Essay on Australia: Macroeconomics and Australia

Submitted By junh
Words: 2039
Pages: 9

Current Context:
After 2009, Australia was experiencing a natural resource boom, in which China played a significant role as the top market for Australian mineral exports. However, this boom is considered as unsecured for Australia’s export’s too much reliance on China. At the same time, the mining boom had caused Australia to develop a two-speed economy, with the mining sector grew at six times faster than other industries (12% versus 2% respectively). The situation leads to a concern of “Dutch disease.”
In my opinion, Australia government has done a good job in the following aspects.
GDP. Exhibit 2 shows that each component of Australia’s GDP has been performing quite stably over the past thirty six years (1975-2011). The country maintains a favorable balance of trade, each at around 20% of the total GDP. Furthermore, the real GDP growth is also stable at around
3% annually. The country tried difficult monetary policies by different governments across time to fight for high inflation, and eventually brought inflation down to around 3%, which shows a remarkable success.
Balance of Payments. Australia’s chronic current account deficit is one of its biggest concerns.
However from Exhibit 3, we can see that its current account deficit does not stem from the natural resources, instead, it’s mainly from the income deficit. Furthermore, through restraint on government spending and a revival in economic growth, the government expected the deficit to narrow over the next three fiscal years, achieving a surplus in 2012-2013.
Moreover, the current account deficit is financed by its financial account surplus. Most of the foreign investment is in the form of direct investment (Exhibit 13a), which shows that Australia provides an attractive business environment.
Maintaining Competitive Advantages. Under the leadership of Labor Party, Australia climbed to rank 7 out of 55 countries in terms of overall national competitiveness (2008 World
Competitiveness Yearbook). Australia-based BHP Billiton and Rio Tinto, the world’s two biggest mining companies, had secured a record 85% and 200% increase in contract prices for iron ore and coking coal respectively. The central bank predicted that the surge in export prices would raise domestic incomes by around 4%, boosting corporate profits and government revenues. Monetary Policy. During 2008 global recession, commodity prices nosedived 10%, the worst performance in 28 years. To restore the Australian economy, the Reserve Bank loosened monetary policy effectively. It temporarily set aside concerns about inflation, and lowered interest rates to 3%. The action drove up new home loans because first-time home buyers sought to take advantage of lower mortgage rates and government incentives. At the same time, lower borrowing rates had reduced households’ debt-servicing burden and provided significant amount of cash flow relief.

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Fiscal Policy. Also during 2008 global recession, Rudd claimed his first stimulus package (cash splash) to boost the retail trade and avoiding further negative growth. The government of
Howard advocated bilateral trade agreement, which led to free-trade agreements with the U.S.,
Singapore and Thailand. It ultimately led to record profits by natural resources companies led corporate tax receipts to more than double in the last six years to A$73 billion.
Addressing Regional Disparity. The huge growth of the Australian mining industry is not shared by the entire country. A majority of Australians lived far away from the west coast mines. The mining industry started offering substantial incentives for these people to relocate, including extremely generous salaries and working schedules, which the manufacturing and retail sectors were unable to match. In 2011, the mining industry created 60,000 jobs when the manufacturing and retail sectors lost 50,000 jobs. This leads to a