The State of Australian Economy: Challenges and Opportunities

Contents
1Global Tariff Uncertainty ..................................................................................................................4
Global Financial Market Uncertainty ..................................................................................................4
2Uncertainty in the US Economy.........................................................................................................5
3Conclusion..........................................................................................................................................6
Introduction 2
The Current State of Australian Domestic Econoomy 2
Australian Economy and the Global Markets 3
Australia and the rise of Protectionist Tendencies 3
Global Financial Markets 3
Conclusion 4
Bibliography 5

The State of Australian Economy
1 Introduction
The Governor of Australia recently expressed satisfaction at Australia growth rate in the first two
quaters of 2018, while expressing concerns over the unstable global economy which could hampler
this growth, precisely the impending trade war between China and the US, the threat of
protectionism (Shane, 2018) and the increase in tariff barriers , in world trade in general, and
growing volatility in the financial markets. This paper is a glance the current economic situation of
Australia , domestic and internationally as well as the possible impact.
State of the Economy
Australia has had the strongest growth in GDP in the last two quarters and compared to the last few
years and is project to grow by 3% in the year 2018 (OECD Data, 2018) . A rise in the GDP would
imply a rise in infllation as well as arise in wages. Wages in Australia have remained stagnant in the
last few years and were beginning to become a cause of concern. (OECD, 2017)
The declining growth in unemployment should, hopefully raise the Aggregate Demand within the
country further (Illustration 1). An increase in the wages shall help induce greater consumption
demand within the economy. However, at the current rate, the consumption demand in Australia is
not a cause of concern as the Australian household debt in already among the highest in the world at
211% of the world. (OECD Data, 2018) Unless some measure to introduce savings are induced, this
household debt may rise further. Hence, a monetary policy of cheap money should be abandoned by
Reserve Bank of Australia to give way for higher interest rates. Since the inflation has been rising
and is within the inflation target of Australia, there are no expected harmful effects to be experience
to inflation targeting.
Illustration 1: Unemployment Rate in Australia since 2016 (Source: OECD Data, 2018)

In the past few years, Australia has been following an expansionary monetary policy in order to
maintain inflation levels and GDP growth rates. Hence, interest rates in Australia have remained
consistently low in the last few years. The impact of low interest rates should have led to a high
demand for investment. (Illustration 1). This demand has been channeled into the housing sector. A
consumer led spending growth in the housing sector has led to a boom in the housing sector. On the
other hand, the mortgages on houses, along with cheap credit for consumption purposes have led to
a high spending among consumers and greater household debt. Lower interest rates do not spur the
consumer to save more. Hence, it is time that monetary policy for Australia must take a somewhat
reverse path and should be aiming at raising interest rates.
Illustration 2: The Dangers of Aggregate Demand (AD) moving beyond Sustainable supply (Full
employment)
Source: Adapted from (Samuelson & Nordhaus, 2004)
If wages, consumption demand and aggregate demand rise further, it will push the economic growth
beyond the sustainable supply level of full employment. Full Employment is usually considered to
be at 5%. In the current scenario, if Australian Economy pushes any lower than 5% employment, it
would be dangerously close to pushing past the Aggregate Supply and experience high inflation,
macro-economic instability and rising asset prices. Hence, there is a case for a tighter monetary
policy. (Mankiw, 2009)
Australia had also accumulated high budget deficits following the Global Financial Crisis of 2008-
2009 as the national policy required to have expansionary policies. However, measures have been