Analysis of Australian Economic Growth: ECON6000 Report

This report, prepared for the Governor of the Reserve Bank of Australia, analyzes the recent slow growth rate of the Australian economy. It examines the causes of the slowdown, including factors like household consumption, the housing market, and net exports, and explores the impact of government policies. The report investigates the decline in economic growth, the role of household spending, and the influence of international trade on Australia's economic performance. It also offers policy recommendations, such as adjustments to the cash rate, open market operations, tax cuts, and infrastructure development, to stimulate economic growth. The study uses secondary data to support its findings and provides a comprehensive overview of the Australian economy and its challenges. The report concludes with a set of actionable recommendations to address the economic downturn and promote future growth.

1
ECON6000
ECONOMIC PRINCIPLES & DECISION MAKING

2
Executive summary
The paper contains a report dedicated to the governor of the reserve bank of Australia. The
report is regarding the recent slow growth rate of the Australian economy and proposition to
get rid of the problem. The study talks about the causes the slow growth along with the tools
that can be used for the betterment of the growth rate of the economy. The paper also
furnishes a few recommendations based on the problem as well.

3
Contents
Introduction................................................................................................................................4
Methods......................................................................................................................................4
Discussion..................................................................................................................................4
Overview of the economy of Australia......................................................................................4
The recent event of a decline in the economic growth rate of Australia....................................5
Reasons for the slow growth rate of the Australian economy...................................................6
Household consumption and the housing market......................................................................6
Net export and the trade connection with the other economies of the world.............................7
Government policies that can boost the growth rate of the Australian economy......................8
Cut in the cash rate.....................................................................................................................8
Open market operation...............................................................................................................8
The tax cut and subsidies...........................................................................................................9
Infrastructure development and government spending..............................................................9
Recommendations....................................................................................................................10
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

4
Introduction
Economic domination and powers nowadays are very important for the sovereignty and value
of a country. In that aspect, one of the major countries that have been successful since the late
'50s in Australia. Australia is currently among the best economies in the world. As far as
nominal GDP is concerned, the Australian economy is the third largest economies of the
world. Apart from that, another advantage of the Australian economy that sets it apart from
all the other developed nations of the world is the fact that Australia has a much better wealth
distribution. Hence it tops the chart for the segment of the highest median income of the
population. However, its growth rate has been concerning the economist since the financial
crisis of 2007. Despite the mining boom, the country has not been able to generate a higher
economic growth rate. Thus, the objective of this paper is to present a report finding the
causes of the slow growth rate of the economy.
Methods
The data and information collected from secondary sources like research papers, articles and
journals. Apart from that, the report also synthesises the information from different
government websites of Australia as well.
Discussion
Overview of the economy of Australia
The Australian economy is among the very few trillion dollar economies of the world. As per
the data of the year 2018, the GDP of Australia is around 1.69 Trillion USD. Due to the low
inequality in the economy of Australia, the median income of the people of Australia is the
highest in the world (Guttmann et al. 2019). The resources available to the government of
Australia are also of very high quality. While the frequent mining boom has helped the
economy to get over from the global financial crisis of the year 2007, high quality of labours
have also increased the production quality and thereby the standard of living as well. The
economy of Australia is among the top 20 exporting nations of the world as well. The recent
mining boom has allowed the country to expand its trade volume with the close partners as
well. The structure of the economy of Australia is very common as most of the GDP
contribution is from the service sector (Laurenceson & Zhou, 2019). Over the years the
contribution of the agriculture sector has been decreasing as the economy is becoming a

5
manufacturing hub. With new negotiations with different trade blocs, the dependency of the
Australian economy on other economies has increased over the years. One of the main
partners of Australia is China whose economy is directly influenced by the changes in the
economy of Australia and vice versa.
The recent event of a decline in the economic growth rate of Australia
Although Australia is one of the largest and the strongest economies of the world, its recent
economic growth rate has raised many eyebrows over the world. Zammit & Howden (2019)
stated that Australia is among the very few economies of the world which managed to get off
the financial crisis quickly. This was mainly due to the mining boom that the country had
been through just a couple of year ago. However, as per the current data of the year 2019, the
economy has grown only by 1.8% till March 2019, which is the lowest since the global
financial crisis of the year 2007. Australian Bureau of Statistics has also stated that the
growth rate of the economy has been far below the expected lines given the mining boom that
it had been through a few years ago. One of the very concerning features of the economy of
Australia at this moment is the low household spending. Loke (2018) stated that household
spending is one of the components of the aggregate demand for goods and services in an
economy.
Therefore, this low household demand contributed to the low economic output and hence low
growth. The demand for housing has been reducing each month and hence the household
spending is failing to contribute significantly towards the GDP of the country. Furthermore,
another biggest component of the aggregate demand that triggers the growth rate of the
economy is government spending (Levy-Livermore, 2019). This component has reduced over
the time following the decision of the government to reduce the money supply in the
economy so that the effects of the mining boom can be realised for a little longer than
predicted. Lastly, the net export is another major component of the aggregate demand which
in turn influences the growth of an economy. Chen & Groenewold (2019) stated that, in an
open economic scenario, a net export component of the aggregate demand connects the home
economy with a foreign counterpart. Thus, demand for the foreign economy which is in turn
influenced by their economic performance can influence the aggregate demand and hence the
growth rate in the home economy. Badreldin (2018) noted that the export to the trade partners
from the side of Australia has declined by 38% compared to the data of 2014.

6
Reasons for the slow growth rate of the Australian economy
Economic production and growth rate is not a simple concept as a lot of factors influence the
activity of an economy. Therefore, to understand the reasons for the economic slowdown of
Australia, different factors influencing the components of the aggregate demand needs to be
understood.
Household consumption and the housing market
First and the foremost component of the aggregate demand is the household spending which
is also the most important in the scenario of the Australian economy. As discussed above, the
median income of the people of Australia is among the bests in the world that also reflects in
the market of housing as well. According to Fox (2018), housing is one of the basic needs of
humans and signs of improvement in the standard of living manifests through the possession
of better housing. However, since the year housing market downturn of the year 2015, the
demand for housing has not bounced back to its original position. Huong & Phuong (2019)
stated that excessive subprime lending from the commercial banks without much security
increased the demand for housing at a time promising the economy a great path towards
growth. However, the sudden burst of the housing market bubble in the economy of Australia
has now pushed the economy of Australia in danger. Thus, the household market is one of the
factors which through the component of household consumption have reduced the economic
product and the growth rate of Australia.
Apart from that, household consumption, in general, has also gone done owing to the steep
reduction in the per capita income a few years ago. Byrne (2019) stated that, since the
decrease in the per capita income starting from the year 2010, the marginal propensity of the
consumers has decreased. One of the important points that need to be noted in this case is that
despite the increase in the marginal propensity to consume, the national savings rate of the
economy has not increased (Villalta Puig, 2018). The main reason for that is the increased
income tax slab imposed by the government of Australia. The government of Australia
increased the income tax to generate government revenue that can be used as an investment
in the mining sector so that the period can be strengthened. Therefore, these two factors
influencing the household spending ultimately contributed to the decreased economic growth
rate of the Australian economy.

7
Net export and the trade connection with the other economies of the world
The Australian economy with is impressive economic performance till the year 2014, also
made sure to negotiate relationships with different trade partners of the world. One of the
biggest involvements of Australia in terms of the volume traded is in the Asian trade
cooperation. Australia has been exporting mining materials and other goods and services to
the markets of Asia, especially China. According to Chen & Groenewold (2019), the trade
surplus of the Australian economy has been increasing since the time it has adopted
neoliberal policies. The increased in the component of net export has boosted the growth of
the Australian economy until the year 2007 when the country was slightly influenced by the
global financial crisis. China is the most important trade partner of Australia having 13% of
the overall export from Australia. On the other hand, to China as well, the economy of
Australia is important in the sense that it acquires around 37% of the raw materials from the
markets of Australia. Thus, the dependency among the countries has increased in the last
decade. Stanford (2019) noted that one of the biggest disadvantages of global dependencies is
the economical dependencies that also influences the economy of the partner as the economy
disturbs in the home economy.
In this case, Australia’s economic performance is to some extent influenced by the economic
conditions of China. For example, in the year 2006, while china was experiencing a high
growth rate averaging 7.4 per year, the demand for the goods and services exported from
Australia increased significantly (Wu, Wu & Wang, 2018). On the other hand, since the last
year due to the trade sanctions against China from the side of the US, the manufacturing
sector in China was experiencing a huge downturn. This resulted in reduced demand for the
raw materials exported from the markets of Australia. Apart from the mining goods, the
export of other goods and services is also hampered since the imposition of tariff against
China. Lowered demand for the manufactured goods of china has reduced the overall
aggregate demand in their economy which has further affected the net export of Australia
(Gilfillan, 2019). Thus, through open trade relations, the economy of Australia is intertwined
with the global economy and hence the changes in the external environment influence the
economy of Australia.

8
Government policies that can boost the growth rate of the Australian economy
Cut in the cash rate
The government of Australia along with the central bank of Australia needs to take the
responsibility to boost the growth rate even in the scenario where the economy is linked to
wither economies of the world. One of the tools which are in the direct control of the
government and the central bank is the cash rate. The governor of the central bank of
Australia is in favour of a cut in the cash rate to boost the economic growth rate of Australia.
Abbott (2019) stated that the cash rate is the rate at which the central bank of Australia issues
money to the commercial bank. One of the advantages of this policy is that it can directly
impact the household consumption of the aggregate demand. If the cash rate is lowered the
commercial banks would be able to reduce the nominal interest rates for the loans they issue
to the customers. As a result, the demand for the housing will rise again leading to an
increase in the household spending of the economy. Given the fact that house market of
Australia is one of the biggest controllers of the aggregate demand in the economy, any king
of increase in this market would eventually reflect in the economic growth rate of Australia
(Hartigan & Morley, 2019). Another important benefit of this policy is that it would increase
the money supply in the market leading to an increase in the demand for overall goods and
services in the economy. However, this policy has its negatives, as well as the prices of the
goods and services in the market, are expected to go up. From the quantity theory of money it
is evident that, with the increase in the money supply following the reduction in the cash rate,
the inflation is expected to go up. Apart from that, the rate of return for the investment is also
expected to go down due to this policy of the government and the central bank.
Open market operation
Another major tool available to the central bank of Australia is the open market operation.
Under this tool, the central bank buys or sells its securities in the market to regulate the
money supply. In this case, the central bank of Australia can buy back its securities to
increase the money supply in the market (Doherty, Jackman & Perry, 2018). This increased
money supply will increase the cash in hand of the customers of the market and hence the
demand for goods and services will increase eventually. According to, the government needs
to increase the aggregate demand for goods and services of the economy. However,
compared to the cash rate cut, the advantage of this tool is that it will have no effects on the
investment inflow in the economy of Australia. This policy will have no impacts on the

9
nominal interest rates and hence the likeliness of the investment especially from the foreign
economy will not reduce over time (Schroeder, 2018). Despite that, there is a major problem
with this policy which makes it inferior to the previous policy suggested by the governor of
the central bank. Open market operation requires a fast processing securities market which is
not present in most of the economies of the world including Australia. Apart from that, the
results f the open market operation also takes a lot of time to reflect on the growth rate of the
GDP. Therefore, this policy is not suitable when the goal of the government is to boost the
growth rate of the economy in a short period.
The tax cut and subsidies
Another policy of the government that can contribute to the growth of the economy of
Australia is the tax and rebates. This is often used by many economies of the world to
improve the growth rate in time of recession. The tax cut and subsidies work through both the
components of household spending and the investment. While on one hand, it increases the
disposable income of the consumers of the market, it also increases the rate of return from the
investment. Therefore, two of the major component of the aggregate demand which directly
influences the economic growth increases significantly. However, Cowling & Tanewski
(2018) noted that one of the biggest disadvantages of this policy is the double increase in the
inflation rate of the economy. Inflation increases when the demand for the goods and services
increases as the disposable income increase. It also increases through the seigniorage
(Printing and distribution of new currency) to meet the government expenditures. Apart from
that, too much decrease in the tax rate can also harm the productivity of the workers as well.
As discussed above, Australia is known for its highly skilled workers with high productivity.
The reduction in productivity would work against the improvement of the economic growth
rate of Australia and hence the goal of the government would not be achieved.
Infrastructure development and government spending
Another way to approach the problem of Australia is by influencing the government spending
component of the aggregate demand. Government spending is known as the expenditure
made by the government for the development of the economy. Under this one of the main
head of expenditure of the government is infrastructure development. In this way, the
government can increase tax revenue and invest in development projects that are high in
return. This will further enable the economy to have better productivity and hence a higher
growth rate. One of the biggest advantages of this policy is that it consulates the economic

10
consistency for a long period. However, as Adeney (2018) highlighted that as per the
empirical evidence government spending may not improve the growth rate of the economy in
times of recession or slow growth which is currently the main problem of the Australian
economy. The main reason for this failure of the government could be the unambiguous
effects of the tax rates on the consumption of the consumers of the market.
Recommendations
As per the problems of the Australian economy and the finding of the paper, it is
recommended to the government and the central bank to use the tool of the cash rate. The
rationale behind using the cash rate as a boost for the economic growth rate is that it has
minimal side effects for the economy. Another close alternative to the changes in the cash
rate in the open market operation. However, the lack of presence of matured security markets
in Australia is a great burden for the government to implement this policy. Thus, it is
recommended to use the cash rate as a tool to boost the growth rate of Australia in the short
term.
Another recommendation to the government and the central bank of Australia is that they
should acknowledge the importance of the housing market in the Australian context. From
the study, it is clear that the housing market plays a valuable role to run the economy of
Australia after it has finished benefiting from the recent mining boom. In addition to that, in
correlation with the low economic growth rate of Australia, the housing market has also been
in the downturn. Thus, if the nominal interest rate can be reduced the demand for the loan for
housing would increase providing short term support to the growth rate of the economy.
Conclusion
Therefore, the paper showcases the recent problem of the economy of Australia. It highlights
the key role played by the housing sector of the economy. The downturn in the housing
market has largely contributed to the slow growth rate of the country at the moment. There
are other factors as well which have contributed to the reduced growth rate as well. The paper
also provides an approach that could be taken by the government and the central bank of the
country to retrieve the growth rate back in a short period. The study also recommends using
the tool of cash rate as it would provide an apt solution based on the goals of the government.

11
Reference
Abbott, M. (2019). The United Kingdom’s Economic Relations with New Zealand and
Australia after Brexit. The Round Table, 108(1), 21-35.
Adeney, R. (2018). Structural change in the Australian Economy. Reserve Bank of Australia,
Bulletin, March Quarter, pp. 9-14.
Badreldin, A. (2018). Structural Impediments to Sustainable Development in Australia and
Its Asia-Pacific Region. In Pathways to a Sustainable Economy (pp. 43-57). Springer, Cham.
Byrne, P. J. (2019). The challenges are really hitting home in 2019. News Weekly, (3037), 3.
Chen, A., & Groenewold, N. (2019). The effects of China’s growth slowdown on its
provinces: Disentangling the sources. Growth and Change, pp-898-1024
Chen, A., & Groenewold, N. (2019). Regional resilience in China: The response of the
provinces to the growth slowdown(No. 19-06).
Cowling, M., & Tanewski, G. (2018). On the productive efficiency of Australian businesses:
firm size and age class effects. Small Business Economics, 1-14.
Doherty, E., Jackman, B., & Perry, E. (2018). Money in the Australian Economy. RBA
Bulletin, September Quarter, pp. 75-78.
Ellem, B., & Tonts, M. (2018). The global commodities boom and the reshaping of regional
economies: the Australian experience. Australian Geographer, 49(3), 383-395.
Fox, K. (2018). What Do We Know About the Productivity Slowdown? Evidence from
Australian Industry Data. International Productivity Monitor, (35), 149-156.
Gilfillan, G. (2019). The extent and causes of the wage growth slowdown in Australia, p-11-
89
Groenewold, N. (2018). China's ‘New Normal’: How will China's Growth Slowdown Affect
Australia's Growth?. Australian Economic Papers, 57(4), 435-445.
Guttmann, R., Hickie, K., Rickards, P., & Roberts, I. (2019). Spillovers to Australia from the
Chinese Economy| Bulletin–June Quarter 2019. Bulletin, (June), pp. 35-78

12
Hartigan, L., & Morley, J. (2019). A Factor Model Analysis of the Australian Economy and
the Effects of Inflation Targeting(No. 2019-10), pp.78-133
Huong, V. T., & Phuong, N. T. L. (2019). Changes in Vietnam-China Trade in the Context of
China’s Economic Slowdown: Some Analysis and Implications. VNU Journal of Science:
Economics and Business, 35(2), pp-78
Laurenceson, J., & Zhou, M. (2019). Small grey rhinos: understanding Australia’s economic
dependence on China, pp.78-789
Levy-Livermore, A. (2019). Economic analyses of financial crises. Routledge.
Loke, B. (2018). China's economic slowdown: implications for Beijing's institutional power
and global governance role. The Pacific Review, 31(5), 673-691.
Schroeder, S. (2018). Just how fragile is the Australian economy?. Australian Options, (87),
18.
Stanford, J. (2019). A turning point for labour market policy in Australia. The Economic and
Labour Relations Review, 30(2), 177-199.
Villalta Puig, G. (2018). Drivers and difficulties in the economic relationship between
Australia and the European Union: from conflict to cooperation. Australian Journal of
International Affairs, 72(3), 240-254.
Wu, J., Wu, Y., & Wang, B. (2018). Local Government Debt, Factor Misallocation and
Regional Economic Performance in China. China & World Economy, 26(4), 82-105.
Zammit, K., & Howden, M. (2019). Economic overview. Agricultural Commodities, 9(1), 16.