Australian Growth Beats Estimates as Rebalancing Begins by Michael Health - Article Example

Article for Economic Analysis Name: Institution: Article for Economic Analysis Introduction Michael Health in his article, Australian Growth Beats Estimates as Rebalancing Begins: Economy cites that the economy has grown faster than it was forecasted. Australia was among the few countries that were not hit by the recent global economic crisis thanks to a boom in resource investment. The boom has helped the nation in achieving continued growth over the past few years. Currently, the resource-investment boom is no more and the country has to rebalance by transitioning from a resource investment led economy towards other sectors such as household spending. The rebalancing has started to show benefits where household spending increased by 0.8% in the last quarter of 2013, growing the GDP by 0.4%. Additionally, the country has seen an increase of 2.4% in exports, while machinery and equipment reduced by 8.8%, leading to a 0.4% reduction of the GDP. The unemployment has reached a record height of 6%, which presents on of the main challenges to the economy. This essay analyzes the article using several economic theories and principles relevant to GDP growth. Health (2014) cites that the economy grew by 2.8%, which was above the estimates of 2.5%. Currently, the growth rate in unemployment is at 3%, caused by the rate of real gross domestic products that keeps it constant. With a lower growth rate in GDP, it means the unemployment is slowly but steadily rising. Only a growth rate of more than 3% in the economy can slow its down. The article indicates that a nation’s economy is dependent on the household spending, investment and capita accumulation. One of the economic theories that can explain this situation is the economic growth theory. Analysis The economic growth theory identifies several sources of economic growth in a country. This theory states that economic growth is a long-term expansion of a country’s productive potential. It measures the long run path of output in a country over a period of several years, even decades. Each country has different economic drivers, which influence a country in different levels. Some of these drivers include growth in the labor force, physical capital stock, technological advancement allowing higher output per employee, quality of labor force and increasing demand in goods and services. Each of these factors will have a different level of impact on the economy depending on the country. In this article, a rising demand for goods and services evidenced by an increasing household spending is one of the main factors driving growth. According to Health (2014), “Household spending advanced 0.8% in the fourth quarter, adding 0.4 percentage point to GDP growth, today’s report showed.” When spending increases, it means more business for the nation, hence an increase in growth. Spending is also influenced by several factors such as taxation, level of national income, unemployment and savings. Among these factors, saving is more relevant to this article. Household spending is mutually exclusive with savings, which indicates that when the level of saving is high, spending goes down if income remains at the same level. One chooses between spending and saving. In this case, Australians have reduced their levels of savings as indicated by the article, subsequently resulting in increased spending. “Australia’s economy expanded faster than analysts forecast last quarter on rising household spending and lower savings, as the central bank’s bid to spur consumption-led growth bears fruit,” (Health, 2014). The article indicates that savings fell to 9.7% in the final quarter of 2013, which was the first time it went below 10% since 2010; meaning people spent more, hence the growth in the economy. Some of the factors leading to the increased consumptions can be the increase in both domestic and external trade. Health (2010) cites that exports increased by 2.4%, which meant the demand for Australian goods are increasing in the international markets. This increase led to a 0.5 point in the GDP growth. Currently, the central bank is cutting on its rates in order to encourage increased demand for its products both domestically and internationally. This means consumers both domestic and international can access Australian goods at a lower price, which increases demand. This is in accordance to the law of supply and demand that stipulates when prices goes down demand increases, as more people are willing to buy. This was autonomous consumption considering it was not triggered by an increase in income. During the global economic recession, the country continued to experience growth. As aforementioned, Australia was one of the few countries that were able to avoid the crisis due to its heavy resource investment. During the season, the country was heavily reliant on mining. This required many investments in resources in order to continue production. As a result, the country’s production remained up while other developed countries such as United Kingdom and United States experienced downturns in production as well as investments. Increased investments are yet another economic growth factor. This is within increase in physical capital stock, which leads to an increase I the capital employed per worker. This allows workers to be more productive considering there are more resources. The article indicates that the country had invested heavily in the mining sector, which had greatly contributed to the economic growth. The economic growth theory refers to this as capital deepening. It allowed the nation to continue with production over the last decade. Another growth factor in the Australian economy addressed in this article is the cost of borrowing where the government cut it by 2.5% to reach a record low of 2.5%. This was aimed at driving building approvals and household prices. When the cost of borrowing is low, which means the interest rate to pay is lower; many people are willing to take up loans. Majority of these loans go to functions such as mortgages. When the interest rate is low as it has been in the past few years according to the article, people are willing to spend more. Interest rates can affect consumers spending in four ways. The first one is determining the levels of savings. When it is low, it means consumers will earn very little by saving in banks. On the other hand, it also means they have access to cheaper loans as aforementioned, which encourages them to borrow and spend. In the case of Australia, it is evident that the low interest rates have made the market unfavorable for saving, while it makes it good for borrowing and spending. Health (2014) cites that, “The central bank has cut rates to a record low to support the economy as a mining boom moves from the employment-intensive investment phase to one of increased supply and higher exports.” Conversely, a rise in interests will mean the opposite, where it diverts people from spending because they have to use a significant amount of money to pay interests. In addition, a high interest rate will discourage households from borrowing. Finally, it can affect spending by altering consumer perceptions. When it is too high, many people will wait for what happens next, refraining from both spending and saving. Clearly, Australians are finding it better to borrow money than save. This is one of the main reason contributing to the increase in spending within the nation. Health further cites that it is expected that interest rates are likely to go up, which might bring the consumption down (Health, 2014). The other issue addressed in this article is exchange rate. A country’s exchange rate has significant influence over its economy. The Australian Dollar has traded high against the American dollar, recently reaching its highest point in the last two decades. “Australia’s currency averaged about $1 in the past three years, compared with around 72 cents in the prior two decades, spurred by the resource investment boom and near-zero interest rates in the U.S. and Japan,” (Health, 2014). This has not been beneficial especially to the automobile industry that has seen major players in the market such as Toyota Motor Corp. Ford and General Motors make announcement of stopping manufacturing in Australia. One of the effects of a high currency is making it expensive for other countries to do business. The three motor companies have found it quite expensive to continue operations in Australia considering the costs. An increase in the exchange rate increases prices, which reduces aggregate demand. In addition, it reduces demand for exports because other countries find the goods expensive. The exchange rate principles indicate that whenever there is a change in the rate, a double effect occurs. It affects both imports and exports. When the rates are high, imports becomes cheaper while exports are more expensive. The opposite happens when the exchange rate depreciates, where the imports become more expensive as exports become cheaper. For Australia, the exchange rate is quite high. This can partially explain why domestic consumption has gone up. People can purchase more of imported goods. In addition, it would be theoretically correct to say that it could lead to a deficit in the balance of payment between imports and exports. This is because a higher exchange rate allows Australians to import more, while it reduced exports. Overall, an exchange rate can increase or decrease the aggregate demand, which subsequently affects the GDP. Effects of exchange rates can be represented in the following graph. In this diagram, when the price of a county’s currency depreciates allowing the foreign currency to appreciate from P1 to P2, aggregate demand increases, triggering a forward movement on the graph. Aggregate supply as well increases, leading to a higher equilibrium. The national income increases as well. If the price against foreign currency goes up, the curve shifts to the left. In Australia’s case, a lower exchange rate would bring down the price of its goods, which could allow forms to operate at a lower cost. Conclusion The article Australian Growth Beats Estimates as Rebalancing Begins: Economy by Michael Health indicates that the Australian economy has grown faster than it was estimated. Much of its growth is coming from the increase in household consumption. The government has been seeking to rebalance the economy from a resource investment led one into other sectors, mainly through consumption. To do this, the government reduced the interest rate, making it favorable to borrow and spend instead of saving. Spending and saving are mutually exclusive; hence, they cannot occur at the same time. One has to choose between spending and saving. Another important economic theory is the exchange rate. Australia has a high exchange rate, which increases the price of exports, but reduces price of imports. This has the potential to reduce exports while imports increase, leading to a negative balance of payment. Currently, the country has seen three automobile firms announce their plans to stop production in Australia. To reverse this, the government will have to come up with a solution that can make manufacturing cheaper. On the other hand, the lower interest rates should enable expansion of business because of easier loans. Reference Health, M. (2014). Australian Growth Beats Estimates as Rebalancing Begins Economy. Retrieved from http://www.bloomberg.com/news/2014-03-05/australia-s-economy-expanded-faster-than-forecast-last-quarter.html Read More