Beruflich Dokumente
Kultur Dokumente
2010- Autumn
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Contents
1 Executive Summary............................................................................................................... 4
2 Introduction .......................................................................................................................... 5
3 Australias current economic situation ................................................................................. 6
4 Fiscal Policy ......................................................................................................................... 10
5 Monetary Policy .................................................................................................................. 12
6 The RBAs August decision .................................................................................................. 14
7 Conclusion ........................................................................................................................... 17
8 Bibliography ........................................................................................................................ 18
9 Turnitin Report
10 Marking Rubric
Australia is recording a 3.2% annual growth rate in GDP to this quarter1 (The Australian
Bureau of Statistics, 2010). This is equal to the 30 year average growth rate and above the
2009 forward estimate to for this year (see Figure 1: Real GDP Growth) (Australian
Government, 2010).
Australias GDP is predicted to increase to 3.75% to 4% during the 2011-2012 financial year,
though may be an unreasonably high GDP prediction, given the fragility of the recovery
(Reserve Bank of Australia, 2010; Brinsden, 2010).
1
To second quarter 2010.
2
Two quarters of simultaneous negative GDP growth.
Equation 1: GDP
Any accurate description of Australias current economic situation must factor in changes in
the components of GDP.
3.2.1 Consumption
Consumption is a major indicator of a countrys economic situation. Australias retail
spending increased in June to reach an overall 0.8% increase in volume over the June quarter
(The Australian Bureau of Statistics, 2010). This marks a trend of modestly increasing
confidence in Australia, with both business and consumer confidence greater than the long-
run average.
This consumption growth contributes more than 1.5% of Australias GDP growth (Reserve
Bank of Australia, 2010).
3.2.2 Investment
There has been growth in net investment, driven by mining. There was an expectation that
the mining tax would reduce investment from overseas, but investment in the mining industry
rose by 29% in the June quarter, as compared to the same quarter last year, and almost 50%
above expectations (Pascoe, 2010).
Furthermore, there has been recorded a mildly optimistic investment outlook (Pascoe, 2010).
3.4 Inflation
Australia underlying inflation rate is currently at 2.75% (Minutes of Monetary Policy, August
2010), which is the first time in nearly three years it has been under 3%. Australias headline
Consumer Price Index was at 3.1%. The upwards pressure on inflation can be explained by
the GDI outpacing the GDP due to increased Asian demand (primarily from India and China)
for Australian minerals. This has been offset by passive consumer demand in recent times,
lower wage growth in 2009, the appreciation of the Australian dollar, retail price discounting
as well as a decline in domestic holiday accommodation pricing and little increase in utility
prices in the last quarter.
The RBA continues to stress that external global uncertainty, especially from Europe, remains
an issue. Further, Australias reliance on Asian growth and demand (see Figure 2:
International GDP Growth, above) for mining exports are making Australias economic future
fragile (Reserve Bank of Australia, 2010).
Fiscal Policy is the mechanism by which government alters their spending, either in the form
of government investment (G) and/or transfer payments (TR), or their collections through the
taxation rate (t) to reduce fluctuation in the business cycle and lessen the output gap.
The equilibrium position of the economy lies where AD=Y; as illustrated by Eq1.
Eq1
The government plans to return the budget to surplus by 2012-13 a few strategies are being
put in place to slowly withdraw the expenditure. This includes confining annual real growth
to 2% until the budget surplus reaches 1% of GDP (Parliament of Australia, 2010) by limiting
expenditure, and increasing revenues through Super Profits Tax (12billion in tax revenue in
four years) and higher excise on alcohol and cigarettes (Swan & Rudd, 2010).
The Stimulus Package also includes $12.7billion in TR, a one off tax free cash-handouts of up
$950 to income earners, single income two-parent families earning up to $150,000, families
with schoolchildren, students and apprentices, and drought affected famers (Gittins, 2009).
The initiative encouraged individuals to spend money (increase consumption) thereby
providing an immediate stimulus to the economy. These results correspond to the
theoretical notion (Eq1), that an increase in TR will directly affect the consumption function
(Eq2) hence resulting in an increase in AD.
Eq2
*
dY 1
3
i.e. the change in government expenditure effects a change in equilibrium income on a
dG 1 c(1 t )
greater than 1:1 basis because of its further effect on reducing taxes and increasing consumption.
The RBAs cutting of the cash rate was gradual; an over 4% drop was made within 6 months
(Fig3). The cash rate of 7.25% held from Mar-Aug 08 down to a 49-year low (AAP News,
2009) of 3% by April 2009. This interest rate was held for a 5 month period, only rising
slightly to 3.25% in Oct 09 (ABC News, 2010)
The overall effect of expansionary fiscal and monetary policy has resulted in a GDP growth
rate of 0.9% in Dec09 quarter from -0.8% in Dec08 (ABC News, 2010). According to Treasury
Reports, without the stimulus the economy would have contracted at a rate 0.7% (Gittins,
2010).
Limiting consumer price inflation [to] between 2-3%; the stability of the Australian currency;
the maintenance of full employment within Australia; and the economic prosperity and
welfare of the Australian people - (Reserve Bank of Australia, 2007; Reserve Bank Act ,
1959)
The primary goal of monetary policy, since 1993, is to maintain stable price levels (Reserve
Bank of Australia, 2007). This must be balanced against the goal of economic prosperity
and full employment. Together, these goals have been interpreted as maximising
sustainable economic growth, with the requirement for sustainability encompassing
consumer price inflation.
As such, all monetary policy decisions, including the August 2010 decision not to raise
interest rates above 4.5%, must have been made in light of the above considerations in
order to be valid.
Reducing interest rates would act strongest on consumption spending (due to reduced
mortgage costs increasing disposable income). Consumption is already on a steep rise, with
increased consumer sentiment said to translate into even higher consumption in the next
year or so. Consumer spending has increased by 0.7% and household spending by 1.1% in
the Dec 09 quarter since the recession. As such, this would be over-stimulating the
consumption component of the GDP, potentially creating inflationary pressures.
Further, a decrease in the interest rates would also reduce Australias interest rate
differential, potentially reducing foreign investment in Australia by reducing the risk-free
level of growth.
Underlying inflation had continued to fall to 2.75% below 3% for the first time in three
years, and is now within the RBAs target band. The CPI is at 3.1%, which is partly due to the
increases in tobacco taxes earlier this year and maintenance price of utilities. This rate is
expected to remain steady over the next twelve months while underlying inflation is
expected to increase to 3% due to supply constraints being reached with the expansion of
the resources sector. Due to these inflationary pressures reducing the RBAs cash rate
would not have been a logical choice.
Despite the Banks expectations for global growth to be about trend for the coming year,
expansion has been uneven. Most advanced economies have experienced moderate rates
of growth, and key economic indicators suggest that China is shifting to a more sustainable
rate of development. However the overall strong growth in Asia and Latin America has led
to an increase in the price of Australia's two largest exports, iron ore and coal. As a result,
terms of trade have again risen to the historically high levels experienced in 2008 and
economists expect this to be sustained over the next few years.
Whilst reducing the interest rate might increase employment, the unemployment rate is low
enough, and close enough to the natural rate of unemployment, that targeting this with
monetary policy would have diminished returns, and would directly increase inflationary
pressures.
The goals of monetary policy are clearly delineated. There is high, almost peak non-
inflationary growth, the unemployment rate is falling as the participation rate is increasing
and Australia is enjoying record external stability. As such, the RBAs decision to keep cash-
rates as-is is sound, protecting current growth without adding inflationary pressure.
4
Hysteris is cyclical unemployment becoming long-term unemployment or a reduction of the participation rate
via deskilling or workers no longer willing and actively seeking employment.
Evidently, there are a multitude of factors that determine Australias current relative
economic stability. This report primarily identified that Australia was able to avoid being
unduly affected by the global economic recession due to its government expenditure
bolstering consumption, and a healthy export sector bolstered by increasing commodity
prices. These factors have led to Australias economic resurgence leaving Australia in a good
position to lead the global economic recovery. This report stresses a neutral monetary
stance will benefit the Australian economy as increasing the cash rate may simmer
Australias feel consumption demand whilst a reduction in the cash rate could see the
reappearance of inflationary pressures. Maintaining the cash rate served the RBAs goals,
and are, thus, a reasonable response to the economic climate.
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