BUSINESS REPORT: THE AUSTRALIAN ECONOMY
China is currently the second largest economy in the world which has witnessed massive economic growth in the last decade, however, the rate f economic growth in the country has gone down in the last two years and this has had direct effect on other countries such as Australia. This paper aims to show how the economic slowdown of China has affected Australia. The paper also aims to show how ten Reserve Bank of Australia uses interest rates to stimulate economic growth and finally, the paper aims to explore some of the policies that the new Australian Labor government elected into power has enacted to assist economic growth. At the end, recommendations and suggestions for potential future economic strategies and policies will be given.
Introduction
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Effect of Chinese economic slowdown of the Australian economy
China is one of Australia’s greatest trading partners and as such, the economic trends of Australia are hugely influenced by those of China. Australia exports commodities such as coal, ores and agricultural products to China. The trading venture between Australia and China has often been accompanied by a high commodity price. The Chinese economic growth has however witnessed serious decline in the last few years and its famous “commodity boom” has transcended downwards
The seer and ernomous size of the Chinese economy with a GDP of almost $9 trillion US dollar has a lot of significance to the world’s economy. In addition, the last few years have witnessed China’s connectivity to parts of the world such as Latin America and Australian increase. Therefore, the economic situation in China could affect such regions through various channels of transmissions such as exports, commodity process and financial markets.
This decline of China’s economic growth has been directly translated into the Australian economy which has as a result exhibited signs of decline. For instance, there has been a significant decline in the power of the Australian dollar. Forecast for the annual economic growth of Australia has also been revised downwards by the IMF such that the growth will not be the previously forecasted 3.3 per cent but will now be 2.8%.
It has also been predicted that the slowing of the China’s economic growth will reduce the Australian GDP by almost 3%. The main reason for this is because of reduced demand for coal and iron ore exports from Australia. The graph below depicts Australia’s % GDP change in comparison with other countries.
How RBA uses interest rates to stimulate the economies
The Reserve Bank of Australia is charged with the responsibility of formulating as well as implementing the country’s monetary policy. In a nut shell, decisions on monetary policy involve determining interest rates of the “overnight: loans across the Australian money markets. The interest rates set by the monetary policy influences other interest rates in the country in varying degrees such that the behaviour of lenders and borrowers in the nation’s financial markets are actually affected by the overall monetary policy.
Having experienced an economic downturn that can be attributed to a similar downturn in the Chinese economy, it is vital that the Reserve Bank of Australia formulates several strategies on terms of interest rates setting so to be able to stimulate the nation’s economy.
In such a situation, the Reserve Bank of Australia is guided by a set of constitutionally set objectives which are to ensure
- The stability of the Australian currency
- Safeguarding of employment in the nation
- Economic prosperity, welfare and satisfaction of the Australian people
For a considerable period of time, these objectives have found expression in terms of regulating the consumer price inflation in Australia. Since inflation is an inevitable feature, the Reserve Bank of Australia has set a target inflation rate of 2-3% per annum. The RBA aims to achieve this target over a medium term with the hope of stimulating a strong and sustainable economic growth. This is because controlling inflation essentially preserves money’s value.
For the rate of inflation to be controlled, the rate of interest charged on overnight loans between various financial intermediaries needs to be controlled. This is where the RBA comes into play. The RBA’s board sets this rate. The cash rate has a powerful effect or influence on several other interest rates and as such, it form as basis from which the structure of national interest rates in the Australian economy is built.
Therefore, the rate determined by the RBA is very crucial and can determine the nations’ economic trend. For instance, in times of economic turbulence, the RBA board normally cuts this rate to significantly low figures. Most recently, the board has set the rate at 2.5 % and its stimulatory effects on the Australian economy have started to be felt, particularly in the housing sector which had previously witnessed significant decline.
Policies implemented by the federal government to assist the economy
The Liberal government has initiated several strategies and policies meant to assist the economy. The first policy has been the cutting down of interest rates through the Reserve Bank of Australia. Another policy meant to stimulate the economy has been the levying of a Resource Super Profit Tax on some Mining companies, a strategy that was first initiated by the Labor Party when it was still in power. This has mainly been levied on luxurious mining companies dealing with minerals such as nickel, uranium and gold. Proceeds from this tax were meant to fund new government ventures such as family payments, tax breaks for small business and bonuses for school going children.
Conclusion
In conclusion, it is fairly safe to state that the Australian economy has witnessed a down turn in term of its growth and this one of the reasons for this has been the slowdown in the Chinese economic growth. China is Australia’s most important trading partner and as such, a particular change in its economy is likely to be felt in the Australian economy. However, it has been observed that the Reserve bank of Australia cans help to mitigate this trend through the setting of appropriate interties rates; In addition, it has been shown that the Liberal Government has adopted several strategies in trying to assist the Australian economic growth.
Recommendations and Suggestions
Altering an economic trend is not an overnight activity. However there are some steps that the Australian government can take to protect itself from future economy slow down. For instance, Australia should diversify more in terms of exports targets and trade more with other nations. This will significantly reduce the current dependence that the country has on China. In addition, the country should set aside national fund that can be used a stimulus package should the country ever face an economic down turn or a recession.
References
Switzer, Peter 2013, Aussie Economy Still Struggling, Charterer Accountants Journal, pp 52-53.
Jianye, Wang 2013, Is the Chinese Economy Slowing Down? China Today, pp 40-41.
Cecilia Kok 2013, If China Sneeze, the world sits up and worries, Nation Multimedia Group, pp 1-3.
Reserve Bank of Australia. 1987 . Reserve Bank of Australia: Functions and operations. Sydney: Reserve Bank of Australia.
Brittle, S. A. 2009. ‘Fiscal policy and private saving in Australia: Ricardian equivalence, twin deficits and broader policy inferences’.
Hindess, B. 2010. “Liberalism: rationality of government and vision of history”. Social Identities, vol 12, pp 34-45.
Appendix
The Australian National Constitution- Established rules and policies regarding various Australian economic aspects
Reserve Bank of Australia: The Australian Economy and Financial Markets-RBA Chart Pack 2 October 2013- Document showing graphical representation of various economical trends in Australia
