Reasons for the Variation of Growth Rates - GDP of Australia - Case Study Example

Australian Economy Name: Course: Instructor’s Name: Date: Comment on its growth rates over the period of last ten years. In 2005, the Australian economy was experiencing a boom in commodity prices such as iron ore and lead thus; the revenue obtained from exports was high. This boom is showcased by the 3.2% GDP growth rate. In the years prior to 2005, the economy was very stable hitting a growth rate of 4.1% in 2004 and 3.9% in 2002 (World Bank, 2017). However, a fall in the increase in exports influenced the 2006 GDP. It experienced a 3.0% growth rate, which is slightly lower than the previous year. The slight fall was a result of a slip in the manufacturing sector that year. However, the mining sector through exports enabled consistent growth. This mining boom alongside a series of economic factors such as good global commodity prices, increased mining output enabled the economy to achieve 3.8% GDP growth rate. The effects of the GFC slowly crept into the Australian economy through the banking, manufacturing, and agricultural sectors. This resulted in -1.9% growth rate of the GDP in 2009. Reduction in the exports of agricultural products and turmoil in the banking sector, caused by the GFC facilitated the negative drop. However, the government to restructure the economy by cash input strategy to enable a stable economy implemented policies. The flow of cash enabled the economy to achieve a growth rate of 2.0 in 2010. Even though the recovery was slow, the country managed to evade recession in all economical sectors thus securing the jobs. The mining commodity boom also facilitated this evasion, which was at its peak. Consistent growth was experienced from 2010 to 2012 due to improved export prices of natural resources such as iron ore, gold, and lead by 1.6%. However, the manufacturing segment failed in productivity in 2013; also, the mining boom was affected by the entrance of new suppliers such as Brazil in the global market. Despite the fact that the sector was resilient in the past, its productivity was ailing thus reducing non-mining commodities exports. Thus, the growth rate lowered to 2.4%, which is 1.2% lower than the 2012 growth rate. The economy obtained cushion from the export of mining products to long term trade partner China. From 2013, the economy has been consistent; growth has averaged a GDP growth rate of 2.4%. The high rates are not the norm because of the deflation of the mining boom and the economical slowdown of Australian products largest importer. Critically analyze the reasons for the variation of growth rates in that period. Australia is ranked as the 12th largest economy in the world measured by nominal GDP of 2015. The economy driven by a 12 million-labor force that depends on the services sector, that provides for 73% of the GDP (RBA, 2016). The mining and construction sectors are also dominant segments with 16% as at 2015. The manufacturing sector also takes up 7%. The export sector plays a huge role in the economy of Australia, it earned the economy $184.4 billion in 2015. The main trade partner is China with Australia exporting 32.2% of the products to China and the former importing 23% from the latter. The main export goods are iron ore, gold, coal, meat alumina, machinery, and transport equipment. The main imports are crude oil, petroleum products, computers and office machines, machinery and transport equipments and telecommunication equipments. Export performance has a huge effect on the GDP of Australia. This effect is illustrated during the recession in which Australian mining exports boom enabled the economy to maintain a growth. Thus, when the export performance is prolific, the economy grows at a steady rate. This is illustrated from 2005-2008 when the economy averaged a GDP growth rate of 3.4%. However, the large export figures reduced due to the deflation of the mining boom, economic growth slowed down. This is well showcased from 2013 to 2015 when the economic growth is at an average at 2.3%. Australia has a brilliant market structure. The commonwealth mainly exports its products to the rapidly emerging economies of East Asia such as China, India, Malaysia, and Japan. Emerging economies always have a high uptake of commodities such as iron ore as they have a vast and vibrant manufacturing sector. However, the major importer of Australian products is currently experiencing an economic slowdown. This slowdown causes a slowdown in the economy of Australia as it reduces the net exports output and the revenue collected from the government from China. The construction industry is growing massively in Australia. It is a field that creates high employment numbers to cover up for loss of jobs due to deflation of boom in the mining sector. The services sector is also relatively growing thus creating jobs and generating income through tax. The services sector is accountable for 75% of all jobs in Australia. It enables the commonwealth to achieve tax benefits from income tax dividends. Through the introduction of modern technology, productivity has been enhanced in the service industry thus maximizing the potential of the sector. Even though the economy should be independent of the services sector intensely, the sector is offers high revenue rates that add up to the GDP thus relieving the slowly growing economy. Pre-Global Financial Crisis Australia In 2007 and 2008, the Australian economy was at its helm with growth in key sectors especially mining and construction. The continuous commodity boom of its mining products facilitated this rapid economic growth. Commodity prices create a variation over the years regarding GDP growth rate. This dependence is shown by the growth rate from 2005 to 2008 when the economy was mining export driven. In addition, the manufacturing and agricultural sectors were resilient, and the economy was growing steadily. The net tax collected by the commonwealth and state governments was increasing as the real income wages for individuals was increasing. All sectors of the economy were efficient, the productivity of all sectors was brilliant, and there was a demand or Australian products. The banking sector was at its best thus facilitating massive economic growth. The country also boosts of good labor reforms, policies that enable trading externally and internally and high tax compliance. Thus, it is correct to say that the economy of Australia went into the recession in a very stable condition. To cap it, the budget was a surplus and no negative growth had been experienced in 16 years. How the Australian economy evaded the Global Financial Crisis. In relation to the OCED, Australia is one of the advanced countries that avoided the 2008 recession. Even though other sectors of the economy were affected adversely, the banking sector weathered through the financial crisis (McDonald and Morlin, 2013). In Europe notably Greece, the Global Financial Recession had a huge effect on the banking sector. Their banks required massive bailouts yet some were declared bankrupt. These financial institutions directly affected the economy of the country thus a negative growth in the consequent years. The banking system in Australia is typified by well-monitored systems, few off balance sheet activities, large capital requirements and regulations and restrictions (RBA, 2015). It is also described by its effort to promote financial stability, clear and credible recovery and resolution mechanisms and focused and proactive supervision. These characteristics have helped the banking sector protect the economy such that there were no government bailouts of insolvent companies during the recession, no bank required the government’s recapitalization or nationalized and no bank acquired because of the recession. The system is framed by strict regulations and supervisions and has good crisis management measures. These regulations are enforced by an adequate informal coordination between the commonwealth and state authorities. These measures helped the country avoid the Global Financial Crisis. The mining boom also had a role to play in the recession evasion. Mining is a sector that relies on the market for survival, even though the global financial conditions were poor, the market for the mining commodities were not deterred. This stability not only ensured a net tax income flow but also secured the jobs thus maintaining income tax and quality of life. Post Global Financial Crisis Australia Policy responses and implications also helped the Australian economy evade the recession. The reserve bank and commonwealth made the decision to unfreeze and restore liquidity to the hugely affected financial markets. In addition the Reserve Bank expanded the range of securities that are acceptable as collateral for repurchase agreements. The government also introduced new regulations that aimed at preventing the activities of financial markets and institutions from creating further instability. Interest rates reduction and fiscal actions were also implemented to offset the crisis-induced slowdown in economic activity (Scutt, 2017). All this actions were aimed at safeguarding the Australian economy and the interests of the people of Australia. These recommendable actions can be credited for achieving their objectives and rejuvenating the economy. As a result, the economy withstood the financial crisis. The manufacturing sector failed to recover properly from the GFC. This slow recovery rate is a result of reduced levels of productivity. Productivity and efficiency when implemented together will ensure that the manufacturing sector becomes robust. However the rise in labor income has reduced the flexibility of production. Given that, the sector controls 21.1 % of the labor force as at 2015. When the tax deductions are high and the increase in labor income occurs, the product suffers low productivity as most money is used to maintain the labor force. On the other hand, competitors are using affordable labor to produce their products hence they have a competitive edge over Australian products in pricing. The real estate sector has also grown rapidly since the recession. More investors through FDI are building and purchasing buildings in major cities in Australia. The recent surge in sector has offered cushion to the economy after the recession. Notable influences are elaborated in the number of jobs created by the sector since 2009. The sector had an employed 5% of Australia labor force in 2009 while it has 9% in 2015. The still growing sector has increased the contribution of construction to 9% of the GDP in 2015. Reduction in output has been witnessed in the mining sector. This reduction is facilitated by the competition the exports face in the global market from other countries such as Brazil who produce in large numbers. In addition, the mining sector is at the operation stage thus cutting the jobs created for construction. Thus, jobs are lost in the sector thus affecting the income tax achieved by the government. What are the major challenges it faces in enhancing their growth rates? The economy faces a problem with the unemployment sector. The government spends on social benefits to the unemployed thus utilizing revenue collected. This setback restricts the growth rate of Australia. Ideally, an increase in the number of the unemployed increases the costs used in health costs and welfare costs. The current 5.7% unemployment rate deters the economy from achieving maximum growth rates. In addition, unemployed benefits are financed through taxes; the entire sectors contribute to the revenue collected. It also causes a low output of goods and services thus lowering the GDP. Fewer tax revenues will be acquired as fewer people are earning enough income to pay tax. Thus, this inconvenience affects the taxation process and government spending. The manufacturing sector plays a huge role in any rapid growing economy. In Australia, it constitutes of 7% of the GDP, as at 2015, this is a decline from the 12% in 2007. Global trade relies on goods acquired from the sector. In years prior to 2005, the economy attained stability because of growth in the sector. However, when productivity is hindered the output of the sector deteriorates. Consequently, when production is low, the sector fails to create employment and high revenue. Thus, for Australia to achieve rapid economic growth, it needs to strengthen the manufacturing sector. The introduction of policies implemented in the private sector with the aim of leveling and diversifying manufactured products. These policies can include the use of incentives, policies to protect against foreign competition in the domestic market and the extension of various forms of concessional finance. These policies should create an export oriented manufacturing sector. The debt level of Australia has been increasing after the 2007-08 financial year (OECD, 2016). This increment is a result of the Global Financial Crisis of 2008, which reduced the net revenue collected thus necessitating debt. The budget deficit rise by 4% also illustrates this menace. This menace undermines the growth of the economy. this rise in debts is attributed to the high spending by federal governments, lack of an export oriented manufacturing sector and high levels of foreign debt owed by the private sector. The current Australian tax system faces numerous hindrances that affect its efficiency and effectively (Battellino, 2010). The present system has not experienced change for the last two decades. It operates in such a way that there are 120 types of taxes while 20 of them account for 90% of the total tax collected. Reforms will restructure the tax set up and streamline its efficiency. In turn, this will ensure high tax compliance and generate a high tax turn over. This will make the country attractive to FDI, protect local manufacturers, and maximize the effectiveness of collecting revenue. Thus, the reforms should broaden the income tax base to ensure all forms of income are subject to tax and eliminating tax credits and deductions. This will enable the government to collect maximum revenue thus increased funds for economic growth. The government should also diversify the market of its goods. The economic slowdown in China has already affected the economy of the country. Before further damage is done, the country should look for emerging markets for its exports. These markets will help the exports have a diverse market thus maximizing profits. References Scutt D (2017) Why Australian interest rates are unlikely to return to pre GFC levels, Retrieved on 18/05/2017 https://www.businessinsider.com.au/why-australian-rates-are-unlikely-to-return-to-pre-gfc-levels-2017-2 Battellino R (2010) Twenty Years of economic growth, Retrieved on 18/05/2017 https://www.rba.gov.au/speeches/2010/sp-dg-200810.html McDonald T, Morling S (2013) The Australian Economy and the Global Downturn, Economic Roundup, vol 32 (2) 54-67 RBA (2016) labor force division, Retrieved on 16/05/2017 www.rba.gov.au/labor-force-division World Bank (2017) Data Bank, Retrieved on 16/05/2017 http://databank.worldbank.org/data/home.aspx OECD (2016) Australian Economic forecast summary (November 2016), Retrieved on 16/05/2017 http://www.oecd.org/economy/australia-economic-forecast-summary/ Read More