Australian Economy and Financial Crisis - Essay Example

?Australia has managed to deal with the global financial crisis with firmness and resolve. The impacts of the global financial crisis have impinged Australia less than other countries in the developed world. Wayne Swan is of the opinion that the Australian economy is in a strong position and warrants a positive economic outlook despite uncertainty in global economic circles (Australian Government, 2010). Australia registered an annual growth of 3.2% in the GDP till the second quarter of 2010 (The Australian Bureau of Statistics, 2010) which is unlike other developed economies that have displayed either slower growth or negative growth. This rate of growth equalled the thirty year average for the Australian economy and was greater than the forward estimates for economic growth predicted in 2009 (Australian Government, 2010). Figure 1 - Historical real GDP growth in Australia's economy The Australian economy is expected to see a rise of between 3.75% and 4% in the GDP for the 2011-12 fiscal year. However certain estimates see this prediction as too high given the current global economic climate (Reserve Bank of Australia, 2010; Brinsden, 2010). The figure below speaks volumes of the success of the Australian government and the Australian Reserve Bank in keeping the Australian economy afloat (Australian Government, 2010; Reserve Bank of Australia, 2010; Bureau of Economic Analysis, 2010). Figure 2 - Comparison of international GDP growth rates The GDP of any nation is composed of the consumption (C), the investment (I), the net governmental fiscal spending (G) and the net exports (X – Q) which can be expressed mathematically as: Australia’s response to these components can be used to better delineate the response of the Australian government and the Australian Reserve Bank to deal with the challenges in the wake of the global financial crisis. Consumption can be used as a major indicator of the economic situation. Australia saw an increase in retail spending of around 0.8% by volume between June 2009 and 2010 which indicates greater consumer confidence (The Australian Bureau of Statistics, 2010). However there is little denying that the global financial crisis made Australian consumers all the more conservative (Gruen, 2010) as the household savings rate went up by 1.3% by May 2010 (Reserve Bank of Australia, 2010). Given that consumption growth alone is responsible for 1.5% of the growth of the Australian GDP, it serves as an important sector. The GDP also witnessed a boost in investment especially in the mining sector although the government’s new tax on mining was expected to prohibit further growth. The mining industry witnessed a growth in investment of 29% between June 2009 and 2010 which was around 50% more than expected (Pascoe, 2010). As an initial response to the global financial crisis the government spending shot up dramatically but this was slowed down fearing: overstimulation of the economy; crowding out of private investment; placing a large debt burden. The GDP was positively supported by the net exports as the current account deficit first fell and then went into a positive trade surplus. The increase in net exports can be seen to result from increased demand for Australian minerals in the South East Asian market. Moreover contribution from net exports is expected to rise in 2011 as new capital investment is lowered into mineral operations that will remove bottle necks that affect production capacity (Stutchbury, 2010). The policies and approaches adopted by the Australian government since 2008 have been directed at handling the impacts of the global financial crisis. Macroeconomic policies have been specifically designed and geared to minimise damage from the global financial crisis. Moreover another chief aim of these policies remains the provision of adequate exit strategies that would be implemented once economic stability is seen on the horizon. The current fiscal stance of the Australian government is more towards contraction as the budget deficit for 2010-11 was some 40.8 billion AUD which represents 2.9% of the GDP against a budget deficit of some 57.1 billion AUD for 2008-09 which represented around 4.4% of the GDP (James & Sebastian, 2010). The last two years have seen the Australian government apply a Stimulus Package worth 42 billion AUD in order to reverse the symptoms of recession that have began impacting in the aftermath of the global financial crisis (Parliament of Australia, 2010). The Stimulus Package is composed of government based investment expenditure as well as Transfer of Payments in order to sway the levels of aggregate demand output. This in turn is envisioned to support and promote equilibrium income and thus the GDP. A number of strategies are being implemented by the government in order to provide stimulation. The Stimulus Package consists of government investment expenditure directed towards large scale infrastructure projects along with microeconomic reform. In this respect, 14.7 billion AUD was spent to extend existing school halls while 10.5 billion was spent on residential building projects and ceiling insulations for houses. Another 890 million AUD has been spent on road construction packages (Gittins, 2009). The net effect of these investments has been a net increase in jobs as well as greater activity within the construction industry that is likely to support increases in the Australian dollar in the medium term. Moreover the government has provided some 2.7 billion AUD as business tax breaks in order to encourage businesses on the edge of closure to remain open. Risk averse businesses have been seen improving as a result of this step (Gittins, 2009). These manoeuvres by the government can be seen as an extension of the Keynesian modus operandi which calls for government intervention as and when required rather than constant stewarding. These steps are expected to return the budget to a surplus by 2012-13. Strategies have already been designed and implemented to remove the expenditure when the budget ends in surplus. A large measure is to confine the annual growth rate of the budget to 2% till the point in time when the budget surplus reaches around 1% of the GDP’s total (Parliament of Australia, 2010) through a combination of measures such as limitations on expenditure, increases in current revenue using Super Profits Tax (roughly 12 billion AUD in four years) as well as greater excise duties on the sale of alcohol and tobacco (Swan & Rudd, 2010). Another major aspect of the Stimulus Package is the tax returns policy which is composed of some 12.7 billion AUD. The package consists of a once off tax free cash handout of some 950 AUD to employed people as well as single income nuclear families that earn around 150,000 AUD annually. Other people affected by this scheme include families with school going children as well as apprentices, students and farmers hit by drought (Gittins, 2009). This in turn has spurred consumers to increase spending and hence positively affect consumption which in turn has provided the economy with a jump start. In addition to the government’s efforts at shoring up the economy, the Reserve Bank plays its role by issuing favourable monetary policies. These monetary policies in turn affect the inflation as well as the output. The Reserve Bank’s monetary policies before the global financial crisis were aimed at managing economic growth along with maintaining a target inflation figure of 2-3% by increasing the interest rates in order to slow down the economy or to decrease interest rates as a means of stimulus. After 2007 the monetary policies have been aimed at contraction but around 2010 these policies plateaued at around 4.25% (ABC News, 2010). The Reserve Bank of Australia has constantly been loosening the monetary policies in use since 2009 in order to deal with the loss of consumer confidence and business confidence in the aftermath of the global financial crisis. The interest rates were reduced significantly in order to trigger consumption. Moreover the liquidity was also improved in order to spur consumption by various target groups such as individuals and businesses. The Reserve Bank of Australia reduced the cash rate gradually with a 4% decrease made in around two quarters. The cash rate was held constant at 7.25% between March and August 2008 after which it was reduced down to 3% in April 2009. This represented a 49 year low for the cash rate in Australia (AAP News, 2009). The interest rate was held at 3% for some 5 months before it was increased marginally to around 3.25% in October 2009 (ABC News, 2010). These steps represented careful manipulation by the Reserve Bank of Australia in order to spur economic activity and consumption so that consumer confidence and business confidence could be restored in the longer run. The various policies and strategies put in place by the government and the Reserve Bank of Australia have been successful at dealing with the global financial crisis. The Australian economy averted economic meltdown. Moreover the policies and strategies ensured that Australia was on its road to recovery in as little time as possible. The positive effects of these policies and strategies are visible as the levels of consumption increase while unemployment decreases and the national output registers a positive growth. Figure 3 - Historical CPI for Australia The greatest effect on consumption results from decreasing interest rates as the mortgage costs would come down and would increase the disposable income. Consumer consumption is already steeply rising in Australia with expectations that consumption would rise all the more rapidly in the near future. The amount of increase in consumer spending has been some 0.7% while the increase in household spending has been some 1.1% within the December 2009 quarter. Some circles have indicated that this amount of stimulation could roughly be translated as overstimulation which could lead to inflationary pressures. Furthermore underlying inflation has been on the decrease from 3% to 2.75% for the first time within a three year period. The current inflation rate is within the Reserve Bank of Australia’s expected range. The CPI in 2010 was some 3.1% which reflected increases in the taxation on tobacco as well as the maintenance prices of utilities. The current CPI is expected to remain at this rate constantly for the next fiscal year while the underlying inflation would rise again to some 3%. The actions of the Reserve Bank of Australia suggest that its policies are walking a fine line between inflationary pressure and stimulation of the economy. As far as employment is concerned, the unemployment rate has decreased from 5.8% in October 2009 to 5.1% in June 2010 (The Australian Bureau of Statistics, 2010). The employment statistics are improving as some 200,000 jobs have been added since August 2009. As investment based growth from the government’s end increases and as the number of jobs increases, the consumption would be stimulated. This would lead to steadier economic recovery and progress. As a consequence of the fiscal policies and strategies, the GDP has registered a growth rate of around 0.9% in the December 2009 quarter against negative growth at 0.8% in the December 2008 quarter (ABC News, 2010). Moreover the Treasury Reports indicate that without the Stimulus Package in place, the economy would have shrunk at a rate of some 0.7% (Gittins, 2010). 1. 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