Performance of the Australian Economy (Start 2019)

1. © Andrew Tibbitt 2019
Performance of the Australian
Economy - Start of 2019
WACE ATAR Economics - Unit 4
Slideshow 12.2 Update

2. Performance Objectives for the Australian
Economy
The domestic or internal performance of the economy can be judged
against a number of broad goals or objectives.
Objective Explanation
Economic growth Steady, sustained growth. As much growth for as long as
possible, without causing problems elsewhere.
Low unemployment At the natural rate or zero cyclical unemployment or at the non-
accelerating inflation rate of unemployment (NAIRU)
Price stability Low inflation, within the RBA target band of 2% to 3% inflation
per year. (This is the only specific performance target)
Equitable income
distribution
More equal distribution than would occur in a purely free market
economy.
Efficient allocation of
resources
Use of economy’s scarce resources in an efficient way.
Increase productivity.
Environmental
sustainability
Stewardship of ‘global commons’ or common access resources,
such as the climate and oceans
© Andrew Tibbitt 2019

3. External performance indicators
Given the global nature of the economy, Australia’s economic
managers do not attempt to achieve specific international or
external economic objectives.
They will, however, monitor a number of external performance
indicators that impact on the internal performance of the economy
including:
• Balance of Payments data
• Foreign liabilities (Foreign debt and Foreign Equity)
• Terms of Trade
• Exchange Rates
© Andrew Tibbitt 2019

4. Objective 1: Steady, sustainable economic growth
Explanation Increase in the capacity of the economy to satisfy
the needs and wants of members of the society.
Indicators  Rate of change in real GDP
 Rate of change in national income (NNI)
Comment As much growth as possible for as long as possible
(without causing problems elsewhere in the
economy). Growth generally leads to an increase
material living standards but the impact is not
distributed evenly throughout the economy.
© Andrew Tibbitt 2019

5. Objective 1: Steady, sustainable economic growth
Trend level,
desirable rate
Too high,
economy
overheating
Too low,
output gap
increasing
Rising
unemployment,
slow growth in
living standards
Sustainable
level
Rising inflation,
labour shortages,
environmental
damage
Over 27 years without recession
© Andrew Tibbitt 2019
Source: RBA Chart Pack

6. Objective 1: Steady, sustainable economic growth
Fall after GFC and
end of mining
investment boom
Over 27 years without recession
Slow and patchy
recovery after GFC
Back to trend
growth level
in 2018-19Strong growth
during mining
investment boom
© Andrew Tibbitt 2019
Source: RBA Chart Pack

7. Objective 2: Low unemployment
Explanation Achieve zero cyclical unemployment (natural rate of
unemployment) or unemployment at non-accelerating
inflation rate of unemployment (NAIRU). A job for
everybody that wants to work without causing inflation
to accelerate.
Indicators  Unemployment rate
 Participation Rate
 Underemployment rate (including part-time
workers who want to work more)
 Employment to labour force rate
Comment Avoid cyclical unemployment and reduce structural
unemployment. Natural rate and NAIRU appears to be
about 4.5% to 5% unemployment.
© Andrew Tibbitt 2019

8. Objective 2: Low unemployment
Natural rate
or NAIRU
level
Too high
Too low
Economic and
social costs of
unemployment
significant
Equilibrium in
labour market
Labour
shortages, rise
in wage costs
© Andrew Tibbitt 2019
Source: RBA Chart Pack

9. Objective 2: Low unemployment
Rate affected by growth in
aggregate demand, productivity
growth and growth in labour force
Underemployment includes part-time workers who would like to work
more hours - typically 50% - 60% higher than unemployment rate
© Andrew Tibbitt 2019
Source: RBA Chart Pack

10. Objective 2: Low unemployment
Participation Rate affected
by cyclical factors (i.e.
growth) and structural
factors (e.g. social
changes, structural
change)
Pick up in
growth
Slow and patchy
recovery after GFC
© Andrew Tibbitt 2019
Source: RBA Chart Pack

11. Objective 3: Price stability
Explanation Low inflation. Little or no sustained, appreciable rise in
the price level over time.
Indicators • Rate of change in the Consumer Price Index (CPI)
• Changes in underlying inflation measures to account
for outliers and volatile prices
• Rate of change of the Implicit Price Deflator Index
(IPDI) - an indicator of changes in producer costs
Comment RBA inflation target is for inflation between 2% and 3%
on average over the duration of each economic cycle.
© Andrew Tibbitt 2019

12. Objective 2: Price stability
RBA target
zone
Too high
Too low
Problems of income redistribution,
loss of international competitiveness,
confidence and efficiency
Fear of
slipping into
deflation
© Andrew Tibbitt 2019
Source: RBA Chart Pack

13. Objective 3: Price stability
All three measures follow
similar pattern
Height of mining
investment boom (no
output gap), and then fall
in exchange rate
Output gap increases after GFC
and years of slower growth
© Andrew Tibbitt 2019
Source: RBA Chart Pack

14. Objective 4: Equitable income distribution
Explanation An equitable distribution of income creates distributive
justice. Aim is to balance fairness (equity) with
efficiency through maintaining incentives and rewards.
Indicators • Gini-coefficient (calculation linked to Lorenz Curve)
• Palma Ratio (proportion of income of the richest 10%
divided by income of the poorest 40%)
Comment Striking the balance is a political matter involving
incentives, destroying moral hazard and creating
welfare dependency
© Andrew Tibbitt 2019

15. Objective 4: Equitable income distribution
Affected by structural change (e.g. linked
to technology and globalisation) and tax
and welfare redistribution
© Andrew Tibbitt 2019Data source: Hilda Report, Melbourne University 2018

16. Objective 4: Equitable income distribution
© Andrew Tibbitt 2019Data source: Hilda Report, Melbourne University 2018
The more uneven income distribution the
higher the Gini-coefficient - tax and welfare
make distribution more equal

17. Objective 5: Efficient use of resources
Explanation Use resources to achieve productive, allocative and
dynamic efficiency.
Indicators • Deadweight loss
• Labour productivity
• Total factor productivity
Comment Address market failure and government failure to
improve productivity and improve the allocation of the
economy’s scarce resources
© Andrew Tibbitt 2019

18. Objective 5: Efficient use of resources
Productivity growth was good
during economic reform program
of Hawke-Keating governments in
1980s and 1990s.
Productivity growth
weaker during mining
investment boom (lag
before output
increased)
Multi-factor
productivity has
grown slower
than labour
productivity.
© Andrew Tibbitt 2019
Source: Productivity Commission

19. Objective 6: Environmental sustainability
Explanation Address environmental issues and reduce costs
imposed on future generations
Indicators Level of Greenhouse Gases
Rate of resource depletion
Extent of climate change and global warming
Comment For example, address climate change and global
warming, use and disposal of plastics, reduce landfill.
© Andrew Tibbitt 2019

20. Objective 6: Environmental sustainability
Australia’s emissions on a per capita
basis are relatively high (one of the
highest in the developed world).
Over 50% of electricity is generated
using coal, and we are major exporters
of coal to other economies
© Andrew Tibbitt 2019
Source: Wikipedia Commons

21. External indicators 1: Balance of Payments
Affected by
cyclical,
structural and
special (shock)
factors
Narrowing trend consistent with
fall in foreign investment inflows
and lower exchange rate after
fall in commodity prices
© Andrew Tibbitt 2019
Source: RBA Chart Pack

22. External indicators 2: Foreign liabilities
Mostly long-term
private sector
debt
Net equity worth
due to
investment by
Super Funds in
overseas share
markets
Finances
investment:savings
gap - investment
boosts size of GDP
© Andrew Tibbitt 2019
Source: RBA Chart Pack

23. External indicators 3: Exchange Rate
TWI affected by commodity prices and the
terms of trade, relative interest rates, the
global risk environment as well as
fundamental strength of the economy
© Andrew Tibbitt 2019
Source: RBA Chart Pack

24. External indicators 4: Terms of Trade
Mainly reflects changes in mineral and
energy commodity prices
Most significant
impact is on real
national income in
Australia
© Andrew Tibbitt 2019
Source: RBA Chart Pack

25. Policy options
Assuming the macro-managers don’t think the economy will self-
adjust (or can’t wait for the economy to self-adjust) they have
demand-side and supply-side policy options available to bring about
improved economic performance.
Demand-side policies Supply-side policies
Fiscal Policy
Government spending
Taxation
Borrowing
Monetary Policy
Cash rate changes
Economic reform
Interventionist
(e.g. infrastructure,
health, education)
Market-orientated
(e.g. wage flexibility,
competition, trade
© Andrew Tibbitt 2019

26. Performance scorecard
Macroeconomic
objective
Latest data
(Start 2019)
Ideal level
Performance
assessment
Growth rate
GDP
3% to 3.5% 3.5% Good
Standard of living
(NNI/hd)
Rising Rising Good
Full employment 5% 4.75% Good
Labour force
Participation
65.5 67.5 Good
Price stability
(CPI)
1.8% 2% to 3% A little low
Underlying inflation 1.75 to 1.50% 2% to 3% A little low
Income distribution 0.325 0.33 Good
Efficiency (multi-
factor productivity)
0.25 0.75 Too low
Environmental
sustainability
18.6 ton CO2 / hd 7.5 or below Too high
© Andrew Tibbitt 2019

27. External performance scorecard
External indicator
Latest data
(Start 2019)
Ideal level
Performance
assessment
Balance on current
account (%GDP)
-2.5% of GDP No target Sustainable
Trade balance (%
GDP)
+0.5% of GDP No target Sustainable
Foreign liabilities 53% of GDP No target Sustainable
Exchange rate
AUD/USD 0.70 to
0.75
TWI 62 to 63
No target
Makes exports
relatively competitive
Terms of trade 120 (2015-16 = 100) No target Relatively stable
© Andrew Tibbitt 2019

28. End of slideshow
© Andrew Tibbitt 2019