Economic Growth

Demand Factors and Sustainable Economic Growth

Any factor that will cause an increase in aggregate demand may lead to an increase in real GDP in Australia. As such, we can assess the impact of a change in a demand factor by using the supply and demand graphs.

As the equilibrium point has moved to the right, it is possible that the economy has seen some growth during this period. This growth can be achieved through many demand side factors. It is important that you are comfortable when linking any change in a demand side factor to changes in Australia’s rate of growth. Let’s consider an example:

Economic growth and consumer confidence in Australia

From this a link between changes in consumer confidence and our rate of growth becomes apparent. In theory, when consumers become more confident about the future, they are more likely to spend their disposable income, rather than save it. This will be reflected in an increase in the consumption spending (C) component of aggregate demand, and as a result the demand curve will move to the right. Similarly, as confidence falls we will see the demand weaken, and so the growth rate may slow.

In 1999/2000 consumer confidence was low. Due in part to the introduction of the GST, low consumer confidence resulted in reduced spending. As a result we recorded our lowest growth rate for observed period (1.0%).

In more recent times, the link between consumer confidence and economic growth can be seen once again. During 2005, consumer confidence fell. This was due to significant increases in the price of fuel, and the lingering threat of an increase in interest rates. (These fears turned out to be well founded - interest rates increased three times during 2006, and twice more in 2007.) You can see on the graph that this coincided closely with a downturn in the rate of economic growth, which fell to only 2.6% during that year. While other factors undoubtedly played a part, the fall in consumer confidence had a strong impact on this result.

During 2008 consumer confidence fell dramatically. While the Reserve Bank and the federal government both responded with aggressive expansionary policies, falling confidence resulted in lower consumer spending in the second half of 2008 and early 2009. This will have an impact on economic growth and, as a result, employment.

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