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Content

• Introduction
• Comparison of GDP of Australia with China
• Per Capita GDP of Australia and China
• Unemployment in Australia and step taken by the government
• Comparison of Inflation between Australia and India
• Fiscal policy of Australia
• Comparison of the Growth rate of Australia with India in past five years
• Conclusion
• References

Introduction

Unlike many developed economies, Australian economy is one of the economies that have been growing for the last 20 years. For the past one decade the Australian economy has grown on an average rate of 2.64%. During these years it has seen many economic cycles and has always been adapting to these changes by transforming itself. The economic activities in any economy can be classified under Agriculture – related to produce from agricultural activities, Services – Related to intangible products or services provided, Manufacturing – the goods that has been produced in an economy. However contribution of these sectors to GDP differs in different economies. In some economy majority of the GDP growth comes from the manufacturing as these countries enjoys cheap factor of production. This could be cheap land, cheap labour, cheap capital or advanced technology that gives them edge over rest of the world to produced better products which have greater demand in global market and drives the manufacturing in that country which helps the GDP. While in some countries which have large population, their GDP is primarily driven by services of agriculture. This is a dynamic process. As the GDP of a country grows and per capita income increases the demand for services also increases which starts driving the growth at the same time higher per capita GDP results in costlier labour thus the manufacturing decreases. Australia is a prime example of this. Country was once the home for several auto manufacturers and was driving the GDP with manufacturing. However, emergence of many poor countries like India, started providing cheap labour and various incentives that drove the manufacturing from Australia to countries like India. This has led to shift in GDP from manufacturing to services which contribute more than half of the GDP now. Australia has been able to make such shifts and grow for the past 20+ years indicating that Australia economy has great resilience to transform itself against any adversary. Given the per capita income level that Australia has reached such growth rate is commendable as we have seen that after reaching to a threshold per capita income limit it becomes difficult for the countries to grow. The prime example of this is Japan which after reaching to certain per capita income is now finding difficult to grow. This continuous growth in the GDP of the Australia can be explained with all the economic indicators and policies of the government (fiscal policies), Reserve Bank of Australia (Monetary policy) etc. We can also analyse the economic indicators like unemployment rate, inflation rate over the 20+ years of period to see how the economy of the Australia has moved.

Comparison of GDP of Australia with China

Country	2010	2011	2012	2013	2014	2015
Australia	51845.65	62216.55	67646.10	67652.68	61995.83	56327.72
China	4514.94	5574.19	6264.64	6991.85	7587.29	7924.65

Per Capita GDP of Australia and China

 

Country	2010	2011	2012	2013	2014	2015
Australia	2	2.4	3.6	2.4	2.5	2.3
China	10.6	9.5	7.8	7.7	7.3	6.9

GDP growth rate of Australia and China

There is vast difference in the GDP of Australia and China. Australia is a service economy while China is a manufacturing economy. Australia relies more on inner consumption and exports of commodities while China relies on global consumption for the demand of its products while it imports commodities. Result of this is that China is more reliant on global economy to grow and as the global growth has collapsed China has slowed down drastically while the self-sufficient nature of Australian economy has allowed it to keep growing at the same pace as before. China has fuelled its growth by very cheap credit which has resulted in excessive capacity in the economy which has been lying idle. At the same time Australia has also allowed the cheap credit by cutting down cash rate but it never made credit so cheap that business can indulge in creating excessive capacities. These excessive capacities have led to crediting asset bubble or debt bubble in China. Earlier creation of such assets was resulted in higher growth rate as the demand for all the material was very high thus production as at the peak but now this has resulted in a situation where management of such asset has become so difficult as most of these assets are not generating any revenues and are called non-performing assets. This has resulted in very bad balance sheet of Chinese banks (Junankar, 2015).

Unemployment in Australia and Step Taken by the Government

The unemployment rate of an economy is the biggest indictor of its present as well as future growth. A country facing very high unemployment not only indicates that it has many idle resources which are not into production thus slowing down the economy but also these resources are dependent of productive resources and government dole outs. Thus for the growth of the country it is very important that the working population must have very low unemployment rate. This has been the trend for the Australian economy which has seen one of the lowest unemployment rates for last so many years. Australian economy has much labour heavy industries like mining which employs many persons resulting in low unemployment rate in the GDP. However the rate of employment is not uniform as different regions have different economic environment. Thus the growth potential, presence of industries differ that result in different opportunities for employment. The cities like Sydney, Melbourne have seen greater attraction from the companies around the world. Many of the global banks and Multi-National Corporations have set up their regional offices there. This has provided opportunities to many and helped the cities to grown resulting in low unemployment. The areas which are mining driven have been impacted by the slowdown the global economy. As China has slowed down the demand for the minerals have also come down. This has resulted in loss of employment in these areas. Thus to boost employment the Australian government has undertook expansionary fiscal policy. Government has increased fiscal deficit by higher borrowings and has been spending on these sectors so that employment can be increased. Government has so far given two stimulus packages one of $10 Bn or 1% of GDP and another one of $42 Bn to increase the spending and boost the growth. Government has used this money to increase public welfare expenditure which can give additional income in the hands of Australian thus boosting the demand and has increased the investment on capital resources which can generate productive assets for the economy and employ more people in the economy (Baten, 2014).

After the global financial crisis there was significant slowdown in the Australian economy. The country was facing credit crunch as money was not available to businesses. At that time government of Australia decided to pursue fiscal deficit or fiscal expansionary policy. However government never stretched it so far that it becomes toxic for the entire economy.

Fig 1- The Performance Indicators related to job market in Australia

Fig 2 – Latest Trend of unemployment figures

The Regional Breakup of the Unemployment in Australia is as Follows

Comparison of Inflation Between Australia and India

Country	2010	2011	2012	2013	2014	2015
India	9.47	6.49	11.17	9.13	5.86	6.32
Australia	2.9	3.3	1.7	2.5	2.5	1.5

 

The inflation is the basic law of demand and supply. If more people chase limited amount of goods then inflation increases. However this increase in the demand can be on account of increase in the level of the income of the people as well as availability of cheap credit. The inflation in Australia mainly comes from real estate. The government of Australia has given various incentives to the housing sector. These incentives include the benefits given to the first time home buyer and the liberal FDI in the real estate. This has pushed the demand for the housing in the country. The real estate is not just used for the purpose of consumption but also used for the purpose of investment as it has given one of the best returns in the past. Thus as the disposable income of the country has risen the people have started using these incentives to make multiple house which has also contributed to the demand for the housing. Housing sector is one sector on which serval industries depends upon (Michael Janda, 2012).

Few industries are direct depended while some share indirect linkages. Direct linkages industries are industries which supply raw material to the real estate. Thus steel, cement, iron etc are direct beneficiary of the booming real estate while electronics, furniture etc are indirect beneficiary. Thus as the real estate market grows the demand grows which fuels the inflation. Further the inflation in Australia has increased on account of cheap credit. The Reserve Bank of Australia has city the cash rates as high as 7.25% in 2009 to 3,25%. Thus cheap credit helps in preponing the demand which increased the inflation.

However India has seen higher level of inflation on account of wrong policies of government, bad monsoon and corruption. These factors have created miss-match in demand and supply by creating bottle necks for the supply. Thus without any increase in the level of income in India, the inflation has soared.

Fiscal Policy of Australia

Fiscal policy is in the domain of government and is an instrument of economy management. Fiscal refers to the management of revenues and expenditure. It is the obligation of the government to tax wealth creating resources or high net worth individuals or business and then use them for the benefit of the entire nation including poor. The use of resources to the activities which create wealth is called capital formation resources or planed expenditure whole the expenditure which goes in form of dole out like pension etc are non-planned expenditure. The first use of resources i.e. capital formation resources increase the productivity of the economy and are good for the economy as they help to further increase the taxes. For example if government uses these resources to build road than the toll collected from road goes to the government kitty to further use them for any purpose. At the same time new road increases the connectivity and encourages business to operate smoothly and expand to far reaching places. Many a time government has many obligations thus has to have keep sending on the non-planned resources which shrinks the coffer of government to spend on the planned expenditure. However to continue growth and make economy ready for future government has to have spent on planned resources as well. Thus government borrows money for this expenditure and increases the fiscal deficit Reserve (Bank of Australia. 2016).

	2011	2012	2013	2014	2015
Fiscal Deficit	-3.4	-2.9	-1.2	-3.1	-2.4

(World bank, 2016)

 

After the global financial crisis there was significant slowdown in the Australian economy. The country was facing credit crunch as money was not available to businesses. At that time government of Australia decided to pursue fiscal deficit or fiscal expansionary policy. The fiscal deficit, if used to fund capital expenditure, allows extra money in the hands of weaker sections whose propensity to consumption is high then this helps to boost the demand in the economy. As the demand increases businesses starts investing more in the economy and creates job. Fiscal deficit is a lagging leading indicator and as government takes fiscal expansionary policy after sometime the results starts to show as can be seen from the graph. As government started fiscal expansion the employment rate jumped after few years. It takes time for the capex to show results as demand boosts slowly thus it takes time for companies to start hiring (Australia GDP, 2016).

Fig – 5 Relationship between Fiscal deficit and unemployment

The graph clearly indicates that the unemployment was at its top of 5.6% in 2010 at that that time government started fiscal expansion program and it peaked to 4.2% of GDP. To curb rising unemployment government had to take these measures thus fiscal deficit is counter cyclical as it helps to break the cycle of low unemployment and demand (Budget: a quick guide – Parliament of Australia, 2016).

The measurement of fiscal deficit can be done by various ways and one of them is to see what the underlying cash balances of the economy are. Since Australian government had started fiscal program its cash deficit has reached to $40 Bn. Government has given first stimulus of $10 Bn and second one of $42 Bn to expand economy. However these stimulus which drives fiscal deficit must be one of time as it is not always in the best interest of the economy to boost demand by these stimulus. These stimuli are funded through either higher cash supply from the Federal Reserve Bank or borrowing program of government where it issues bonds. Sudden surge of money leads to higher level of inflation in the economy while higher borrowings from bonds increases the interest cost in the economy. Since Australia largely depended upon the commodities to increase its revenue and repay the debt however the demand for the commodities has evaporated worldwide. One of the prominent buyers of the Australian commodities is China which itself has been facing various issues. Thus drop in revenues from commodities can run risk of miss-match in the inflow of money from commodities and interest and principal maturity of bonds. Thus this is a credit negative event and could impact the sovereign rating of AAA assigned by global rating agencies of the country. Thus the approach of the Australian government is to increase the revenue in form of taxes and mobilize other revenue sources to bridge the deficit once economy starts growing at a decent pace (Karl Brunner, 2009).

Comparison of the Growth Rate of Australia with India in Past Five Years

In the last decade the GDP there has been significant difference between the growth rate of India and Australia. The Australian GDP has grown on average of 2.64% from 2011 to 2015 while Indian GDP has grown by over 6.72% in the same period. However Australia is a developed country while India is a developing country. Thus Australia has already developed so many areas from where the growth comes easily like roads, ports and railways. After development of these areas it gets difficult and difficult to produce growth as growth then only come from improvement in productivity, increase in efficiency as well as technological innovations (Carlson, 1997). Indian economy is at the nascent stage of development as vast part of the economy is still untouched with very basic facilities like toilets, electricity, roads etc. Thus It is very easy for the government to increase growth rate by little investment and efforts. Further if we see the per capita income of Australia is $64000 while per capita income of India is $1600. 2.64% of $64000 is $1689 while per capita growth of 6.72% will result in effective growth of $107. Thus even with lower growth rate Australia has been growing multi-time more than India.

However, no one can deny the fact that scenario has been slowly and rapidly changing towards in the favour of India. India which has 18% of GDP from manufacturing is targeting 30% of GDP from manufacturing by 2020 while Australia has seen decline from 30% of GDP to 12% of GDP today. India offers cheap labours which have basic knowledge and ability to learn fast. Indian government has been focusing on manufacturing and promoting it globally. This along with favourable policies and reforms from government has attracted serval countries to set their work shops in India. This has impacted Australia adversely. Australia which once used to be the motor production hub of the world has lost this tag as most of the manufacturing has moved to the countries like India which has impacted the employment in Australia. India and Australia both have more than 50% of GDP from services. Thus both the countries have vibrant service sector. This coupled with growing manufacturing sector helps India to grow way faster than Australia (Thayer, 2013).

GRO. RATE	2011	2012	2013	2014	2015
Australia	2.4	3.6	2.4	2.5	2.3
India	6.6	5.6	6.6	7.2	7.6

 

Conclusion

Australia is a developed economy with the all the human indicators and financial indicator indicating that it has one of the best living standards in this world. Australia has one of the biggest GDP with $1.65 trillion of size and with moderate population it results in one of the highest per capital GDP of $64,000 in the world. Silver lining for the country is that despite such a big GDP and per capita income unlike many other developed countries it has not stopped growing. The country has consistently been posting positive growth rate of GDP for more than 20 years now. Country has technological advanced companies, huge commodities and natural resources, moderate population. This has resulted in vibrant manufacturing sector, huge service sector which has been major contributor to growth as well as huge mining sector which has contributed significantly to the employment in the country.  Even though the country has posted average growth rate of 2-3% for the past one decade but at the same time it has very low inflation level resulting higher real income for the citizens. The real growth rate is inflation adjusted growth rate. Thus in countries like India which have 8% GDP growth also have 8% inflation which results in no real growth in the income of the country. The economic management of the government of Australia and the Federal Reserve Bank has insured that the country successfully comes out of the various economic difficulties like global financial crisis and keeps growing (Aziz, 2013).

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