Economics for Business: Australian Economic Analysis and Outlook

This report provides an analysis of the Australian economy, focusing on its Gross Domestic Product (GDP) trends over the last five years. It examines the components of GDP, highlighting the dominance of the service sector and the contributions of various industries such as mining, construction, and agriculture. The report details the fluctuations in GDP growth rate, identifying key factors such as falling commodity prices, slowdown in China's growth, and instability in the housing market that have influenced economic performance. Furthermore, it explores the role of government policies, including fiscal and monetary measures, in shaping economic growth and stability. The report discusses specific policies implemented by the Australian government, such as automatic stabilization and counter-cyclical fiscal policies, and their impact on employment, productivity, and overall economic well-being. It also offers insights into the future outlook for the Australian economy, considering the challenges and opportunities ahead.

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Table of Contents
Introduction......................................................................................................................................
Components of GDP........................................................................................................................
Analysis of trend in GDP.................................................................................................................
Factors explaining trend in GDP.....................................................................................................
Economic growth and government policy.......................................................................................
Policies of Australian government to influence economic growth..................................................
Future outlook for Australia............................................................................................................
Conclusion.....................................................................................................................................
Reference list.................................................................................................................................

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Introduction
The goods and services produced in a nation in a given year is measured with the
Gross Domestic Product. It is the monetary value of all the produced goods and services in
a nation. In order to find out market values of goods and services quantity of produced
goods and services are multiplied with respective market prices. The market price can
either be current year market price or market price of a pre-determined base year. GDP
presented with current year market price is called nominal GDP presented with base year
market price is known as real GDP. GDP is considered as a single composite measure of
well-being (Uribe and Schmitt-Grohé 2017). An overtime increase in GDP indicates growth
of a nation. Rate of change in GDP is a proxy measure of economic growth.
The paper examines trend in Australian GDP in the last five years. GDP of
Australia is dominated by service sector with contribution of service sector being more than
60% in GDP (Rieber 2017). After discussing trend growth rate, the paper tries to find
possible factors explaining the concerned trend. Government policy often plays a key role
in determining economic growth. In this context, policies undertaken by Australian
government to promote growth is discussed.
Components of GDP
Primary, secondary and tertiary sectors are the three main contributor of gross
domestic product. For a developed economy like Australia, service sector has the
dominating share in GDP. The service sector contributed nearly 69.4% of GDP (rba.gov.au
2018). Among different sub sectors in the service sector, the most vital sector is finance
and insurance. Four big banks of Australia namely Commonwealth Bank, Westpac, ANZ
and NAB belong to the list of world’s fifty safest bank. After finance and insurance, the
other important services of Australia include professional and technical service, education,
tourism, ownership dwellings, media and communication, tourism and such others.
Secondary of industrial sector having a contribution of 26.6% is the second largest
contributor of GDP (Nielsen 2017). Among different industries, the two major industries of
Australia economy are construction and mining. Mining industry alone contributes 8.8% of

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GDP with more than 50% of the coal exported to different nations. The contribution of
manufacturing is 5.9%. Followed by mining, the next important industry is construction
with the share GDP being 7.7% (Yu et al. 2017). The smallest contribution in GDP has
come from agriculture. Contribution of agriculture in Australian GDP is only 4%. Despite
having relatively small contribution in GDP, the sector is important both for the internal
and external economy.
4.00%
26.60%
69.40%
Sectoral Composition
Agriculture
Industry
Service
Figure 1: Sectoral Composition of Australian GDP
(Source: rba.gov.au 2018)
Analysis of trend in GDP
The figure below shows the GDP of Australia in the last five years. GDP being a
representative measure of economy’s aggregate output, analysis of GDP over the last five
years reveals the economic performance of Australia.

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Figure 2: GDP of Australia
(Source: tradingeconomics.com 2018)
The trend in GDP shows a sharp fall after 2013. GDP in 2013 was recorded as 1567.18
USD billions. In 2014, GDP declined to 1459.6 in 2014. The declining trend in GDP was
followed by a fall in GDP in the next two consecutive years of 2015 and 2016. GDP
declined to 1204.62 USD billion in 2016 (Anderson 2017). The sudden decline in GDP is
quite surprising for a nation like Australia, as it experienced long period of a stable and
rising GDP. Dynamics of the trend in GDP can be understood from the trend growth rate
GDP.
2013 2014 2015 2016 2017 2018
2
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.16
2.62
2.47
2.65
2.27
2.4
GDP growth
Year
Growth rate

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Figure 3: Economic growth in Australia
(Source: data.worldbank.org 2018)
Trend in GDP growth rate in the last five years showed a considerable fluctuation in the
GDP growth rate. The fluctuation point represents period of peak or trough. After 2016, the
economy experienced a trough, which pushes the economy towards a recession. The
economy recovers slightly in July 2017, with rate of growth being around 2%. In the last
quarter of 2017, the accounted GDP growth rate was 2.9 percent. In the beginning of 2018,
economic growth fell to 2.4% (tradingeconomics.com 2018).
The recent growth rate of Australia is below the estimated growth rate. The
economy is now facing some major growth constraints. The falling price of exported
commodities in the world market is one of the major factors driving down growth of the
nation. Energy sector is one important contributor of Australia GDP growth. Demand for
energy and resource from Asia particularly that would be derived from China has slowed
down. Household consumption, public and private investment and support from
government expenditure have tried to recover economic growth of Australia (abc.net.au
2017). Mining and construction on the other hand continued to experience a downturn in
investment. In the service sector, growth of financial service has remained stagnant while
social assistance and health care service has recorded an increase.
Factors explaining trend in GDP
Australia over the last five years is consistently accounting a slow growth rate. The
growth rate of Australia has hardly reached to 3% and remained mostly around 2%. Some
positive sign in economic growth has been observed from increases in public investment
and slow recovery of household consumption. Two of the most important industries in
Australia are construction and mining. Both the sectors are now going through a slump.
Mining has long been a major driving force for economic growth of Australia and helped
the nation to maintain its strong growth position. The collapse in global commodity prices
has however taken the Australia to a costly readjustment. The recent slowdown in China’s
growth phase is another factor that led the economy towards a transition (Taylor and Tyers

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2017). The turmoil condition in housing market was contributed from an instability in the
housing price. Australia’s trade balance has worsened from a decline in export along with
an increase in import. The decline in export mainly resulted from a gain in AUD/USD
exchange rate. The average wage growth in Australia is below the expected growth rate. As
a consequence of slow wage growth, household spending lowers (Bishop and Cassidy
2017). The low inflationary pressure attributed from low wage growth and a historically
low cash rate further slows down economic growth.
Economic growth and government policy
Economic growth is defined as the rate at which output or economic activity
expands overtime. Aggregate output and economic activity is measured in terms of goods
and services produced in the economy. As the value of goods and services are quantified
with the aggregate measure of GDP, rate of change in GDP is taken as a representative
measure of economic growth. The percentage change in GDP is computed to measure
economic growth of a nation (Mankiw and Reis 2018). The GDP might shows a steady
increase but rate of change in GDP growth rate might be fluctuating following fluctuation
in economic activities. Fluctuation in economic growth is associated with different phases
of business cycle.
Government by influencing economic activity influences economic growth. Fiscal
and monetary policy are the two government tools that can alter economic growth. In times
of recession, policies taken by government are expansionary in nature. Under expansionary
fiscal policy government either cuts the tax rate or provides spending stimulus. This by
raising aggregate demand stimulates economic growth. The monetary policy works with the
adjustment through bank rate. With expansionary monetary policy, central bank cuts the
bank rate. With ease of lending investment increases (Walsh 2017). During high inflation,
contractionary policies are taken by government. The contractionary fiscal policy works
either through an increase in tax rate or through a reduction in government spending. The
contractionary monetary policy is undertaken increasing the bank rate. This tightens the
money market and reduce investment. The effectiveness of fiscal and monetary policy

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however depends on the internal structure of the economy and corresponding multiplier
effect.
Policies of Australian government to influence economic growth
Support from government and stable policy framework s one factor responsible for
a sustainable economic growth rate of Australia. Government of Australia always focuses
on designing a robust policy creating favorable condition for economic growth (Fatás and
Summers 2017). Despite the fact that, the economy in recent years is experiencing a
slowdown in its growth rate, growth however is still higher than many other developed
countries of the world.
Figure 4: Economic growth of Australia compared to other nations
(Source: treasury.gov.au 2018)
The government policy framework has a significant contribution towards this end. Both
fiscal and monetary policy are used in the nation to maintain a stable internal economic
structure. These policies provide the economy necessary stimulus to overcome sudden

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shock or recessionary pressure. The policy of automatic stabilization is used to make
timely adjustment with the pace of economic activity. One prominent example of stable
policy framework in Australia as compared to the rest of the world is in time of Global
financial crisis (Hochrainer-Stigle et al. 2017) The sub-prime mortgage crisis of United
State in 2008 had an adverse effect on most of the developed economies of world. Australia
however had remained relatively less reluctant following a string financial sector and
adaption of stabilization policy by government. Economic policies of the nation designed in
such a way that support interest of small and medium sized enterprises. Australia is a highly
liberalized nation supporting expansion of foreign trade and investment. Following
liberalization policy of the government, there is a considerable flow of foreign funds. A
primary driver of growth is productivity. Presence of high unemployment, productivity of
the economy goes down along with a decline in growth rate. Policies are taken to generate
considerable growth rate. With the objective of reducing employment to increase
productivity government has created more than 300,000 new jobs in the nation last year
(Dizioli et al. 2017). Attention has also been given on raising skills of the labor for to make
them trained with advanced technology.
Government follows both medium and long-term fiscal strategy. Objective of the
medium terms fiscal strategy is to achieve an economic growth through sensible
government expenditure and a growth in government revenue as outcome of a good policy
rather than raising tax. The medium terms fiscal strategy of government has four
components. First, directing government expenditure towards productive investment to
raise productivity and employment growth. Second, maintaining a strong fiscal position by
cutting unnecessary government spending and shifting economic resources towards private
sector (Kataryniuk and Vallés 2017). During this phase, the GDP to debt ratio gradually
falls resulting in economic stabilization and contributing to an overtime decline in net debt.
Third, support government revenue growth by adapting policies that drive up earning along
with economic growth. Fourth, improvement of net financial worth to strengthen balance
sheet. This version of fiscal strategy though implemented in 2016 but it was in place since
global financial crisis.

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In the spending structure, government follows the strategy of deficit exit. The
strategy refers to the policy of holding government expenditure to a nominal rate of 2%
until surplus is achieved. In order to finance deficit, government makes time-to-time
alteration of existing tax rates. The counter cyclical fiscal policy has conducted to achieve
the twin objectives of long-term economic growth along with economic stability. There is
strong link between cyclical stability and fiscal policy framework. The contribution of
counter cyclical fiscal policy in Australia cannot be overlooked. A stable economy by
encouraging investment contributes to an increase in growth potential of the nation.
Stability in fiscal policy also has positive consequences on consumption smoothing leading
to an increase in social and individual welfare. A counter cyclical fiscal policy also has the
potential benefits in terms of reducing exposure to low income groups to economic
recession.
Future outlook for Australia
Australia is projected to grow at a faster pace in the coming years. Investment other
than mining and housing construction will gain momentum contributing to an upsurge in
growth. Export is expected to boost in response to increasing capacity of new resource
sector. Projection has been made that central bank will reduce the cash rate in the second
half of 2018. The tight monetary policy in combination with other prudential measures will
stabilize the housing market. Fiscal position of the government is sound and it is expected
to close the budget deficit soon (Collins 2017). With an economic downturn, fiscal policy
of the government should remain active and protect the interest of the most vulnerable
groups of the society.
The relative strong position in terms and resource based export growth have
contributed to an increases in income and a resulted increase in tax revenues. There is a
gloomy outlook for mining investment. The positive influence on growth has been
attributed from an increases in capacity utilization and increased business confidence. This
point toward economic expansion outside housing and mining. The labor market has
strengthened with employment growth arising from increasing number of job vacancies
(Alexander, Rutherford and Floyd 2018). The growing underemployment along with a

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stable wage and inflation growth. The slow wage growth along with indebtedness of
household show signs of cooling house market. This will keep consumer spending
relatively soft. Still growth in household spending has remained subdued.
The monetary policy Reserve Bank of Australia remains supportive with cash rate
remained at the level of 1.5 percent third quarter of 2016. Tight monetary policy can be
employed from the middle of 2018 as wage growth and inflation picked up. The ratio of
public debt to GDP though has risen but it still remains low and is expected to decrease
following budgetary objective of the government to reduce deficit to a significantly low
level in the upcoming years (uow.edu.au 2017). A favorable business environment and
policy measures taken to counter social exclusion will facilitate benefit from broad
economic growth and trade. Production of liquefied natural gas contributes add to export
growth. The rebalance of economic state through increasing investment in non-mining
sector will stimulate overall economic activity. Following a moderate slowdown in global
economic growth especially that of China will drag economic growth slightly in 2019.
Conclusion
Australia despite being one of most stable nation in world is facing some economic
fluctuation in recent years. The finding from last five years GDP and growth indicates a
below average growth rate for the decade. Collapse of global commodity prices, slow
growth of China, slump in construction and mining and worsening condition of trade
balance are the some of the factors responsible for economic slump. Government of a
nation is always in a position to influence economic growth. Australia received significant
support from Commonwealth and State government to promote growth. Government makes
investment to improve infrastructure of a nation. Existence of high unemployment dragged
economic growth. Government therefore takes policies to generate employment along with
enhancing education and skills. While raising expenditure, government also focuses on
maintaining a balance in budget. In order to support economic growth RBA has kept the
official cash rate to a considerable low level. The slow growth in Australia however is
unlikely to be converted to a recession. With export expansion from new resource sectors

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and growth of non-mining and different service industries Australia is expected to recover
the slow growth soon ensuring a stable growth in future.