A Description and Comparison of the Australian and New Zealand Economies - Case Study Example

A Description and Comparison of the Australian and New Zealand Economies Student’s Name Course Tutor’s Name Date Executive Summary This report provides a description and comparison of the Australian and New Zealand economies. The report commences by noting that New Zealand is approximately a tenth the size of Australia. Basing its description on the two countries’ national output and expenditure, wages and employment, and the external sector, the report notes that Australia has in the past performed relatively well in the macroeconomic front compared to New Zealand. In recent times however, New Zealand’s macroeconomic performance seems to have improved considerably. Specifically, New Zealand’s terms of trade are on an increase while Australia’s have been on a downward trend. Moreover, New Zealand’s unemployment rates are on a decline and almost at par with Australia’s. The latter’s unemployment rate has been on a rise in the recent past. In 2013 and 2014, New Zealand’s GDP growth has exceeded that of Australia, therefore indicating that regardless of its small size, New Zealand’s economy is on a growth trajectory while Australia’s has stagnated. The only major issue that seems to be dragging New Zealand’s economy behind is the cost of labour, which when compared to Australia’s, is relatively high. The high cost of labour is arguably occasioned by a shortage of skills, which makes the available skills expensive. The report’s conclusion reiterates the comparisons between the two economies and recommends that policy actions by each country will largely depend on macroeconomic areas that may generate the most desired outcomes. Introduction As geographical neighbours, New Zealand and Australia have a lot in common socially and geographically. Economically, however, the two countries are quite different. The New Zealand economy is estimated to be a tenth the size of the Australian economy (Jericho 2014, para. 6). Additionally, New Zealand relies on more on agriculture, while Australia relies on a combination of economic activities, key among them being mining. Notably, Australia is a vast country, which for administrative purposes, has a federal system. World by Map (2014) estimates that Australia’s total land mass is 7,682,300 square kilometres, which is enormous compared to New Zealand’s 267,710 square kilometres. Effectively, the enormous land mass in Australia means that the country’s economy is subject to implications occasioned by government expenditure on infrastructure and defence among other social needs that the government must attend to. Moreover, Moreno, Pigeot and Ahrens (2011, p. 112) estimate that by 2011, Australia’s population had exceeded the 20 million mark, while New Zealand’s population was just slightly over the four million mark. Interpreted, the foregoing statistics indicate that Australia’s economy has about five times more human resource and/or burden to handle when compared to New Zealand. Notably, both Australia and New Zealand are classified as developed countries based on their respective human development index (HDI). Moreno et al. (2011, p. 112) define HDI as a composite measure that gauges a country’s performance on life expectancy at birth, adult literacy, and standard of living. Based on figures provided by Moreno et al. (2011, p. 112), Australia ranks second internationally in the human development index, while New Zealand ranks at position 20 globally. This report will analyse the economies of both countries in more detail through three macroeconomic sectors, namely: the national output and expenditure; wages and employment; and the external sector. National Output and Expenditure A country’s national output is commonly referred to as the Gross Domestic Product (GDP) – a term that describes the value of goods and services that an economy produces in a given period. 2009 (billion) 2010 (US$ billion) 2011(US$ billion) 2012($US billion) 2013(US$ billion) 2014(US$ billion) Australia 923.5 1138.3 1384.2 1532.4 1560.6 1525.9 New Zealand 118.95 143.47 163.99 171.47 182.59 211 Source: Trading Economics (2015a) and Trading Economics (2015b). To calculate the GDP growth rate, a formula that requires one to divide the GDP in a year by the GDP in a previous year and then subtracting 1 is proposed (Nash 2015). For example, to find the GDP growth for 2010, one would need to use the following formula: (GDP YR 2010/GDP YR 2009 – 1) x 100. Following the above formula, the GDP growth for Australia and New Zealand would appear as reflected in the table below. 2009 2010 GDP growth (%) 2011 GDP growth (%) 2012 GDP growth (%) 2013 GDP growth (%) 2014 GDP growth (%) Australia 23.3 21.6 10.7 1.8 -2.2 New Zealand 20.6 14.3 4.6 6.4 15.6 Figure 1: GDP Growth in New Zealand and Australia. From the statistics reflected in the table and graph above, it is clear that both Australia and New Zealand were on a good GDP growth trajectory in 2010. In 2011 however, the differences in GDP growth in both countries widen as Australia takes the lead with a seven percent difference. In 2013, the situation changes as New Zealand’s GDP growth takes a lead and Australia’s GDP growth slows down to 1.8 percent. At the time, New Zealand’s growth was low, but not as bad as Australia. In 2014, New Zealand recovers with a 9.2 percent margin, will Australia’s plummets to a low of minus (-) 2.2 percent. In 2013, New Zealand’s GDP composition consisted of five (5) percent agriculture, 25.5 percent industry and 69.5% services (Jericho 2014). In contrast, Australia’s GDP composition was made up of 3.5 percent agriculture, 26.3 percent industry and 70.2 percent services (Jericho 2014). In both countries, the services sector make up the biggest contribution to the GDP. Notably, the services sector includes such services as transport and storage, property and business, health and community services, finance and insurance, retail trade, education, government, communication and ownership of dwellings. On its part, the industry sector is made up of activities such as mining, construction and manufacturing. Expenditure The chart below indicates New Zealand’s government expenditure for the five years between 2009 and 2014. From the chart, it is quite evident that the country’s expenses always surpass its revenues. This means that the country operates at a deficit, which it probably fills with any of the available financing options. For example, the government may opt to borrow from the internal or external markets in order to finance its expenditure. Figure 2: New Zealand’s government expenditure as a percentage of the GDP Data sourced from: Jericho (2014) As indicated in the chart below, Australia’s government expenditure does not have a wide gap as New Zealand. Arguably, New Zealand thus has a much bigger revenue problem occasioned by its relatively higher expenses when compared to Australia. In the absence of revenue and expenditure statistics for 2014, this report has opted to use data from 2008 to 2013 in Australia. Figure 3: Australia’s government expenditure as a percentage of the GDP Data sourced from Jericho (2014) Investments and savings also have an effect on a country’s GDP because as Nolan (2015) indicates, GDP is the subtotal of consumptions and savings. Savings on the other hand equals the net exports plus investments. In New Zealand, the total investments as a percentage of the GDP was 27, 24, 21, 22 and 23 percent for years 2008, 2009, 2010, 2011 and 2012 respectively (Jericho 2014). The average investment for New Zealand from the five years period was 23.4 percent of the GDP. In Australia, the total investments as a percent of the GDP have in the period between 2008 and 2012 been higher than the savings. The country’s savings were 25, 22, 23, 24 and 25 percent of the GDP in years 2008, 2009, 2010, 2011, and 2012 respectively (Bishop & Cassidy 2012). On an average therefore, Australia’s investments were 23.8 percent of the GDP, hence indicating that the country performed marginally well compared to New Zealand. Wages and Employment In full employment, every person who wishes to work at a particular income level is able to do so (Dernburg 1998). Additionally, at full employment, wages are optimal because there is no excess labour, which ideally causes wages to fall. In economics, full employment is ideal since it would enhance people’s spending in an economy, but is also highly unattainable (Dernburg 1998). In both Australia and New Zealand, employment has always been below optimal, which is the case in most other countries. However, the near optimal one country is, the more likely it is that its economy is faring better compared to the other. In New Zealand, the December 2009 quarter wages increased by 1.9 percent, while full time employment decreased by 2.5 percent (Bascand 2010). In 2010, full time employment increased by 0.2 percent while the hourly earnings went up by 1.85 percent (Bascand 2011). In 2011, full time employment increased by 0.6 percent, while hourly earnings increased by 0.2 percent (Bascand 2012). In 2012, there was an increase of 0.4 percent and 2.6 percent on full time jobs and hourly earnings respectfully (Galvin 2013). In 2013, the increase was 0.4 percent for full time jobs and a 0.5 percent increase in hourly earnings (MacPherson 2014). In 2014, statistics available for the 2014 quarter indicate that full time jobs increased by 0.3 percent while hourly earnings rose by 1.0 percent (MacPherson 2014). In Australia, statistics about wage and employment are not available. For the sake of this comparison, this report will rely on the labour productivity of the two economies. According to Freeman (2008, p. 5), labour productivity is an indicator that reveals the living standards, competitiveness and even the economic growth of a specific country. Through labour productivity, economists in a country can explain the primary economic foundations that are essential not only for economic growth, but also for social development (Freeman 2008, p. 5). Notably, labour productivity is calculated by dividing the workforce’s output (usually through goods and services as reflected by a country’s GDP by the effort of the workforce (usually reflected by the number of hours that a population works) (Freeman 2008, p. 8). The chart below shows the productivity of both Australia and New Zealand for the five year period between 2008 and 2012. The chart, whose data is sourced from Jericho (2014), is based on GDP for the cumulative hours worked in each economy. For the sake of consistency, labour productivity in the chart below is measured using the US dollar, whose conversion in each economy is based on the purchasing power parity. In other words, to get the value of the Australian dollar and the New Zealand dollar, the equivalent of US dollar of each currency is gauged for what it can purchase in each country. As is evident from the chart, Australia’s labour productivity has been higher than that of New Zealand in years 2008, 2009, 2010 and 2011. However, the economic tides changed for both countries in 2012 when New Zealand’s labour productivity exceeded that of Australia. Figure 4: Labour productivity in Australia and New Zealand Data source: Jericho (2014). Any improvement in labour productivity is interpreted to mean that a specific country’s standard of living is rising (Freeman 2008, p. 6). Therefore, based on the above chart, it can be argued that the standard of living in New Zealand was not as good as Australia’s in the period between 2008 and 2011. However, it is clear that the standard improved considerably in 2012, to a point that it was higher than the standard of living registered in Australia. Labour costs in Australia and New Zealand seem to be worlds apart as evident from the following chart Figure 5: Labour cost Data sourced from Trading Economics (2015c) and Trading Economics (2014d) Evidently, labour cost is much higher in New Zealand, and as Janda (2014) observe, the implication of such a scenario is that the cost of producing something in New Zealand is higher when compared to Australia. In the end, the high labour costs affect the international competitiveness of a specific economy. Moreover, there are cost-push pressures in the domestic market of the subject country, and this may eventually lead to inflation, negative balance of payments, slow economic growth, and an increase in unemployment. Notably, the negative effects of high labour costs may be more pronounced for New Zealand during economic expansion since economic players such as manufacturing companies may increase their product prices in order to recover some of the costs used to finance labour. Eventually, that would mean that the cost of doing business in New Zealand would be higher than Australia’s. Employment and labour force growth is also another metric that can gauge the economic performance of an economy. Specifically, economic indicators such as unemployment, underemployment, skills shortage and immigration affect the productivity in any economy. The chart below shows unemployment in Australia and New Zealand. From the chart, it is evident that Australia has fared well compared to New Zealand, especially in the years between 2009 and 2013. However, it is also evident that in 2014, the two economies were almost at par with each other in relation to unemployment. The chart also indicates that New Zealand’s unemployment rate was reducing while Australia’s unemployment rate was increasing. Figure 6: Unemployment rate Data source: Jericho (2014) From most of the reviewed sources, no statistics about migration from Australia to New Zealand is available. Conversely, data on New Zealand nationals migrating to Australia is readily available. Figure 7 below shows the migration trend of New Zealanders to Australia, which for the past decade has registered better economic prospects for them. With migration unfortunately, New Zealand ended up losing some of its human resource to Australia. As New Zealand’s economy starts performing impressively as indicated by the declining levels of unemployment, the BBC (2015) reports that the tides are changing. Specifically, for the first time in several decades, Australians are expressing their interest in migrating to New Zealand for work. According to BBC (2015), one of the possible reasons for the slowdown of Australia’s economy is the end of the mining boom. Additionally, the China’s demand for raw material sourced in Australia is slowing down, hence having a cooling effect on Australia’s economy. Figure 7: Migration Data source: Jericho (2014) Skills shortage is also another factor that affects wages and employment. Currently, Australia seems to have minimal skills shortage, which according to Janda (2014) has led to falling labour costs in the country. Consequently, the country is considered a competitive economy since its main trading partners have registered rising labour costs. As baby boomers continue retiring however, the situation may change and a skills shortage may arise, hence raising the relative costs of labour (Janda 2014). Unlike the situation in Australia, Mok et al. (2012, p. 9) indicate that firms in New Zealand do not find good workers easily. Some of the reasons for the skills shortage are the absence of skills or a skills-job mismatch (Mok et al. 2012, p. 9). External factors Trade in goods is one of the external factors that are affecting the performance of Australia and New Zealand. The terms of trade for New Zealand have, for example, increased by seven percent between June 2011 and December 2013 (Jericho 2014). Notably, Australia’s terms of trade for a similar period have declined by almost 20 percent as indicated in the figure 8 below. Figure 8: Balance of trade for Australia and New Zealand Source: Jericho (2014) Trade in services is also another significant external factor for both Australia and New Zealand. In Australia for example, services on average account for 70 percent of the GDP (Department of Foreign Affairs and Trade (DFAT) 2015). The trade in services is made up of exports that include travel services related to education, recreational travel (tourism), business travel, professional services, and technical and non-technical business services (DFAT 2015). New Zealand is no different from Australia. Its services trade accounts for 69.1 percent of the country’s GDP. The services sector includes travel services exports, exports of education travel-related services, transportation services, insurance services and government services (Statistics New Zealand 2014). Current account balance (CAB) is also another macroeconomic indicator of an economy’s performance. According to the World Bank Group (2015), the CAB is calculated by adding all exports of both goods and services and both the primary and secondary incomes in an economy. In the 2010–2014 period, both Australia’s and New Zealand’s CAB according to the World Bank Group (2015) was at -3.2 percent of the country’s GDP. The negative CAB indicates that both economies are net borrowers from the rest of the world economy, and that their foreign assets are decreased by 3.2 percent. Exchange rate role in Australia also has implications on the economy in that for decades, Australia has used the exchange rate as an economic buffer against external shocks. The Reserve Bank of Australia (2015) specifically notes that Australia uses its exchange rate to attain price stability and economic growth in its domestic market. However, in New Zealand, it has been argued that the exchange rate occasions fundamental and non-fundamental shocks in the economy and also brings about high-frequency volatility in the foreign exchange market (Cassino & Oxley 2013, p. 6). It is argued that some of the fundamental shocks include productivity and pricing shocks, while non-fundamental shocks include changes to the capital inflows (Cassino & Oxley 2013, p. 6). Trade agreements are another aspect of external factors that affect the macroeconomic conditions in both Australia and New Zealand. In Australia for instance, trade agreements with China have effects on the country’s real GDP, real consumption, real imports and exports, and also affect the current account (Australia China Business Council 2008, p. 36). Overall, trade agreements help Australia to get good deals with its trading partners, especially considering that the country is a net importer as reflected by the negative balance of trade registered in the country since 1971. New Zealand is no different, but its exports seem to favour the relatively small country because in 2015 for example, it recorded a trade surplus of 350 New Zealand dollars. Conclusion With rising unemployment, reduced terms of trade and a slowing mining sector prompted by decreased demand from china, Australia’s macroeconomic outlook seems relatively dim compared to New Zealand’s. On it part, New Zealand has registered increased terms of trade and rising employment levels; and a growing retention of its human resource means that not many people are seeking employment in Australia as was the case before. Policy responses by the two countries will largely depend on the desired result. With a reduction of activity in the mining sector, for example, Australia may target its policies to other sources of export revenue. New Zealand’s policies on the other hand may target strengthening its exports sector. References Australia China Business Council 2009, ‘Estimating the impact of an Australia- China trade and investment agreement: 2008 economic modelling update’, The Centre for International Economics, pp. 1-55. Bascand, G 2010, Quarterly employment survey: December 2009 quarter’, Statistics New Zealand, viewed 30 June 2015, . Bascand, G 2011, ‘Quarterly employment survey: December 2010 quarter’, Statistics New Zealand, viewed 30 June 2015, . Bascand, G 2012, ‘Quarterly employment survey: December 2011 quarter’, Statistics New Zealand, viewed 30 June 2015, . BBC 2015, New Zealand migration to Australia reverses, viewed 30 June 2015, . Bishop, J & Cassidy, N 2012, ‘Trends in national saving and investment’, Reserve Bank of Australia, viewed 30 June 2015, . 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