Australia

Inflation, Employment, Economic Growth and External Balance in Australia

The Australian economy is considered relatively small, as its GDP is just 5 percent of that of the United States. Practically, it means that the economy is significantly exposed to the rise and fall of the global economy and the major world trends as in the case of energy prices increases. As a small economy on the edge of the world, a country of vast distances and small population, Australia still develops according to common macroeconomic laws. From macroeconomic perspective, there are several important indicators which reveal the status of Australian economy, namely economic growth, employment, inflation and external balance.

In regard to measurement of economic growth, in this particular paper, Australian GDP indicators and disposable income (DI) will be used. From 1950 to 1987, real GDP increased 450 percent and the population doubled; so GDP per capita grew by 2.24 times. By way of contrast, real GDP growth was virtually static from 1902 to 1939 (OECD Economic Surveys, 1998). According to Australian Bureau of Statistics (ABS), between 1993-94 and 2003-04, real net national disposable income per capita grew by an average annual rate of 3.1% a year (ABS, 2005).

As ABS notes, from 1994-95 to 2002-03 the real income of low income Australians rose by 12% (ABS, 2005b). From the critical standpoint, in Australian context, investment (I) as integral part of GDP should be mentioned. ike many aspiring industrialized nations, Australia developed a general strategy of protecting industry, encouraging foreign direct investment to enjoy the associated excess profits, and directing a significant part of its work force to the protected sector. It was hoped that the larger population would allow these infant industries to outgrow their protection as they took advantage of the economies of larger scale.

The focus was inward, but the policy was not unsophisticated.The strategy was effective, up to a certain point. Direct investment was forthcoming. Tariff profits were shared with foreigners who maintained the manufacturing sector at about the same share of the economy that it had been in 1950. With rapid growth of GDP this implied a substantial inflow of capital. The domestic industry, however, has never been able to take advantage of scale economies, since the optimal size of industrial output continued to expand beyond the capabilities of an inward-looking manufacturing sector.

Australia had greater success in the development of its financial sector. As it can be seen from statistics provided by ABS, Net International Investment amounted $516,827 million (ABS, 2005a). By the June 2005, according to ABS, Australian GDP constituted $209,648 million. As ABS explains the trends in National GDP, GDP increased 0.7% in the June quarter. GDP per capita grew by 0.4%, GDP per hour worked in the market sector increased by 0.1% and real net national disposable income grew by 1.8% (ABS, 2005a). Real GDP growth rate is between 2.3%-2.4% annually.

The Australian labor force has grown rapidly over the last few decades, impelled by the postwar baby boom, high levels of migration, and rising levels of female labor force participation. Labor inputs have been slightly more restrained, since males have tended to reduce their participation rates; and the hours worked by the typical worker during the week have tended to fall. In the late forties the standard working week was reduced to 40 hours; annual leave increased during the eighties to three to four weeks, and working hours per week have tended to decrease toward 35 over the last decade (OECD Economic Surveys, 1998). Part-time work has also become far more important. Wages have been determined by arbitration through a system that has become increasingly centralized, is quasi-legal, and explicitly confronts worker and employer interests. There is considerable debate among economists about the extent to which the arbitral authorities can act independently of market forces.

Two trends are worth mentioning: real wages increased dramatically in the mid-seventies; and while unemployment rose significantly, there was no corrective reduction in wages for many years, and a second real-wage jump took place at the start of the eighties, unemployment went up again, and wages only slowly fell back to levels that restored macroeconomic equilibrium (Bell & Bell, 1998). In contemporary labor situation in Australia, unemployment rate constitutes 5%, with employed inpiduals exceeding 10 million (ABS, 2005a). The retention of unemployment rate at 5% mark is crucial for national GDP in order to maintain its growth between 2%-3% annually.

Current Australian account balance has a deficit of $12,640 million as of June 2005. In 2005 Export-Import difference has been inessential as goods exports constituted $17.8b while goods imports were $17.9b (ABS, 2005e). However, 16% increase in exports has been attained largely due to increase in prices, while imports increase has been largely due to increase in volumes. From this perspective, it makes difference for Australian GDP, because negative Net Export (En) decreases gross domestic product.

According to numerous experts, including ABS and Economist Intelligence Unit, consumer price inflation in Australia is going to remain between 2 and 3 percent, and practically this trend ensures the stability and continuous growth of consumption, which consequently is favorable for country’s GDP (ABS, 2005a). If such indicators, including GDP, Unemployment, Investment, and Inflation are adequate to discuss Australian economic growth is subject for further consideration. ABS in its article, “Is life in Australia getting better? Beyond GDP: Measures of economic, social and environmental progress” explains that there are other important indicators, which can be considered more actual for measuring economic position of the country. They are health, education and training, work, financial hardship, human environment, crime, etc (ABS, 2005d).

From the critical perspective, macroeconomic situation is primarily dependant on the politics of Australian government, and since John Howard’s Liberal-National coalition controls a majority of Senate, economics of the country will be defined by the government’s political reforms (Economist.com, 2005). The government’s priority will be to push through its proposed industrial relations reforms. It is also preparing for the sale of the state’s remaining 51.8% stake in Telstra, the country’s dominant telecommunications provider, which is expected to take place in the second half of 2006 (Economist.com, 2005). If the government decides to proceed with it, the privatisation the country’s largest private health insurer, Medibank Private, is likely to follow in late 2006 or early 2007. Further welfare reforms and an overhaul of media laws are also on the federal government’s agenda.

Speculation as to whether or when prime minister John Howard might hand the leadership to his ambitious and long-serving deputy, the treasurer, Peter Costello, will re-emerge periodically. Any handover would need to occur not much later than mid-2006 if Mr Costello is to have sufficient time to settle into the role before the next federal election, which is likely to take place in 2007.

Despite further generous tax cuts announced in the budget for fiscal year 2005/06 (July-June), the first tranche of which took effect at the start of July, the government will continue to keep the budget in surplus. It will also set up an investment fund (the Future Fund) to pay for unfunded pension liabilities.

Economist Intelligence Unit in its forecast indicates that weaker domestic demand will see real GDP growth slow to 2.4% in 2005, although the composition of growth will be more balanced than in recent years. Stronger export growth will underpin annual average real GDP growth of 3.4% in 2006-07 (Economist.com, 2005). Annual GDP growth is expected to average 3.3% in 2008-10, slightly below its long-term trend. According to EIU, annual inflation will rise, but stay within the 2-3% target range set by the Reserve Bank of Australia (RBA, the central bank) (Economist.com, 2005). The current-account deficit will shrink to 5.7% of GDP in 2006 as the trade deficit narrows, but it is unlikely to shrink below 5% of GDP by 2010, owing to the large income deficit.

Bibliography

• OECD Economic Surveys. 1998: Australia, Organisation for Economic Co-Operation and Development, OECD
• Philip Bell, Roger Bell.1998. Americanization and Australia; University of New South Wales Press
• ABS. 2005d. Is life in Australia getting better? Beyond GDP: Measures of economic, social and environmental progress <http://www.abs.gov.au/Ausstats/[email protected]/Lookup/5988025C0A0C3441CA256F720083304E> Retrieved Oct 23, 2005
• ABS. 2005e. 5302.0 Balance of Payments and International Investment Position Retrieved Oct 23, 2005
• Economist.com 2005. Country Briefings: Australia. Forecast. Retrieved Oct 23, 2005