Answer To: Principles of Financial Markets The objective of this assignment is to assess the investment...
David answered on Dec 20 2021
Contents
2Economic analysis
2Overview
2Strong FDI
3Current challenges
3Persistent current account deficit
3Appreciating Australian dollar
4Strong trade and investment policies and negotiations
4Future risks
4Renewed inflationary pressures
6Foreign
7Money supply and interest rate
8Employment
9Highlights
9Outlook for 2012-16
10Political outlook
10Unemployment falls, but so does consumer sentiment
11Inflation remains moderate
11Current policy
11The Treasury emphasises the sweeteners in a tough budget
15The RBA cuts interest rates
15Long-term outlook
15Summary
Economic analysis
Overview
The service sector, particularly financial services, is an important contributor to Australia's economic activity. The service sector grew by around 7% in 2010 and contributed 72.8% to the country’s GDP. The country’s industrial growth was buoyed by the strong financial services, advanced manufacturing, infrastructure, biotechnology, mining and resources, clean energy, agri-business, information and communications technology (ICT), and food and beverage sectors. The country has transformed itself into an export-oriented economy by reducing tariff rates, removing the barriers to trade, and facilitating the privatization of government enterprises. Additionally, foreign direct investment (FDI) into the country grew by 7.5% to A$474bn ($436bn) in 2010. However, a current account deficit continues to persist in the economy. Moreover, the appreciating Australian dollar has led to significant job cuts in the manufacturing sector and has resulted in lower earnings for the exporters. In addition, inflation jumped to its highest level in five years in April 2011. The construction bubble in Asia, especially in China, is also a big threat to Australia’s exports.
Strong FDI
Similar to its exports, the country’s foreign direct investment (FDI) was not severely affected by the global slowdown in 2008 and 2009. Net FDI inflows in 2009 were $13.3bn compared to $15.1bn in 2008, and FDI into Australia grew by 7.5% to A$474bn ($436bn) in 2010. The top five FDI source countries were the US, the UK, Japan, the Netherlands, and Switzerland. South Korea, Canada, the Association of Southeast Asian Nations (ASEAN), Singapore, and Hong Kong also contributed significantly to the country’s FDI inflows. While FDI from the US increased by more than 20% to A$120bn ($110.3bn), FDI from China increased by 41% to A$12.8bn ($11.8bn). The country’s increasing trade with its Asian neighbors is a positive sign for Australia.
Current challenges
Persistent current account deficit
A current account deficit continues to persist in the economy. This deficit rose steadily to reach a high of 6.7% of GDP in 2004, after which it hovered above 6% of GDP until 2007. In 2008, the current account deficit declined to 3.7% of GDP. However, the global financial crisis hampered the positive development of the current account balance, leading to an increase in current account deficit of $43bn, which amounted to 4.8% of GDP in 2009. In 2010, the country’s international trade touched $439.2bn and its current account deficit stood at 3.3% of GDP.
Appreciating Australian dollar
Australia’s currency has appreciated by 26% since June 2010 to reach $1.07 in May 2011. The rising exports to China and India and other Asian economies are expected to lead to further appreciation of the Australian dollar. The appreciating Australian dollar has also affected the $23bn private equity sector as it makes assets expensive and results in lower returns for foreign investors. The country is highly dependent on exports. The country’s balance of trade hit a surplus of A$16.8bn ($15.45bn) in 2010, with exports of A$284.6bn ($261.7bn) and imports of A$267.8bn ($246.2bn). However, the appreciating Australian dollar impacted the manufacturing sector negatively as it recorded a loss of 5,100 jobs. The appreciating Australian dollar could also eat into the earnings of the exporters.
Strong trade and investment policies and negotiations
Australia has transformed itself into an export-oriented economy by reducing tariff rates, removing the barriers to trade, and facilitating the privatization of government enterprises. International trade increased from $410bn in 2009 to $439bn in 2010, with Asian countries accounting for more than 50% of the trade. To improve trade and investment, the country actively participates in key economic forums including the Group of Twenty (G20), the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation (APEC) forum, and the Organisation for Economic Co-operation and Development (OECD). The country has also improved its relations with China by resuming negotiations for a comprehensive free trade agreement (FTA) after a long hiatus. FTA negotiations have also continued with Japan, South Korea, Malaysia, and the Trans-Pacific Partnership (a joint FTA with seven Asia Pacific countries). Furthermore, Australia has signed an agreement formally launching the ASEAN-Australia-New Zealand FTA.
Future risks
Renewed inflationary pressures
Australia's rapid economic recovery has resulted in renewed inflationary pressures in the economy. In April 2011, inflation jumped to its highest level in five years due to higher food prices, as well as upward pressure on interest rates and currency. The rate of inflation was 3.3% year-on-year during the first quarter of 2011, with the effects of flooding and a cyclone sending fruit and vegetable prices soaring by 15% in the quarter. It is expected that inflationary pressure will persist in the economy, which could possibly make exports unviable, further widening the current account gap in the near future.
The global economic downturn has brought financial policies to the fore. The government has taken a number of bold policy decisions in the form of fiscal stimulus packages and guarantees of deposits, as well as wholesale borrowing for many financial institutions to prevent the economy from entering recession. The Australian economy has performed better than other developed economies in facing the crisis. In February 2009, the government announced a A$42bn ($33.3bn) nation building and jobs plan stimulus package that included increased spending on education and infrastructure, tax breaks for small businesses, and cash handouts to eligible workers, farmers, and students. Under the plan, the government approved more than 49,000 projects worth A$26.84bn ($21.25bn), as well as earmarking A$16.2bn ($12.8bn) for the Building the Education Revolution (BER) program. Nearly 24,000 projects were approved under the BER program, out of which nearly 84% were completed by January 2011. A major component of the BER program was the A$14.1bn ($11.2bn) Primary Schools for 21st Century initiative, under which over 10,500 projects were planned, including building and upgrading infrastructure in nearly 8,000 schools across the country. As of January 2011, 66% of the projects were completed. . The country’s moderate employment rate is expected to continue in the near term. After a decline in 2009, wages have grown to their pre-downturn levels. The devastating floods in the country affected businesses in a big way. The modest credit growth and high exchange rate are also exerting pressures on trade. With this economic background, the central bank as of June 2011 retained the interest rate of 4.75%.
Foreign
Australia has been an active player in international affairs since World War I. Moreover, since World War II, it has built close ties with the US. It signed its only formal security treaty with New Zealand and the US, popularly known as the ANZUS treaty, in 1951. The country was also one of the founding members of the UN. Australia has shown an active interest in relations between developed and developing nations and has emphasized continuity in its foreign policy towards the US and Asian...