Describe the current Australian economic situation and support your claims - Assignment Example

Introduction Global Economy is experiencing one of its worst phases of history because of the widespread economic downturn. What started with the subprime mortgage crisis has now created widespread economic panic which has even resulted into the downgrade of credit ratings of the largest economy of the world. The emerging sovereign debt crisis has exposed many governments’ ability to maintain a sustainable level of debt. The Euro Zone is actively looking for new ways and means to support economies like Greece, Spain, Portugal, Italy to avert their sovereign default.

Considering such situation, the overall growth prospects for the world economy are suggesting a stagnant growth rate of approximately 4.5% for current year and for the year 2012 and 2013. Australian Economy however, despite such downturn managed to achieve reasonable growth rates as well as better economic performance. Growth during 2010 and 2011 remained healthy despite the fact that country faced harsh weather conditions which slowed down economic growth. Real GDP increased by 2.7% as on Dec 2010 however, growth in household consumption remained low.

It is important to note that there is a gradual increase in the inflation owing to rise in the food prices. (BBC, 2011). Increasing inflation level therefore may erode the overall economic growth of the country if it is not able to control inflation levels. The recent statistics for the unemployment level also suggest that the overall level of unemployment is increasing in the country. Figures for July 2011 suggested an unemployment rate of 5.1% which seem to have surprised many. (Zappone, 2011).

Current Economic Situation in Australia As discussed above that economy of Australia posted improved performance when world was witnessing economic and financial turmoil. However, the recent data suggests that the overall economic situation may not sustain for long as there is a gradual increase in the level of inflation as well as the unemployment level. The overall cash rate i.e. the rate offered by Reserve Bank of Australia is held at 4.75% however, there are indications that the overall rate may further be increased due to rising inflation level.

(RBA, 2011). Higher interest rates prevailing in the economy may be due to the fact that the Australia may be looking for to ensure that the inflation remain within control. The recent monetary policy issued by the central bank of the country suggests that the increase in the level of unemployment has slowed down however; it is still increasing thus causing important repercussions for the Australian economy. It is also important to understand that the overall industrial wages are also increasing in the economy thus increasing the overall burden on the firms in terms of their overall variable costs.

It has also been suggested that the overall fiscal policy is being exercised in contractionary mode thus creating an environment where the demand for government purchase of goods and service may decline. Such contraction therefore may result into the reduction in the overall aggregate demand in the economy and thus reduce the overall growth rates. The current performance of the economy therefore may witness further decline in the future. Important Factors One of the key challenges faced by reserve bank is the declining consumer activity within the economy.

The lack of domestic demand therefore may be one of the key economic variables