Domestic Economic Conditions

Overview

The Australian economy grew by 2½ per cent over 2016, which is a bit below potential growth (Table 3.1; Graph 3.1).  GDP growth rebounded to 1.1 per cent in the December quarter, after negative growth in the September quarter.

Looking ahead, economic growth is expected to pick up gradually to be a bit above potential growth, supported by the low level of interest rates and the ongoing recovery in the global economy.

The economic adjustment to the end of the mining investment boom is well advanced. Activity in the mining sector (net of imports) contributed to growth over 2016, as the increase in resource exports more than offset the decline in mining investment. Household spending, business investment and dwelling investment have all contributed to growth, supported by low interest rates.

Public demand has also been strong.

Household Sector

Household consumption growth picked up in the December quarter. A marked increase in goods consumption contributed to the pick-up. Low interest rates and ongoing growth in household net wealth have continued to support spending (Graph 3.5).

Low growth in household disposable income continues to impact on spending. In the December quarter, real household disposable income was unchanged, held down by the fall in labour income. Surveys indicate that households believe that paying off debt is currently a wiser place for saving than investing in real estate (Graph 3.7); overall household debt-to income ratio has been on an upward trend for the past couple of years.

Dwelling investment remained at a high level in the December quarter and is expected to continue to contribute to economic growth over the next year or so, particularly given the large volume of new apartment construction in the pipeline (Graph 3.8).  Low interest rates should continue to provide support to housing demand. Total housing loan approvals remain around record highs, although new prudential measures are expected to lead to some tightening in lending standards and to slow the rate of growth in credit.

Government Sector

Public demand grew at an above-average rate in the December quarter, driven by a rise in public investment, while public consumption was little changed. Recent strong growth in the pipeline of public infrastructure projects is likely to support public investment growth over coming years (Graph 3.12).

Business Sector (Non-mining)

Business investment increased by around 3½ per cent over 2016, although it remains low as a share of GDP.

Investment intentions in surveys indicate subdued machinery and equipment investment.

In contrast, survey measures of business conditions have remained above average over the past 2½ years, with conditions improving significantly in the non-mining states. Measures of capacity utilisation have increased, particularly for goods-producing firms. Non-mining profits grew strongly in the December quarter.

The Australian Bureau of Agricultural and Resource Economics and Sciences estimate that the volume of farm production has increased strongly over 2016/17, as favourable weather conditions during winter supported a record crop harvest. Farm GDP rose by almost 10 per cent in the December quarter, led by record wheat and barley production (Graph 3.15).

The depreciation of the exchange rate since early 2013 has supported non-mining exports (Graph 3.16).

Service exports, which include tourism, education and business services, have made a significant contribution to GDP growth over this period. Over 2016, manufactured exports increased and rural exports also rose following a record crop harvest.

Mining Activity

Mining activity (net of imports) increased in the December quarter, as resource exports increased further and mining investment rose (Graph 3.3).

The increase in commodity prices since late 2015 has boosted the profitability of firms in the mining sector. However, this has not led to a material increase in new investment or employment in the sector, unless the increase in commodity prices is sustained.

Resource export volumes have increased strongly over the past year (Graph 3.4). LNG exports are expected to continue to grow strongly over the next few years. Iron ore export volumes are likely to be supported by increased production from Australia’s low-cost producers.

Labour Market

Employment growth picked up in the March quarter, but the unemployment rate has edged higher over recent months to 5.9 per cent (Graph 3.17).

After declining over much of 2016, the level of full-time employment has increased over the past six months; growth in part-time employment nonetheless remains strong. Consequently, average hours worked remain at a historically low level. Measures of underemployment have edged higher, as a relatively high proportion of part-time workers would like and are able to work additional hours.

Forward-looking indicators of labour demand point to further moderate growth in employment over the next couple of quarters (Graph 3.20).

Labour Costs

Wage growth remains low. A number of factors have contributed to low wage growth, including spare capacity in the labour market as well as lower inflation outcomes and inflation expectations.

The underemployment rate and structural changes in the economy (e.g. due to new work arrangements enabled by technological change or increased competitive pressures from the internationalisation of services trade) could also be putting downward pressure on wage growth.

CPI inflation outcomes might also have contributed to recent low wage growth. Information on enterprise bargaining agreements indicated that the CPI was a primary determinant of wage setting. Furthermore, survey evidence from unions suggests that inflation outcomes and expectations are an important consideration for wage bargaining.

7/18/2017 Domestic Economic Conditions | Statement on Monetary Policy – May 2017 | RBA

http://www.rba.gov.au/publications/smp/2017/may/domestic-economic-conditions.html 7/7

© Reserve Bank of Australia, 2001–2017. All rights reserved.

An abridged version of the Reserve Bank of Australia’s Statement on Monetary Policy – May 2017 is on the Assessment Tasks folder.  Read the statement and answer Question 1 below.

Question 1                                                                                                                   (12 marks)

(a)     Based on the report above, identify and briefly explain 4 aggregate demand and 2 aggregate supply factors that impacted on Australia’s economic activity (i.e. RGDP) in the last quarter of 2016 and first quarter of 2017.                                                                                    (6 marks)

(b)     Are the AS factors in Q1 (a) above short-run or long-run AS factors or both? Briefly explain.                                                                                                                                                (3 marks)

(c)     Analyse the effects of the factors you identified above on Australia’s RGDP and price level over the period.

• Use the AD-AS diagram to illustrate your answer.
• Briefly explain your answer and including the change in RGDP and the price level.

(2 + 1 = 3 marks)

       Answer here for AD-AS diagram (Tips: to create new lines, simply copy the existing curves and move to the new location)

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Study the following data for the economy of Universal. It is to be used to answer Question 2

Question 2                                                                                                                               (5 marks)

(a)     Identify the phase of the business cycle for Universal in 2015.  Explain identifying two reasons for your answer.

(b)   What was the likely cause of inflation in 2015? Explain giving 2 reasons for your answer.

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(2 + 3 = 5 marks)

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Japanese economic miracle

Background

. During the economic boom, Japan rapidly became the world’s second largest economy (after the United States) by the 1960s. By 1990s, Japan’s demographics began stagnating and the workforce was no longer expanding as it did in previous decades, despite per worker productivity remaining high.

“Golden Sixties” and shift to export trade

The period of rapid economic growth between 1955 and 1961 paved the way for the “Golden Sixties,” the second decade that is generally associated with the Japanese economic miracle. In 1965, Japan’s nominal GDP was estimated at just over $91 billion. Fifteen years later, in 1980, the nominal GDP had soared to a record $1.065 trillion.

Under the leadership of Prime Minister Ikeda, former minister of MITI (Ministry of International Trade and Industry), the Japanese government undertook an ambitious “income-doubling plan”. Ikeda lowered interest rates and taxes to private players to motivate spending. In addition, due to the financial flexibility afforded by the FILP (Fiscal Investment and Loan Plan), Ikeda’s government rapidly expanded government investment in Japan’s infrastructure: building highways, high-speed railways, subways, airports, port facilities, and dams. Ikeda’s government also expanded government investment in the communications sector of the Japanese economy previously neglected. Each of these acts continued the Japanese trend towards managed economy that epitomizes the mixed economic model.

Besides government intervention and regulation of the economy, his government pushed trade liberalization. By April 1960, trade imports had been 41 percent liberalized (compared to 22 percent in 1956). Ikeda planned to liberalize trade to 80 percent within three years. He moved toward liberalization of trade only after securing a protected market through internal regulations that favored Japanese products and firms.  Ikeda also set up numerous allied foreign aid distribution agencies to demonstrate Japan’s willingness to participate in the international order and to promote exports. Ikeda furthered Japan’s global economic integration by joining the GATT in 1955, the IMF, and the OECD in 1964. By the time Ikeda left office, the GNP was growing at a phenomenal rate of 13.9 percent.

However………The period of growth came to an end with the bursting of the Japanese asset price bubble in 1991. This was followed by the “Lost Decade” (1991–2000).

Japanese-made TV sets during the economic        Steel plant of Nippon Steel Corporation in Chiba Prefecture – Japanese coal- and boom.                                                                  metal-related industry experienced an annual growth rate of 25% in the 1960s.

Wikipedia 17 June 2017

Note: This article may require additional citations for verification Question 3

The Japanese economy has experienced periods of deflation since 1990.

What is deflation and why is it a concern for economies at times of low Real GDP growth or recession?                                                                                                                               (3 marks)

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