Australian Economic Growth, Unemployment and External Stability


  • Economic Growth 

Economic growth within Australia has varied in recent times with the trends over the years being caused by different factors. Australia has had very volatile growth in the past which was unsustainable and was very unpredictable. This was due to the much centralised economy that had existed with very high tariff rates and with domestic markets heavily protected by the Government through subsidies. As seen in the diagram below (fig 1.1) economic growth reached a low of -3.40% and a high of around 9.00% in the period between the 1970’s and 1980’s.
Fig 1.1 Australia's Annual GDP Growth Rate
However, with more recent trends, the growth rate has been more stable and sustainable with growth following the 1990’s always above 0% per annum (ABS, 2014). This was due to the onset of globalisation within Australia, which saw the passing of trade liberalisation policy such as the joining of the World Trade Organisation in 1995, which saw a spike in GDP growth, and with some deregulation in the financial markets, Australia was able to improve its exports and Terms of Trade (ToT) meaning that over the long term, economic growth would not only increase but would remain stable.

Structural changed ensued following the integration of Australia’s economy with the rest of the world. This is because as natural and man-made trade barriers were reduced or abolished competition increased in the domestic Australian market, with goods and service imports that were made in countries with a comparative advantage causing prices to fall domestically. Structural changes such as the increase in the growth of the mining sector have occurred due to Australia having a comparative advantage in simply transformed manufactured goods and commodities. 

This structural change was the cause of Australia’s economic growth following 2002 with the trend growth averaging around 3.5% between 2001-2008 (Riley, 2015). This higher growth was also affected by the ‘mining boom’ which saw increased demand for natural resources such as coal and iron ore from several countries, most notably China, as well as an increase in investment into Australia which increased growth through increasing aggregate demand. This private investment into Australia increased Australia’s export competitiveness through creating economies of scale and increasing the production possibility frontier to increase production capacity closer to a technical optimum.

Australia currently averages at a trend of 2.3% GDP growth p.a. (ABS, 2014) which is lower than previous trends. This has been due to a weakening of Australia’s Terms of Trade, caused by a fall in commodity prices as well as the supply of commodities finally reaching its demand.
  • Unemployment 

Australia’s unemployment levels have been heavily affected by the economic growth within Australia. In particular, cyclical unemployment has been affected the most as the demand for labour is derived from the demand for the goods and services it produces. This means that if economic growth is low, then cyclical unemployment will be high and if economic growth is relatively high then cyclical unemployment should decrease and shift towards the natural rate of unemployment (NAIRU).


As explained earlier, structural changes occurred in the later 90’s and early 00’s due to globalisation. This caused a decrease in structural and frictional unemployment as well as cyclical unemployment over the long term, due to an improvement of allocation of resources and the upswing in the business cycle respectively. Both these underlying factors saw decreased unemployment over this period, as seen in the diagram below with unemployment decreasing throughout the latter half of the 1990’s (Trading Economics, 2015). 

The mining boom, as with all booms and upswings as according to economic theory, saw a decrease in unemployment, particularly cyclical unemployment as the demand for goods and services in the industry increased exponentially, leading to an increase in the demand for labour in that industry. An increase in investment in the mining sector also saw mining-related jobs such as construction and development increase in demand further lowering unemployment. This can be seen in the diagram below with a trend following 1995 of a steady decline in the unemployment rate, from a high of around 8% in 1996, reaching a low of 4% in 2008 (Trading Economics, 2015).  

However, the GFC followed this first stage of the mining boom and caused many issues in unemployment trends. Unemployment increased as international demand for domestic goods and services fell sharply due to the closure of many businesses and loan defaults internationally. This can be seen in the sharp spike in unemployment following 2008 in the graph above.

In more recent trends, there has been high structural unemployment in Australia due to the Dutch Disease effect as well as the ongoing effects of the GFC, as seen in the graph above with unemployment still remaining high at and above GFC levels. This post-GFC period has had the flow on effects of the mining boom, which saw an increase in Australia’s ToT as well as increase in the Australian Dollar. This however, caused a disparity between the exports of commodities and the exports of other goods and services, due to the fact that commodities are not priced in AUD but other domestic goods and services are.

This high price caused the closure of many businesses most notably being in the manufacturing industry, with companies such as Ford and Holden announcing their withdrawal from manufacturing in Australia. This caused the high unemployment rate of 6.4% in January of 2015, the highest level since 2002, which was pre-mining boom. However, recently the rate has fallen to 6.2% (RBA, 2015) as business confidence and consumption has slowly increased with cash rate cuts made by the RBA.
  • External Stability

External stability is the aim of government policy that seeks to promote sustainability on the external accounts so that Australia can service its foreign liabilities in the medium to long run and avoid currency volatility (Dixon, 2014). External stability can be measured through three main indicators being the current account deficit (CAD), Australia’s net foreign liabilities and the exchange rate of the Australia Dollar (AUD)


·       The Current Account Deficit:
From the 1970’s onwards and into recent trends, Australia has had consistently high CAD’s. In the 1970’s Australia’s CAD was at a low of 1.1% of GDP, increasing to 4.3% of GDP in the 1980’s (Trading Economics, 2015). The trend in the CAD recently, has averaged from around 3% of GDP to 6%. Currently, however, the CAD is 2.8% of GDP (ABS, 2015).


As seen in the graph above the CAD steadily worsened from around 2002 onwards, due to the mining boom. This persistently high CAD has been due to large private investment in Australia, following globalisation in Australia and the emergence of the mining boom.

The current account deficit has also remained largely high due to the large amount of net foreign liabilities which needs to be serviced under the primary income account. Over the period following the mining boom from 2002-2010 and 2011-2015, there has been a significant increase in net foreign liabilities, which has increased the servicing costs for such liabilities and worsening the CAD through worsening the primary income account.


An improvement in Australia’s ToT however, explains the recent low CAD. This is because an improvement in the ToT leads to an improvement of the BOGs which subsequently lowers the CAD. As seen in the table above from the Australian Bureau of Statistics, the CAD has fluctuated but the trend has been a decrease in the net primary income account, falling 14% in the Dec 2014 quarte (ABS, 2014), suggesting that the on costs of net foreign liabilities has decreased.

Australia's Net Foreign Liabilities: 
Net foreign debt or liabilities has been persistently high as well, much like the current account deficit. Net foreign liabilities peaked at 53.3% of GDP in the fiscal year of 2009-2010. Over the financial year of 2002-2003 and 2011-2012 the net foreign debt averaged at around 50% of GDP (ABS, 2014). 

   This consistently high net foreign liabilities trend in recent years has been due to the low savings pool in Australia in conjunction with the increased private investment caused by the mining boom and globalisation in Australia. Australian’s between 2000 and 2002 had a savings percentage of 1.1% to 6.1%. This meant that for businesses to grow and scale they had to borrow from overseas in order to fund their costs as there was simply not enough cash within Australian banks, due to the low savings percentage of Australians.


Australia also seemed to survive with very little impact on its economy compared to the rest of the world in regards to the GFC causing high private investment.  This increased investment can be seen in the diagram above with investment still increasing post-GFC, with net foreign liabilities increasing over 2014 by $38 billion (ABS, 2014). 

The Exchange Rate of AUD: 
Australia has had a fluctuating AUD in recent times and this has not only been due to the Reserve Bank of Australia intervening through macro-economic policy (monetary policy) but also due to aforementioned changes in Australia’s ToT and the slowdown of the mining boom.

The AUD has fallen significantly from a high of $1.10US in 2011 to now a low of $0.77US in April of 2015. This fall has been caused by several reasons with one of them being the cash rate in Australia. The RBA over the period of 2011 slashed the cash rate from 2.50% to a low of 2.25% in March and currently the cash rate is at 2.00% (RBA, 2015). This has been used to increase the amount of investment and consumption is occurring in the domestic economy whilst also lowering the exchange rate of the AUD by making the domestic market less appealing to invest in for foreign investors which would decrease the demand of AUD and reduce the exchange rate.  This followed a previous trend which saw the AUD increase from a record low of $0.48US in March of 2001 to a high of $1.10US in 2011 (ABS, 2014). This was due to the price and amount of natural resource exports increasing, causing rising commodity prices in what was known as the “global resources boom”.

Sources

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