Unit 1
Unit 3
Economic Growth
Australia's Recent Performance
Since the early 1990’s, Australia has been able to achieve excellent results in regards to annual rates of growth. After the recession of 1990-1991 Australia quickly returned to strong growth figures.
It is important to note that during the period seen in the graph below our opinion about the rate of growth that could be sustained in this country changed. Prior to 1999/2000, many economists believed that a rate of growth of between 3% and 4% per annum was achievable. Between 2000 and 2003 it was widely believed that we could sustain a higher rate of growth without the negative side effects of inflation or an increasing current account deficit. However, as has already been established, there is no official goal range for economic growth in this country; we just try to achieve the highest rate that we can without creating any negative side-effects.
In the late 1990s the economy grew at over 4% each year. However, ongoing reforms meant that this rate was not able to be sustained after 1999/2000. The lowest rate of growth for the period was achieved in 2000/01. Our growth rate in that 12 month period was only 1.0%. (However, it is important to recognise that in this year we did achieve positive growth – our output in 2000/01 was 1.0% higher than in the previous year.) This low figure was due to the simultaneous occurrence of several one off factors (which will be discussed under the sections on supply and demand factors). As a result, the Australian economy returned to a healthier rate of growth during the following year.
During 2005, the rate of economic growth in Australia slipped below 3.0%, and by the end of 2006 a figure of closer to 2% was recorded. A number of factors contributed to this result. Most significantly, the end of the housing boom meant that consumers became more reluctant to spend. Although credit growth remained high (an increase of around 13% in 2006) the level of consumption spending was not able to maintain the significant increases that had been seen since 2000. Fortunately, the momentum which had been lost in the household sector was picked up by the business sector and the external sector. In particular, demand for Australian exports such as coal and natural gas increased dramatically. This resulted in an increase in the Australian terms of trade, an appreciation of the currency and a positive rate of growth despite the downturn in consumption spending.
The former governor of the Reserve Bank, Mr Ian MacFarlane, has said that the Australian economy may have to operate with a lower goal for economic growth in the future. He now believes that a rate of around 4% is not sustainable, and that we may have to get used to a figure that begins with a two or a three instead. He went on to suggest that the only way to avoid this situation would be to implement a range of supply side reforms. The former government began to respond during 2005, with the beginning phases of the full sale of Telstra and the introduction of the WorkChoices labour market reforms. With the change of government in late 2007, a new approach to the pursuit of growth can be expected. It is worth noting, however, that Mr Rudd was keen to sell himself as an "economic conservative", and as a result there are some things that will stay the same despite the change of government.
There is no doubt that the pressure that was created by the global credit crisis in the second half of 2008 will have an impact on economic growth in Australia in 2009. The US economy slipped into recession during this period, and this will have ramifications for almost every other country in the world.
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