Unit 1
Unit 2
Global Economic Issues
Demand Factors
The global financial crisis was largely caused by a collapse in demand side conditions. Although we have now established that the crisis was not as bad in Australia as it was in other parts of the world, we will attempt to explain why there was a fall in the level of economic activity in this country due to changes in demand side conditions.
External Conditions
The United States of America is one of our largest trading partners. When economic conditions in the USA falter our exports to that country are unlikely to be maintained. As a result, any businesses that rely on exports to the USA are more likely to see falling profits during this period.
Despite this, many people would be surprised to discover that exports to the USA actually increased during 2008/09. According to the Department of Foreign Affairs and Trade, the USA represented our fifth largest export destination during this period, with year on year growth of 9.4%. In part this can be attributed to existing contracts being finalised, and so it is unlikely that this growth will be seen in following years. It is also worth noting that the USA was our second largest source of imports, and so the net impact of trade with the USA was a reduction in aggregate demand in this country. (We exported $11.6 billion worth of products, but we imported over $25 billion worth of goods and services from the USA during this period.)
Confidence
Perhaps the most dramatic demand side factor was the fall in confidence. Both consumer and business confidence fell during this period. In June 2007, consumer confidence was recorded at 121.7 (according to the Westpac Australia Index of Consumer Confidence). By July 2008 this figure had fallen to 79.0, and it remained below 100 until June 2009. Similarly, business confidence fell from a peak of 10.9 in June 2007 (according to the National Australia Bank Index of Business Confidence) to a low of -30.5 in December 2008. It wasn’t until September 2009 that the business confidence index returned to positive territory.
Falling confidence leads to lower levels of consumption and investment expenditure. During this period motor vehicle sales fell from over 90,000 per month to around 70,000 per month. During 2008 there was only a very small increase in consumption spending, even though the government injected billions of dollars into the economy and the RBA acted to significantly reduce the cash rate. Investment in new equipment was stable, but investment in new dwellings fell.
Income Levels
Individuals derive their income primarily from their participation in the workforce. The total level of income can be calculated by examining the average rate of pay, the number of people who are working, and also the number of hours that they work. This final part of the calculation is very important, because it will help us to explain the overall fall in income levels that were recorded in Australia during the crisis.
It is true that we recorded an increase in the unemployment rate, and also a slight decline in the overall number of employed people. During this time the average rate of pay increased, and by the end of 2009 a full time adult employee in Australia could expect to earn $60,000 per year.
There is significant anecdotal evidence to suggest that people coped with the crisis in a different way. Many people moved from full time to part time work, or agreed to work “one week on, one week off”. For this reason, the aggregate hours worked index fell from 103.7 in September 2008 (the month in which Lehman Brothers declared bankruptcy) to 101.2 in July 2009. A decline in the number of hours worked meant the overall level of income being received in the economy was lower. Lower income levels resulted in lower levels of spending, and therefore a fall in aggregate demand.
Other Factors
A complete list of demand factors that affected the Australian economy during this period would be very long. For example, the Australian dollar was worth over US$0.98 in the middle of 2008, but by the beginning of 2009 it had fallen to less than US$0.65. Soon after, the dollar recovered. The underlying strength in the Australian dollar helped to ensure that by the end of 2009 it was once again worth more than US$0.90. While this suggested strength in the economy, it was also a barrier to increased exports.
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