Economic Principles and Decision Making

This presentation discusses the economic principles and decision making process in Australia. It covers the growth performance of Australia, current performance of the Australian economy, factors behind the decline in economic growth, housing market, slowdown in economic growth of China, decline in household consumption, decline in average wage growth, and the impact of monetary policy on economic growth. The presentation provides an overview of the current status of the economy and justifies the decision of monetary policy expansion.

Economic Principles and Decision
Making
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Introduction
 Growth performance of Australia in 2018
 Average growth rate of 3.8 percent in the first half
 Growth of export and a strong performance of the household sector
 Sudden break in growth performance of Australia in the latter half of 2018
 A number of different factors
 Housing market
 China’s slow down
 Low wage growth
 Decline in household consumption
 Monetary policy expansion.

Current Performance of
Australian Economy
 Below average growth rate
 Some short term weakness
 Recent drought occurred in Australia
 Sudden decline in export volume
 Decline in the household consumption
 Slow employment growth

Current Performance of
Australian Economy
 Poor performance of housing market
 Sharp decline in the housing prices
 Investment, government spending and net export
 Expansion of investment in non-mining sectors
 Prospect growth of LNG exports
 Growth of manufacturing export

Factors behind decline in
Economic Growth
 Ongoing debate discussing slow economic growth of Australia
 slowdown in domestic housing market
 decline in economic growth of China
 There are other factors as well
 Global economic slowdown
 Decline in household consumption
 Persistently slow wage growth.

Housing Market
 An important part of Australian economy
 Continuous increase in dwelling investment
 Steady upward trend of housing price
 Housing price has started to decline
 Sydney and Melbourne
 First downward movement in price in the last five years
 Increase in supply of houses in the capital cities
 Difference in housing market of Sydney and Melbourne
 Absorption of excess supply

Housing Market
 Different state in Adelaide
 Median house price has increased
 Average increase in 4 percent
 South Australia
 Almost unchanged construction cycle
 Mortgage arrears
 Remained at a considerably low level
 Western Australia
 Higher Mortgage rate

Slowdown in Economic Growth
of China
 Steady economic growth in China
 Industrialization, urbanization and openness of China
 Comparative advantage of Australia
 Export minerals to China
 iron ore and coking coal
 One major trading partner of Australia
 Strong interrelation between Australia and China
 Economic uncertainty in China
 Interruption in Australia’s economic growth

Slowdown in Economic Growth
of China
 Change in composition of growth
 From manufacturing to consumption
 Slow economic growth in China
 Huge amount of debt
 Increase in consumption share
 Trade war between China and USA
 Different channels to impact Australian economy.
 International trade, global commodity market and global financial market
 Decline in demand for exported good
 Decline in MTP.

Decline in Household
Consumption
 Sharp decline in household consumption
 Household consumption
 One vital component of GDP
 Accounts nearly 60 percent of GDP
 Adverse effect on Australia’s economic growth
 Slow growth in household consumption
 Less than expected growth rate

Decline in Household
Consumption
 Primarily depends on income
 Slow growth of real income
 Weak growth in household spending
 Decline in share of income to employees
 Decrease in disposable income
 Spending growth exceeds income growth
 Spending financed out of saving
 Decline in saving to income ratio
 Slow growth of real income

Decline in Average Wage
Growth
 Slow growth of wages
 Since 2011
 Wage declined for both private and public sector
 Average wage growth of 2.2 percent
 Slower than the average growth before 2013
 Average wage growth of 3.3 percent

Decline in Average Wage
Growth
 Fall in nominal wage
 Modest inflation rate
 Decline in real wage
 Fall in inflation, cash rate and real wage
 Low cash rate of 1.5 percent
 Decline in terms of trade
 End of mining boom
 Firms give low wage to workers
 Excess supply or spare capacity of labor market

Economic Growth and Monetary
Policy
 Monetary policy
 Important policy tool
 Stabilize economic performance
 Stability in price level
 Stable growth and employment
 RBA designs monetary policy
 Stabilize price and currency
 Maintain full employment
 Maximize economic welfare and prosperity
 Inflation target within 3 percent

Economic Growth and Monetary
Policy
 Cash rate: Main monetary policy instrument
 RBA considers both internal and external economic condition
 Current decision of monetary policy expansion
 RBA tends to low the cash rate
 Increase in investment spending
 Supportive for investors and mortgage payers
 Side effects of the policy
 Hurt savers
 Lower profitability of banks
 Adversely affects shareholder

Conclusion
 Current status of the economy
 Provides explanation for RBA’s decision of monetary policy expansion.
 Economic growth decline after second quarter of 2018
 Discussed different factors explaining economic growth
 Both domestic and global economic factor
 Slow growth justifies RBA’s decision
 Both positive and negative effect
 Should evaluate both sides of the policy measure.

References
 Agenor, P. R., & Montiel, P. J. (2015). Development macroeconomics. Princeton
University Press.
 Andrews, D., Deutscher, N., Hambur, J., & Hansell, D. (2019, July). Wage Growth
in Australia: Lessons from Longitudinal Microdata. In RBA Annual Conference
Papers (No. acp2019-08). Reserve Bank of Australia.
 Carson, E., Fargher, N., & Zhang, Y. (2016). Trends in auditor reporting in
Australia: a synthesis and opportunities for research. Australian Accounting
Review, 26(3), 226-242.
 Cassidy, N. (2019, July). Low Wages Growth in Australia–An Overview. In RBA
Annual Conference Papers (No. acp2019-01). Reserve Bank of Australia.
 Finlay, R., & Price, F. (2015). Household saving in Australia. The BE Journal of
Macroeconomics, 15(2), 677-704.
 Guilmi, C. D., Gallegati, M., & Landini, S. (2017). Interactive
Macroeconomics. Cambridge Books.
 Guttmann, R., Hickie, K., Rickards, P., & Roberts, I. (2019). Spillovers to Australia
from the Chinese Economy| Bulletin–June Quarter 2019. Bulletin, (June).

References
 Kohler, M., & Van Der Merwe, M. (2015). Long-run trends in housing price
growth. Reserve Bank Bulletin, 2015, 21-30.
 Lardy, N. R. (2016). China: Toward a consumption-driven growth path. In Seeking
Changes: The Economic Development in Contemporary China (pp. 85-111).
 Lin, W., & Cheng, Y. (2016). The Bank Credit Transmission Channel of Monetary
Policy in Australia. International Journal of Financial Economics, 5(2), 61-65.
 Loukoianova, M. E., Wong, Y. C., & Hussiada, I. (2019). Household Debt,
Consumption, and Monetary Policy in Australia. International Monetary Fund.
 Stapledon, N. (2016). The inexorable rise in house prices in Australia since 1970:
Unique or not?. Australian Economic Review, 49(3), 317-327.
 Wu, J. C., & Xia, F. D. (2016). Measuring the macroeconomic impact of monetary
policy at the zero lower bound. Journal of Money, Credit and Banking, 48(2-3),
253-291.

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