Commonwealth- Team 6

Economic Analysis: Australia

Country

Country Economic Analysis

Australia
A Case Study

Professor Mohtadi
In partial fulfillment of the MIB course
Global Economics

Hult International Business School

Commonwealth- Team 6
Rawad Hijazi- Cristina Soliz- Francisco Bulacia- Yifu Guo- Rachel ChidraouiJulien Pic

Boston, Massachusetts,

Commonwealth- Team 6
Economic Analysis: Australia

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December 8, 2014
Outline:

I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
XI.

Executive Summary
Economic Trends in Australia
Monetary and Fiscal Policy
Trade Policies
Strengths
Weaknesses
Growth Opportunities
Threats to the Australian Economy
Conclusion
Bibliography
Appendix

Executive Summary:

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Economic Analysis: Australia

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Australia is the largest country located between the Indian and

South Pacific Oceans. Australia is the smallest continent with land size of
2,988,901 square miles and the sixth largest country in the entire southern
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hemisphere. It is known for its abundance in natural resources and is the

worlds ninth largest energy producer exporting 5% of the worlds energy. In
2014, the total population of Australia is 22,507,617 of which 67% account for the labor force.
This labor force is constituted of 13% of 15 - 24 years old, 42% of 25 - 54 years old and 12% of
55 - 64 years old. The remaining percentage of the population that is not part of the labor force is
made of 15% of people who are between 0 - 14 years old and 18 % who are between 65 and
older. The ratio of people who are 65 and older is smaller than the ratio of people who are
between 0 14 years old due to a lower death over birth rate ratio of 5.12/1000. Overall,
Australias labor force is expected to grow annually since more people are joining the labor force
and less are exiting it.
One of the major issues Australia is facing is its huge external debt due
to the deficit in their current account. According to the World Bank, Australia
has had a current account deficit of approximately 3.5% of GDP for the past
5 years (-3.8% in 2010, -3.0% in 2011 and 4.2% in 2012), resulting in an
increasing of its external debt. The gross total investment has been stalled in the past few
years, since both the government and private investments have been reducing.
Privately, the main reduction is in the dwelling investment, caused by a reduction in
alterations and additions which have been dropping since 2009. Looking at investment from
private businesses, drastic changes have occurred in the last 2 years. First of all, investments
were very affected in the following areas: new engineering construction, machinery and
equipment, and reducing the mineral and petroleum exploration. This is mainly due to the
increase in education level and quality provided to the institutions, creating a new wave of

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change with a trend to more scientifically, financial, and added value services; reducing the
manual labor development and switching to intellectual property and innovation.
On the other hand, public corporations reported less investment in 2013, showing a drop
of 28% compared to the previous year. The main factor that influences the delta in gross total
investment is the private sector, which represents 83% of the entire GDP component. Since one
category cannot replace the other (because both are reducing) the solution is to enhance or
promote the public investment into infrastructure, and mainly create conditions (legally,
financially, etc) to attract private investors.

Australia in 2013 had a foreign gross debt of a$1.5 trillion with a

debt to GDP ratio of 19.5%, 80.5% of which was the private sector debt and
a$188.71 billion was public government debt. In the year 2013-2014 the
cash deficit was of a$48.5 billion (3.1% of GDP) and the fiscal balance was of
a$43.7 billion (2.8% of GDP) thus there is a need to borrow more money
because of the deficit. The government net debt was a$202.5 billion (12.8%
of GDP) with a total government expenses of a$413.845 million compared to
a$382.644 million in 2012-13. In 2012-13 the fiscal deficit was of a$23.5
billion and in 2013-14 of a$43.7 billion due to a major increase in
government spending, of which a$8.655 million were spent on social security
and welfare and another a$3.384 million on transportation and
communication.

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In addition that year, Australia has made a net capital investment

of a$3.850 million that includes but not limited to public services, defense,
public order and safety, education, health, social security and welfare, etc...
By 2016-2017 the Australian government has set goals for a budget surplus
but continues to plan investments into new programs, such as a a$14.9
billion to be invested on 7 years on medical care, continue the infrastructure
building with a a$60 billion on 10 years and raising the superannuation
guarantee from 9 to 12%. The Australian government is growing its nation
and implementing policies that benefit the daily lives of its underprivileged
society, which is raising its expenses.
In order to finance those developments, the Australian
government has been increasing its tax revenues, for which the total
elevates to $373.9 billion in 2013-14 with a$248.897 million total of income
tax of which a$167.915 million from individual and other withholding tax,
including individual and company tax that amounts a$68.764 million, which
is at a 30% tax rate. The tax rate in Australia is income based and the
government charges cents per dollar over each income bracket. Additionally,
the Australian government received a$55.517 million in goods and services
tax (GST) at a tax rate of 10% that is a sales tax on the consumer. The total
excise, customs duty was a$343.929 million, which affects suppliers since it
is a tax on the buyer and imported goods. Furthermore, an a$6.62 million on
carbon pricing tax was registered, which indicates the Australian government

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attempts to a greener society and generation of profit from taxation of

businesses with high carbon emissions.
According to the Department of Foreign Affairs and Trade,
Australians total imports of goods and services represent about a$338,035
million from June 2013 to June 2014, which is an increase of 5.3 per cent
compared to the previous year. Total exports of goods and services was
around a$331,184 million which represents an increase of 9.5 percent
compared to the previous year. This gives us a negative trade balance or a
trade deficit for the year 2013-14, meaning that imports have been greater
than exports for the period. The latter is the major factor that led to a deficit
in the Current Account of a$47,056 million or an increase of 5.6% per cent.
Therefore, the Balance of Payments is negative. A negative Balance of
Payment can have many effects on Australias economy. First of all, this will
certainly lead to a decrease of the Aggregate Demand and therefore lower
the GDP and the growth rate of the country, while at the same time, increase
the unemployment rate and cause a deflation. Ultimately, it will also make
Australia a borrower country and increase its demand for real loanable funds,
which will increase its real risk-free interest rate, thus stimulate inflows from
foreign countries.

The Australian Dollar is known as a commodity currency because

it has been used as a medium for acquiring raw materials. Due to the exports

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based on raw materials, the Australian currency is heavily affected by the

imports made by China and other Asian countries/markets. The Australian
Dollar has a high interest rate, thats why it has been used in carry trades,
where the Yen (low interest currency) is sold to buy AUD.
Last October 22nd 2014, the Australian Business Review, revealed
a drop of 0.7% in the inflation rate for the third quarter of 2014 compared to
the previous period. This drop to 2.3% was mainly because on July 1st 2014
the tax related to carbon was removed, which caused a 5.1% drop in the
price of electricity between June and September. In addition, the automotive
fuel showed a 2.5% price reduction, due to the ongoing falls of global oil
price.
On the other hand, there were several rises in prices: fruit 14.7%,
property rates and charges 6.3%, child care 3.1%. The national saving rate
expresses the amount of remaining money in the country after reducing the
government expenditure and consumption from the GDP, which leaves the
quantity that can be intended for investments. On 2013, Australia had a
saving rate of 27%, which means the country had $423,758 billion AUD
added to the balance.
Compared to the worlds average national saving rate, Australias
saving ability is way enlarged. This high percentage saving is mainly due to a
straight and formal fiscal policy which sets a compulsory long-term system of
savings, accumulating large stocks of financial assets.

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In terms of trade policies, Australia has been very productive

recently. Indeed, if the enabling trade index shows a decline from 14th place
in 2009 to 23rd in 2014 due to a decrease in exports that is mainly caused by
a decline in availability and quality of transport infrastructure and services,
as well as very low foreign markets access, the Australian government has
been undertaking appropriate measures to remediate to those infrastructure
problems. In such a perspective, in 2014 the Government of Australia signed
a Free-Trade Agreement with South Korea and an Economic Partnership
Agreement with Japan, which are respectively their second and fourth trading
partner. Moreover, this last November, a major Free-Trade Agreement was
concluded with China, which is Australias number one trading partner by far.
It should include the removal of all tariffs on agriculture and processed foods,
a market worth $9 billion, as well as resources, energy and manufacturing
products that represented over $85 billion worth in 2013.
Additionally, Australia has FTAs with New Zealand, Chile, the U.S.,
Malaysia, Singapore and Thailand; and is under negotiation for two bilateral
FTAs with India and Indonesia; and two regional FTAs with the Gulf
Cooperation Council (Bahrain, Kuwait, Qatar, the UAE, etc.), and the Pacific
Trade and Economic Agreement.
The countries covered by the existing FTAs already represent
about 40 per cent of Australias total trade. But now, thanks to this new

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bilateral agreement with China it will go up to 70 per cent. With no doubt,

those FTAs are improving Australia's attractiveness as a destination for
foreign investment, and are crucial in order to stay competitive.
Australia's simple average Most Favored Nations applied tariff
fell to 2.7 per cent in 2013. Moreover, 77 per cent of Australia's MFN applied
tariff lines are now at 0 per cent for agricultural products and 45.9 per cent
for non-agricultural products. 99.5 per cent of MNF applied tariff line rates
are 5 per cent or lower for agricultural products and 95.5 per cent for nonagricultural products. The Australian Government is expected to continue
with its trade liberalizing efforts. Consequently, the Gini index in Australia
has decreased over the past 3 years, from 0.329 to 0.320 indicating an
improvement in income inequalities due mainly to an increase in government
pensions as mentioned before. However, this is not to be mistaken for an
improvement of the economy as it is only the result of the injection of money
into that economy by the government in accordance to their development
policies before mentioned. This does not systematically means that the
unemployment rate has decreased.
According to the data from Fact Set, the unemployment rate for
year 2013 is 5.15%. By the month of October 2014 there were 772,060
people unemployed and 137,283 job vacancies that werent fulfilled. In
addition, the youth unemployment rate is 13.2% for the same period (people
between 14-18 years willing to work). However, from the data retrieved from
Fact Set for the latest 3 years available, we can notice that the amount of
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people in the work force employed increased in this particular period, while
on the other hand, we can observe the different allocations and adjustments
of employments in the different industries.
The Employment Cost Index or Wage Cost Index measures the
changes in prices of labor force in the country, only considering the cost of
labor without considering the increase or reduction in the quality or quantity
of the jobs. From the data retrieved from Fact Set Economics, the quarterly
increase of the labor price have been mostly reducing since the second
quarter of 2012. We can define these changes as the inflation of wages and
is showing that with every quarter, the cost of employment is not increasing
as much as the June 2010 June 2012 where the index was close to 1%
quarterly.
Labor productivity measures the amount of services or goods
produced in a given time by a person. This productivity can be measured by
industry sector in an economy, particularly in a company, or an entire
country. The OECD database shows the growth in GDP per capita, measured
as a percentage in annual growth. This productivity is considered as GDP
produced per hour worked.
Even though Australia showed a GDP growth from 1,388.3 Billion
AUD in 2009 to 1,543.9 Billion AUD in 2013, we can observe a reduction in
the productivity growth. This can be analyzed as a reduction in the efficiency
(particularly in 2010) of production of goods and services by the workforce

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per unit of time, creating a decrease in the production go GDP per capita in
the country.
Furthermore, Australia has had an entrepreneurial culture over a
long period in history but lately it has been slightly decreasing. Even though
Australia remains in the top 5 of G20 countries for its entrepreneurial culture,
53% of its population believe that access to bank loans has decreased.
However, 40% of the population say that there is an increase in
crowdfunding which somehow compensates for the decrease in loanable
funds. The Australian entrepreneurial culture is vital to decrease
unemployment and develop economic growth to increase GDP and cover the
debt.
In addition, Australia ranks third in terms of index of economic
freedom and second for the human development index. Both indicators show
the willingness of the government to promote growth and decrease
unemployment. However, the global competitiveness index places Australia
in 22nd position, which is 7 places worse than its position in 2010, showing a
weakening of Australias relative competitiveness in productivity, capabilities
and use of resources.
Nevertheless, according to the Australian Bureau of Statistics, the
GDP for 2013 is 1,569,477 million aussi dollars. The real GDP per capita can
be calculated by considering the Real GDP (1,569,477 million aussi dollars)
divided by the total population which is 23.13 million (2013). By doing the

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calculation, the Real GDP per capita is a$67,854.6. The GDP growth rate,
according to the Australian Bureau of Statistics, is 3.2% in the June 2013June 2014 period. The growth rate is calculated by dividing 1.569477 trillion
dollars (2013-14 GDP) by 1.521 trillion dollars (2012-13) GDP. The result is a
growth of 3.18% that we can attribute to the three largest sectors of the
economy that are mining, finance, and construction. For example, in the last
years, the amount of people employed for agriculture, manufacturing, and
media have been reducing; while construction, retail, and health have been
increasing. This information can provide a perspective of how the country is
targeting growth and in which particular sectors is focusing more resources.

The energy industry is a large contributor to the Australian

economy accounting for about 5% of total GVA in 2009-2010. With energy
becoming a growing trend in recent years Australia has an opportunity to
increase investments in this sector to gain a larger portion of the export
market. By capitalizing on its abundance, high quality, and diverse energy
resources Australia could create more renewable energy sources such as
hydropower and winds. Taking advantage of an opportunity for growth and
not only focusing on energy supply from coal, natural gas, liquefied
petroleum gas, and crude oil. This approach would have a positive effect on
increasing export profits and in turn drive GDP growth up.

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Year after year the mining industry is one of the top contributors
to GDP growth and continues to grow having an effect on the stability of the
countrys economy. According to the Australian government mining has on
average added 0.62 per cent to total investment per year providing a strong
growth in revenue and investments not only in mining, but also aligned
industries. The growth mining provides for Australia drives an increase in job
opportunities for workers in mining rich states of Western Australia, Northern
Territory, and Queensland. These employment opportunities will increase
GDP and lead to a substantial growth in GSP for these Western areas. The
increase in employment will helped stimulate income growth, job security,
and have a positive effect on the household sector. Australia will see an
increase in household consumption.
Another of Australias main strength is its localization and their
trade relationships with East-Asian countries. Indeed, Australia trades
strongly with East Asia, as its balance of trade in the region recorded a
surplus of a$74,504 million in 2013-14 which represents an increase of 33
per cent on the surplus of last year. As a reminder, Australias trade balance
with the world was negative, and had a deficit of a$6,851 million for 201314.
Exports in this region represents 64 per cent of Australias total exports of
goods and services in 2013-14, and a market of a$ 208,043 million. This
market has increased by 16.5 per cent compared to the previous year; it is
the one that recorded the biggest growth. For instance, trades with the
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European Union, fell by more than 17.2 per cent and total export with the
world increased by 10 per cent. Imports in the region also went up by 8.9%
compared to last year, which represents a market of over a$133,534 million,
whereas total imports with the world increased by only 5.4%.
We can clearly see why Australia is going into more negotiations
for FTAs and especially with Japan and China. It is very important to eliminate
the barriers to trade with those countries in order to keep a competitive
advantage.
The growth rate of the population is another strength of the
country as the increase in population leads to an increase in total labor force
that causes an increase in total production and larger consumption by
households ultimately leading to an increase in GDP.
Moreover, the control of corruption (95.7), government
effectiveness (94.3), political stability and absence of violence/terrorism
(80.6), voice and accountability (97.1), rule of law (94.8) and regulatory
quality (96.2) indexes are all very high reflecting a strong government and
healthy political environment that is necessary for sustainable growth.

Although, Australia will have GDP growth it will not be evenly

distributed in all areas of the country as it is concentrated around the mining
regions. This affects the stability of the economy by reducing the GSP growth
in states with less mining exposure. Mining does come with the potential risk

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of impacting the high value of the Australian dollar associated with the
mining increase negatively impacting export industries and competitive
imports.
Australias current deficit plays a role in the countrys inability to grow due to
its negative international investment position of -56.6% of GDP with its
external debt accounting for 54% of GDP in 2012. Another weakness of
Australia is its 30% reliance on exportation with the Chinese market because
this makes them vulnerable in export volumes and pricing. China is the
number one trading-partner of Australia for more than 7 years now; it has its
advantages but also its disadvantages. One of the disadvantages is that in
the current state, Australias economy depends a lot on China for their
exports. In 2013-14, 32.5% of Australias exports in goods and services went
to China. These exports increased by 27% compared to the previous year
and the two-way trades were recorded with a growth of 21.8% or $28,596
million. This is mainly the consequence of the Chinese booming economy
leading to a high demand for foreign resources such as Australian resources.
Although trades between the two countries have been growing
continuously over the past few years, the fact that Australias exports are
more and more concentrated to China might be a problem for the economy
of the country. Indeed, if China can find cheaper products elsewhere and
therefore replace its imports from Australia by another country it could be
devastating, as it represents one third of exports revenues. It also means
that Australias economic future is closely linked to the Chinese economy; if
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the growth of China begins to slowdown it could crash the Australian

economy.
Australia geography affects its ability to enter the world markets
and has been found to be a contributing factor on trade, productivity levels,
and exposure to foreign R&D. According to the Australian treasury, it found
that if Australia were as close to the world markets as the United Kingdom it
would see an increase of about 50% in trade levels. The Australian treasury
noted that this distance gap accounted for about 45% of the labor
productivity between the US and Australia. Income levels are affected by
Australias geographic location as transportation costs are absorbed in the
pricing of tradable goods in an attempt to remain competitive among the
market. Australia will continue to be at a disadvantage due to its location
unless it can gain a competitive advantage in the market with a highly
desired good or formulate a measure to use low-cost reusable energy to
lower their current transportation costs. One could also argue that the high
population growth rate is weakening the country as the job opportunities do
not necessarily match the increase of the labor force therefore increasing
unemployment.

According to the Australia government in 2011 land use was

comprised of 6.16% arable land, 0.05% permanent crops, and 93.79% used
as other. Australia uses their other land as meadows, forests, woodlands,

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roads, construction, etc. Australia has a potential to provide a safe, low-risk

environment for businesses to develop. According to the Australian trade
government Australia is the worlds 12th largest economy and is currently in
its 23rd year of uninterrupted annual growth. Australia is an attractive area
for business construction because it has strong ties with the Asia economies,
high productivity levels, and a skilled and diverse labor force. Australia
contributes to the following five future growing sectors: agribusiness,
education, tourism, mining, and wealth management. This future growth will
lead to an increase in GDP, consumer spending, government tax revenue,
and tourism.
Furthermore, as discussed earlier, trade is growing strongly with
the East-Asian countries, and especially exports. Nevertheless, as GDP
growth was recorded for many of those emerging markets such as Singapore,
China, Hong-Kong, Republic of Korea, Indonesia, etc., we can conclude that
there are opportunities for more profitable trade. Recent FTAs signed with the
different countries in the region provides Australia with an advantage over
their export competitors, especially the United States, Canada, Latin America
and the European Union.
Future rise in businesses would greatly have a positive impact on
GDP and lead to an increase in household spending for Australia. Australias
increase in products and services offered would increase discretionary
spending on leisure travel. An increase in tourism would generate foreign
income and create a surge in accommodation and aviation services.
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However, there is a competitive disadvantage for the price

sensitive traveler due to the high value of the Australian dollar. Tourism could
threaten the Australian economy with increased carbon emissions
significantly impacting the entire infrastructure of its abundant natural
resources and biodiversity. The increased amount of waste would also be
costly for the government to dispose of with high transportation costs due to
Australias geographic location. Australias economy is vulnerable to climate
changes which could rise sea level around the continent threatening the
infrastructure of homes along the coastlines. Future temperature changes
could have a significant negative impact on the countrys agriculture
production. Australias current economy is largely impacted by natural
resources and the country would greatly benefit by entering a new market in
which they can control.

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