Macroeconomic Analysis of Australia's Economic Growth: ECON6000 Report

This report provides a comprehensive macroeconomic analysis of Australia's economic growth, examining the factors contributing to its recent slowdown. It delves into key indicators such as GDP, consumption expenditure, investment expenditure, and productivity growth, highlighting the impact of both domestic and international influences. The report explores the roles of aggregate demand and aggregate supply in shaping the economic equilibrium, with specific attention to the decline in manufacturing, the slowdown of China's economy, and the implications for Australia's economic performance. It also considers the effects of stagnant wage growth, sluggish non-wage income, rising debt-to-income ratios, and declining house prices on household consumption. Furthermore, it discusses the challenges posed by weak business investment, the end of the resource boom, and disruptive technological processes. The analysis uses the AD-AS model to explain the current growth scenario, providing valuable insights into the complex dynamics of the Australian economy.

Running head: ECONOMIC PRINCIPLES AND DECISION MAKING:
MACROECONOMICS
Economic Principles and Decision Making: Macroeconomics
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Table of Contents
Introduction......................................................................................................................................2
Current growth scenario in Australia...............................................................................................2
Reason for slow growth in Australia...............................................................................................4
Consumption expenditure............................................................................................................4
Investment expenditure................................................................................................................5
Slow productivity growth of the economy..................................................................................6
Decline in manufacturing activity...............................................................................................7
Slowdown of China.....................................................................................................................8
Analysis of growth scenario using aggregate demand and aggregate supply model......................8
Conclusion.....................................................................................................................................11
References......................................................................................................................................13

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Introduction
The branch of economic study that deals with performance and behavior of the economy
in aggregate is called macroeconomics. If focuses on evaluating aggregate change occurs in the
economy by performance of indicators such as Gross Domestic Product, inflation,
unemployment and others. All the aggregate indicators and microeconomic factors together are
considered under macroeconomics. Macroeconomic study has important implication for policy
formulation for the economy (Heijdra, 2017). Macroeconomic equilibrium attained through the
interaction of aggregate demand and aggregate supply is one important aspect of
macroeconomics. The report attempts to link the concept of aggregate demand, aggregate
demand and associated macroeconomic equilibrium with context of current economic growth of
Australia. In the history of economic growth of most of developed countries Australia is the only
country that experienced a stable growth for a relatively long period of time. The resilience
nature of the economy remains almost unaffected or only slightly affected from most of
worldwide recession. However, since past 1 or 2 years the economy has experienced a break
from its stable growth trend. The economic growth rate now is below targeted average growth
rate (Gurran & Phibbs 2015) Given economic openness of Australia, it is not only the domestic
factors that affect economic growth of Australia but also there are global factor hindering
economic growth of the nation. The factors causing a decline in economic growth of Australia
are discussed in relevance to aggregate demand and aggregate supply.
Current growth scenario in Australia
Outperformance in economic growth constitutes one important part of recent economic
history of Australia. The economy just has successfully completed 112 quarters of nearly
recession free economic expansion. Economic growth of Australia is higher than most of

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developed nations in its peer group. Australian economy grew at an annual average rate of 3
percent from 2000 to 2018. The growth rate was higher than the standard of both IMF’s
predicted growth rate for advanced economies and that of the prediction of OECD member
countries’ average growth. The current growth of Australia however is not at per where it was
previously. Before the global financial crisis rate of real GDP growth was 3 percent and that of
per capita real GDP growth was almost 2 percent (Karp, 2019). After the financial crisis, growth
though declined like most other nation it was still 2.5 percent. Per capita GDP during the post
GFC period grew at an annual rate of near 1 percent. The economy is currently doing worse than
economic performance since the financial crisis. Australian economy accounted a growth rate of
only 1.4 percent for the last two quarters of 2019. This was the weakest economic growth since
the global financial crisis hit the economy in the third quarter of 2009. The slow economic
growth along with a steady growth of population has led to a decline in growth of per capita
GDP by 0.2 percent. Real GDP growth rate in the financial year 2018-19 was 1.9 percent only
(Thirwall, 2019) This is below the federal government projected growth rate of 2.25 percent and
lower than the potential growth rate of 2.75 percent.
Figure 1: Annual real GDP growth rate of Australia
(Source: Thirwall, 2019)

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Figure 1 reflects that average growth is far below than it was in the previous decades. The
slow economic growth was explained by a number of different factors related to domestic and
international economies. Global economic dynamism is one significant factor responsible for
outperformance of economic growth of Australia. Besides, global economic slowdown weak
demand from the private sector contributed to a slow economic growth.
Reason for slow growth in Australia
Economic growth of a nation is measured by the percentage rate of change in the Gross
Domestic Product of the nation. Gross Domestic Product is an aggregate measure capturing sum
of the market value of all the goods and services produced by the country in a given year. Under
expenditure approach, GDP is computed as a sum of four major expenditure components such as
consumption expenditure, investment expenditure, government expenditure and net export
(Uribe & Schmitt-Grohe, 2017). When these expenditure components change their effect is
reflected on GDP growth rate. The current outperformance of economic growth in Australia
large due to sharp fall in consumption expenditure of household and investment expenditure.
Consumption expenditure
Among all the expenditure component of Australia’s GDP one component accounting a
significantly large share is consumption expenditure. Therefore, in explaining declining trend of
Australia’s current economic growth consumption expenditure has a pivotal role. There are
different factors at play that have led to a decline in household consumption expenditure. These
factors mostly include existing stagnant wage growth, sluggish growth of non-wage income and
increase in tax rate which lowers disposable income of household (Gilfillan, 2019). As a
combined effect of all these factors households are forced to reduce their saving for sustaining
high consumption. Adverse condition of balance sheet has exacerbated shrinkage of consumption

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spending. The rising trend of debt to income ratio encourages household to reduce spending. The
position of household further worsens with a sudden decline in house prices. The adverse effect
of declining house prices on wealth has lowered household consumption through by multiplier
effect. Government expansionary policies such as cutting interest rate, providing tax refunds and
policies to restore stability in the housing market are expected to give some relief to Australian
household and will help to recover consumption expenditure to some extent however whether
these policies are sufficient to rebuild lost consumer confidence and household expenditure are
yet to see (Herault & Azpitarte, 2015). RBA needs to adapt further interest rate cut to give the
process a boost.
Investment expenditure
Apart from consumption expenditure the private investment is currently at a struggling
state. A sharp downfall in dwelling investment has been caused by decline in housing price. In
addition to dwelling investment business investment has also remained week. One factor
responsible for fall in business investment is the end of resource boom in Australia (Scutt, 2019).
The economy is also showing indication that process of economic adjustment during the post
boom period is almost close to an end. Along with that investment in non-mining sector is
currently very low giving inadequate support to the economy. The slowdown of housing sector
and corresponding decline in economic activity have led expect a slower growth trajectory of
future capital expenditure plan. In addition to domestic economic condition the conflicting
situation of global economy further lowered confidence of investors. There are series of events
disturbing global economic environment. Some of the significant events are uncertainty resulted
from trade conflicts, Brexit and related populist policies and different political events happening
worldwide. These events certainly have impacted industrial activities and investment of different

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nations worldwide the immunity economic system of Australia seems to be unlikely to absorb
the shock. Disruptive technological process is another factors that adds to uncertainty to
businesses (Thirwall, 2019). Under surveillance of an uncertain economic outlook some business
firms are more tend to reverse payment to shareholder rather than planning to conduct expensive
investment plans.
Slow productivity growth of the economy
Lack of productivity growth is one significant factor contributing to a slower growth for
Australian economy. The economy experienced a reversal of productivity growth for a
considerable long period of time. Growth in productivity started to follow a downward trend
since 2011-12. Productivity growth was a mere 0.3 percent during this time. The situation even
worsens afterwards. Productivity growth reached to only 0.1 percent during 2018-19.
Figure 2: Labor productivity growth in Australia

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(Source: (Thirwall, 2019)
One driving factor of growth of labor productivity in Australia was the increase in capital
to labor ratio. The investment spending has remained relatively week since the past few years.
The decline in capital investment has led to a contraction of capital to labor ratio. The ratio has
now is even below the half of its historical average. The Productivity Commission of Australia
has highlighted the contraction of capital to labor ratio as “capital shallowing” in 2017-18.
Besides, capita other factors that contribute to an increase in labor productivity is known as
multifactor productivity (Lala et al., 2015). This multifactor productivity also remained week
causing loss in the productivity dynamism. Since the beginning of 2000s, Australia enjoyed a
steady increase in productivity with growth rate being higher than most of advanced countries in
world. The higher growth of productivity during this time was mostly driven by higher rate of
investment. With fall in investment, growth of productivity has also been faded (Syed et al.,
2015). The case however is not unique to Australia. Most developed nations are experiencing the
same stage of productivity cycle.
Decline in manufacturing activity
Manufacturing sector plays a vital role in the Australian economy since many years. The
sector previously responsible for employing 15 percent of total population in Australia. The
percentage of people employed in manufacturing sector has currently declined to 7 percent. The
reason behind significant decrease in manufacturing activity is the high operating cost in
Australia. With an increase in value of Australian dollar competitiveness of the sector has
declined. Since, manufacturing constitutes a significant portion of Australia’s GDP after the
service sector, decline in manufacturing activity has affected Australian GDP adversely.

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Slowdown of China
Strong demand coming from China was one primary driving force of resource boom in
Australia. Rapid growth of China’s economy and urbanization led to a significant increase in
imported minerals demand from Australia (Lee, 2015). The strong trade relation made China as
the largest trading partner of Australia. The phase of economic expansion in China has now
ended with the economy recording a slower pace of growth. Given the interconnection between
China and Australia’s economy economic slowdown of China has a strong impact on Australian
economy. China constitutes nearly 29.6 percent of Australia’s total export. With a slowdown of
China’s manufacturing sector there is a significant decrease in import demand from
manufacturing industries for the first time (Guttmann et al., 2019). There is nearly 7.6% decline
in total imports in China which is the largest since the last two years. There is a considerable
decrease in demand for minerals for constructing buildings and agricultural products.
Analysis of growth scenario using aggregate demand and aggregate supply model
Macroeconomic equilibrium refers to the state at which aggregate demand of the
economy matches with the aggregate supply. The macroeconomic equilibrium model popularly
known as AD-AS model helps to understand the state of aggregate output and price level using
the relation of aggregate demand and aggregate supply. Aggregate demand measures amount of
finished goods and services demand in aggregate in the economy (Agenor & Montiel, 2015). It is
presented as the total sum of money that is exchanged as against the produced sum of goods and
services. Aggregate demand of an economy at a given time is seen as a sum of expenditure such
as consumption, investment and government spending and next export. Another component of
AD-AS model is aggregate supply. Aggregate supply refers to the sum of product and services
that an economy plans to sell at a given time. In other words, it captures the total sum of products

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or services that a given economy is willing and capable to sell given a specific period of period
(Heathfield, 2015). The macroeconomic equilibrium in the AD-AS model is represented in the
following figure.
Figure 3: Macroeconomic equilibrium using AD-AS framework
The stable macroeconomic equilibrium obtained as the intersection point of aggregate
supply and aggregate demand can change when some external factors lead to a change in
aggregate supply or aggregate demand (Minford & Peel, 2019). In the Australian case there is
changes in both aggregate demand and aggregate supply that have changed bringing a change in
output and price level.
Aggregate demand is a sum of expenditure in consumption, investment, government
spending and net export. Australian household is currently undergoing a situation of fall in
consumption expenditure because stagnant growth of wage, slow growth of non-wage income
and high tax rate lowering disposable income of household (Sadat, 2017). Besides consumption
another component of aggregate demand that is investment has also been slowed down due to a
decline in dwelling investment, lower business confidence and different economic and political

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events occurring globally. The slowdown of China’s economy has lowered export demand of
Australia which adversely affects trade balance. Due to decline in consumption expenditure,
investment expenditure and net export aggregate demand contracts causing inward shift of the
aggregate demand curve (Brown & Narasimhan, 2019). As aggregate demand falls there is a
contraction of aggregate output and price level.
Figure 4: Contraction in aggregate demand and economic growth of Australia
The factor responsible for contraction of economic growth from the supply side is the
decline in productivity growth of Australia. In determination of aggregate supply state of
productivity has a vital role. Australia is currently undergoing a slowing pace of productivity
because of the decline in capital labor ratio which is the result of decline in investment. Decline
in multifactor productivity and technological disruptions are also hindering aggregate supply of
the nation (Cacciatore & Fiori, 2015) As aggregate supply falls, there occurs an inward shift of
the aggregate supply curve. Given aggregate demand as aggregate supply contracts output
contracts and price level increases. This has been illustrated in the following figure

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Figure 5: Contraction in aggregate supply and economic growth of Australia
Conclusion
The report explains the issue of recent slow economic growth of Australia from
macroeconomic perspective. The issue is explained using the macroeconomic equilibrium model
constructed with aggregate demand and aggregate supply. The decline in economic growth in
Australia is a phenomenon related to both demand and supply side. Important components of
aggregate demand are consumption expenditure, investment expenditure, government spending
and net export. Of these components poor performance of consumption and investment and
decline in export demand are responsible for decline in aggregate demand and economic growth.
Consumption spending which accounts a significantly larger share of GDP is continuously
falling because of a fall in both wage and non-wage growth of income, high tax rate and decrease
in household wealth level because of a fall in house prices. Private investment is falling due to a
sharp decline in investment in housing, fall in business investment especially in mining sector
and inadequate investment in non-mining sector. Slow pace of economic growth leads to a