciation and deficit in current account balance can adversely affect the economic growth of Australia. 

References:

Bernanke, B.S., Laubach, T., Mishkin, F.S. and Posen, A.S., 2018. Inflation targeting: lessons from the international experience. Princeton University Press.

Choi, W.G. and Cook, M.D., 2018. Policy conflicts and inflation targeting: the role of credit markets. International Monetary Fund.

Ellis, L., 2018. Where is the growth going to come from?. Economic Papers: A journal of applied economics and policy, 37(1), pp.4-16.

Forbes, K., Hjortsoe, I. and Nenova, T., 2017. Current account deficits during heightened risk: menacing or mitigating?. The Economic Journal, 127(601), pp.571-623.

Hocquette, J.F., Ellies-Oury, M.P., Lherm, M., Pineau, C., Deblitz, C. and Farmer, L., 2018. Current situation and future prospects for beef production in Europe—A review. Asian-Australasian journal of animal sciences, 31(7), p.1017.

Hutchens, G. 2018. Australia’s economy hits 3.4% annual growth rate, exceeding expectations. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/sep/05/australias-economic-growth-exceeds-expectations-at-34?utm_source=esp&utm_medium=Email&utm_campaign=Guardian+Today+AU+-+collection&utm_term=284931&subid=20797742&CMP=GTAU_collection [Accessed 6 Sep. 2018].

Marks, G.N., 2018. Do the labour market returns to university degrees differ between high and low achieving youth? Evidence from Australia. Journal for Labour Market Research, 52(1), p.5.

Meyer, J. 2018. Economists deeply divided over Australia’s economic path in 2017. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/business/markets/economists-deeply-divided-over-australias-economic-path-in-2017-20170207-gu72ev.html [Accessed 6 Sep. 2018]. – The main article

Qi, C. and Zhang, J.X., 2018. The economic impacts of the China-Australia Free Trade Agreement-A general equilibrium analysis. China Economic Review, 47, pp.1-11.

Qian, W. and Xing, K., 2018. Linking Environmental and Financial Performance for Privately Owned Firms: Some Evidence from A ustralia. Journal of Small Business Management, 56(2), pp.330-347.

Reserve Bank of Australia 2018. Economic Outlook | Statement on Monetary Policy – August 2018 | RBA. [online] Reserve Bank of Australia. Available at: https://www.rba.gov.au/publications/smp/2018/aug/economic-outlook.html [Accessed 6 Sep. 2018].

Tradingeconomics.com 2018. Australia – Economic Indicators. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/australia/indicators [Accessed 6 Sep. 2018].