Australia is among the most flourishing and high open economies in the world. The country’s robust economy is facilitated by its economic and trade links with the developing economies as well as transparent and open investment and trade environment. It has a robust industrial sector and large service sector. The other important sectors in this country include the education sector, agribusiness sector, and tourism sector. The present paper delves into the state of the Australian economy. Particularly, the paper discusses the measurement of the Australia’s macroeconomic performance, its economic performance from 2012 to 2015, the major factors influencing this economic performance, the performance of the Australian economy from the concepts of the business cycle and AS/AD model, and the challenges that this economy experiences in 2016.
The Measurement Australia’s Macroeconomic Performance
The macroeconomic performance is traditionally measured as the degree to which the macroeconomic objectives are attained by the policy makers (Cherchye, 1998). Macroeconomic performance of a given country, thus, entails how well it is doing to attain the government policy objectives. Some of the most important indicators that can be used to measure a country’s macroeconomic performance include the inflation, Gross Domestic Product, Business cycles, and unemployment. The policy makers use these indicators to determine how their economies are performing over time. Below is the discussion of the indicators of Australia’s macroeconomic performance.
The rate of inflation measures the change in the prices of the services and goods acquired by the consumers over a given period. According to Debelle & Stevens (1995), Australia aims to keep an average rate of rising in the consumer prices of about 2 to 3% over the medium term. The achievement of the low rate of inflation has, thus, been one of the key economic goals of the Australian government. In the recent times, this rate has been declining thanks to the decline in the oil prices. Ideally, this decline implies that Australia will continue experiencing increases in economic growth. However, the inflation rate is expected to increase in 2016 and 2017 due to the anticipated high commodity prices. The demand-side factors will, thus, have an impact on the level of aggregate demand in the Australia economy, thus, leading to upward inflationary pressure.
Gross Domestic Product
As an indicator of macroeconomic performance, the GDP measures the total output and income of a country for a given period. GDP provides the information about the size and performance of a country’s economy (Callen, 2008). In spite of times of weakening the worldwide economy, the Australian economic growth has been substantial. According to Gruen & Stevens (2000), the Australian economy had experienced nine years of constant growth as of mid-2000. There has been a consistent growth in Australia’s GDP. Since 1992, Australia has attained a real GDP growth rate of 3.3% annually (Australian Trade Commission, 2016). Ideally, this considerable growth in the real GDP demonstrates a constant, robust economic performance of the Australian economy.
The unemployment rate is a vital indicator of the way a given economy is performing in a certain period. The business cycle heavily affects the rate of employment in Australia. According to OECD employment outlook 2014, Australia continued to fare better than numerous other OECD nations in unemployment in 2014. In an attempt to reduce the unemployment rate, the Australian government introduced incentives such as skill development programs and initiatives to encourage apprenticeships. In essence, these incentives resulted in the declined in the unemployment rate in 2015. According to the Australian Associated Press (2015), the rate of unemployment in Australia fell to 5.8 percent in 2015.
Australia’s Economic Performance from 2012 to 2015
The Australian economy continued to experience well-contained inflation, lower unemployment compared to the other OECD countries, and strong but slow growth from 2012 to the fourth quarter of 2015. Australia has experienced phases of contraction and expansion in its economic growth since 2012. The rate of unemployment continued to increase gradually over the previous years (Kent, 2014). Between 2012 and 2014, the rate of unemployment, especially among the young people, was high. Nevertheless, the unemployment rate reduced in 2015 after the Australian government introduced the incentives already mentioned. Since 2012, Australia continued to experience a mining boom, but the investment in the mining sector started to decline in 2015.
The consumption growth in Australia has been robust for many years. According to Nicholls & Rosewall (2015), the consumption growth in many states in Australia strengthened over 2013 and 2014. Consequently, this facilitated the Australia’s strong economic performance. The interest rates in Australia since 2012 have been friendly due to the low inflation rates. The low-interest rates facilitated the rise in the aggregate demand from 2012 to 2015, thus, strengthening the country’s consumption growth. Also, the aggregate dwelling investment in Australia increased strongly since 2013. Furthermore, the strong growth of the Australian economy in 2014 came from a home building boom, construction industry, as well as, mining, insurance, and financial services.
Major Factors Affecting Australia’s Macroeconomic Performance over these years
One of the major factors that affected Australia’s macroeconomic performance between 2012 and 2015 was the continued rise in the commodity exports. Australia continued to export large quantities of energy as well as mineral resources to the Asian countries, especially China due to the high commodity prices. Besides, Australia’s terms of trade from 2012 to 2015 played a significant role in its macroeconomic performance. These terms of trade facilitated Australia’s foreign trade during this period. Australia was among the leading exporters of energy and natural resources due to its bilateral trade agreements with different countries.
The Australia’s macroeconomic performance between 2012 and 2015 was also affected by its sound policies and investments. The Australian government had a strong fiscal position, which helped to strengthen its economic performance during this period. The monetary stability in Australia also contributed to its macroeconomic performance from 2012 to 2015. The policy makers continued to keep the inflationary pressures in Australia under control. However, the rise in the unemployment rate and decline in investment in the mining sector contributed to the slow growth of the Australian economy between 2012 and 2015.
The Performance of the Australian Economy from the Concepts of the Business Cycle and AS/AD Model
The Australian economy has experienced alternating periods of both contracting and expanding economic activities. For instance, the rate of unemployment in Australia increased progressively between 2012 and 2014 due to the slow economic growth. In essence, the economic growth in Australia was below trend during these years. In 2014, the Australian economy was undergoing a production phase. Previously, it had experienced an investment phase. Consequently, this transition saw the decline in the mining investment, which according to Kent (2014) had peaked in 2012. The Australian government continues to maintain a low-interest rate. As a result, this has led to the strong growth of the housing investment. The low-interest rate has also led to the increase in consumption despite the weak rise of incomes (Kent, 2014). Consequently, there has been a rise in aggregate demand in Australia. The Australian economy is also experiencing an expanding economic activity albeit the decline in the mining investment. The Australian sectors that are interest sensitive continue to improve gradually. Consequently, there is an increase in the aggregate supply.
Challenges the Australian Economy Faces in 2016
Despite being one of the best economies in the world, the Australian economy faces some challenges in 2016. One of these challenges is the depreciation of the Australian dollar. The continued depreciation of the Australian dollar will have a negative impact on the Australian foreign trade. Specifically, the devaluation of the Australian dollar will make the Australian exports cheap and imports more expensive. The other challenge that the Australian economy will face in 2016 is the slow growth in the home price. The house prices in the Australian house market will decline in 2016 as also suggested by McKenna (2016). The fall in the dwelling price will deteriorate the housing market and, thus, affect the economy negatively. In particular, the prices in the Australian house market will decrease the wealth of the Australian homeowners and ultimately result in lower spending levels. The Australian economy might also face rising unemployment in 2016. The anticipated downward trends in the construction industry during the year will raise the rate of unemployment in Australia.
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In Australia, the available information suggests that moderate expansion in the economy continues in the face of a large decline in capital spending in the mining sector. While GDP growth has been somewhat below longer-term averages for some time, business surveys suggest a gradual improvement in conditions in non-mining sectors over the past year. This has been accompanied by stronger growth in employment and a steady rate of unemployment.
Inflation is low and should remain so, with the economy likely to have a degree of spare capacity for some time yet. Inflation is forecast to be consistent with the target over the next one to two years.
Source: RBA Statement by Glenn Stevens: Monetary Policy Decision Dec 2015
Australia’s Treasury lowered its estimate of the economy’s potential growth rate, or speed limit, reflecting weaker population growth and fewer hours worked in an economy adjusting to the end of a commodity-price boom.
The economy’s potential rate will be about 2.75 percent over the next few years, down from 3 percent estimated at the time of the budget, Nigel Ray, deputy secretary of Treasury and responsible for its macroeconomic group, said in a speech in Sydney Tuesday.
Source: Bloomberg 24/11/2015
Real GDP- annual change
CPI- quarterly change
Unemployment rate- trend