Australia: Analysis of Macroeconomic Variables
Australia encompasses a region which has witnessed remarkable steady progress over the years. Australia forms 1.6% of the worldwide economy with a nominal gross domestic product of AUD 2 trillion. Decreased movement in the Australian economy caused by The COVID-19 pandemic and Australian bushfires caused its GDP growth rate to plummet by almost 4% throughout the year. The worst affected quarter was June 2020, with a record low of a 7% decline in the GDP.
This article, accompanied by the time-series data analysed, aims to provide insight into economic trends by incorporating various macroeconomic variables, determinants, and standards that form part of Australia. Combinedly, how these macroeconomic variables interact with each other shapes how well Australia’s economy adapts with itself.
The Australian Bureau of Statistics implemented the uniform usage of chain volume measures to ascertain all figures contributing to the growth rate. By adopting chain volume measures, which is an alternative to calculating estimates through constant prices, quantities are measured by prices updated yearly. Once “chained” together, they produce a time series result of volume measures. Australia’s seasonally adjusted data provides a strong foundation to support the various macroeconomic indicators analysed.
According to chain volume terms, a 0.3% contraction in the Australian economy for 2019–20 disrupted almost 30 years of stable economic growth. A rise in GDP of 3.3% was witnessed after being seasonally adjusted in the September 2020 quarter. The rise in GDP in a time of economic instability around the world can be attributed to Australia’s handling of COVID-19, and the subsequent easing of restrictions throughout the nation. However, despite the rebound in GDP, it was not enough to fully compensate for the lowered economic activity caused by the pandemic.
Because of the economic effects of COVID-19, trend forecasts have been suspended from June 2019 for all series in the National Accounts. In the short term, adjustments to typical economic activity trends would directly affect this calculation. If trend projections were to be estimated without accounting for this unforeseen case, they would possibly provide a misleading view of Australia’s current economic trend.
Overview of Australian National Accounts: GDP, National Income, Consumption
Aggregate demand advanced the GDP growth rate by 4.3 percentage points. As the stringency of COVID restraints gradually reduced, a contribution of 4.0 percentage points was made by household final consumption expenditure, while public demand added 0.3 percentage points to Domestic Final Demand.
The ratio of household saving to income saw a record high of 22% in the June 2020 quarter, followed by a fall of 3% in the September 2020 quarter. The fall is due to the slight recovery in household consumption which outperformed income growth. Household final consumption expenditure partly recovered by an 8% rise in the September 2020 quarter after witnessing a fall of 12.5% in the June 2020 quarter. However, discretionary services were limited as lifestyle habits changed, which was demonstrated by a 6.5% decline.
Spending on services and both durable and non-durable goods went up significantly. With the relaxation in COVID restrictions after improved conditions, spending on services in the hospitality industry, transportation, and other recreation services spiked up by almost 10%. This can be attributed to the unprecedented demand for ready-to-eat/packaged meals, entertainment, and other elements which were inadequate in abundance during the lockdown. Expenditure on health per household went up by 26%, which can be attributed to increased health awareness and recommencement of elective surgeries. Domestic and International border closures led to travel plans being disrupted and reduced. Additionally, spending on goods increased by over 5% in the September 2020 quarter and 3.5% throughout the year.
As the economy opened up again, both labour and non-labour income increased, which was indicated by a 3.5% rise in disposable household income. Household consumption patterns vary across states, despite uniform national restrictions barring Victoria, the worst-hit territory.
Government final consumption expenditure rose by 1.4%, consistently rising throughout quarters, steered by national non-defence — additional social benefits per household, taking into account that people resumed visiting healthcare practitioners for non-emergency appointments following eased restrictions. The Government debt to GDP ratio has remained on the lower end, despite an increase in the past few years.
Weak business investments and a decrease in non-dwelling construction work nullified the rise in housing investment activity and public investment, leading to a 0.2% decline in private investment in the September 2020 quarter. Despite the widespread destruction caused by the Australian bushfires, re-construction work was halted or delayed as construction activity was mainly restricted. Housing market activity prevented a further decline in private investment — transfer of ownership costs increased by 21.4% while renovations and remodelling led to a 5% rise in alterations and additions.
Eventually, after a massive plunge in total inventories of $3,830 million in June 2020, it declined by $135 million. Since there was a steady rise in manufacturing, public authorities and farming commodities, it slightly offset the slump in wholesale trade and mining.
Surged demand for consumption goods, fuels, and non-industrial transport equipment led to a 6.5% rise in imports of goods and services. The demand for consumption goods was driven by home improvement tools such as furniture, retail, home appliances and technology equipment.
The disruptions in global logistics and supply led to delayed deliveries and impeded the consumption of imported goods. Whereas stringent travel restrictions and reduced demand for Australia’s natural resources, such as mining commodities and mineral ores, led to a 3.2% fall in exports of goods and services.
A detraction of almost two percentage points from the GDP in the September 2020 quarter is the record low in 40 years.
Gross Value Added (GVA)
Gross Value Added measures the value of gross output minus intermediate consumption. Estimates in GVA assess the contributions by industries towards the economy.
17 out of 19 industries saw a rise, leading to over 3% increase in Gross Value Added. Industries which catalysed the process were Arts and Recreation Services and Accommodation and Food Services. It is noteworthy that these two service industries were the most impacted during the lockdown, and reported exceptional rises post the easing of restrictions in the latest quarter. However, most industries’ degree of activity was almost stagnant throughout the year, resulting in plummeting negative figures.
After a disastrous June 2020 quarter with adverse unemployment and compensation of employees rates, the latter rose by 2.3% reflecting a rise in employment levels and increased working hours, especially in Healthcare, Social Assistance, Accommodation and Food Services. The Goods and Service Tax drove a sharp increase in taxes. Additionally, subsidies provided for imports and production were raised to support affected businesses through cash flow boosts in the form of COVID economic response packages.
However, the government’s attempts to provide households and businesses with social assistance benefits and wage subsidy schemes resulted in the government net savings being the largest negative savings ever documented at -$84 billion.
In contrast, as the financial support beneficiaries, the positive net saving position in households made the household saving ratio rise to over 10%, which is the highest annual saving rate in over three decades.
The Australian economy uses the Output Indicator method, which makes use of a comprehensive framework to analyse quarterly estimates through quarterly indicators. Supply-Use tables are used to provide annual benchmarks based on the industry, which streamlines the process of compiling quarterly estimates through recurrent interpolation and extrapolation.
Consumer Price Index (CPI)
CPI tracks quarterly shifts in the pricing of a ‘basket’ of goods and services that account for a high percentage of CPI population group spending, mainly characterised by metropolitan households. It does not measure expenditure changes of a particular individual as such.
CPI tracks the levels of inflation and adjusts dollar rates for fixed payments such as pensions and contracts. CPI measures the price inflation of goods and services used by households and is viewed as a comprehensive price index. The CPI basket includes the goods and services purchased by the average household in the economy, and they change over time to reflect changing patterns in household spending behaviour.
The change in CPI in September 2020 from the previous quarter was a 1.6% rise. After free child care ended in July 2020, it had a substantial rise of 0.9 percentage points. It is noteworthy that factors affecting exclusion-based measures and underlying inflation also impact the calculation of the CPI.
There are 11 groups impacting CPI, namely:
Food and non-alcoholic beverages, Clothing and Footwear, Transport, Communication, Education, Insurance and financial services, Furnishings & household equipment and services, Alcohol and tobacco, Housing, Health, Recreation and culture.
The group of Food and non-alcoholic beverages fell by 0.4% from the previous quarter. After the peak COVID-19 stockpiling period, a return to normal discounting cycles propelled activity across a broad range of goods. Throughout the year, the collective impacts of stockpiling and increased demand due to COVID-19, drought due to Australian bushfires, and African swine fever caused this group to rise by 3.4% annually.
The Clothing and Footwear group fell by 0.5% in the last 12 months impacted by garments for women and women’s footwear.
The Transport group fell by 4% over the year, majorly due to a fall in automotive fuel due to limited vehicles operating. By the September 2020 quarter, oil consumption recovered which made fuel prices increase.
As the telecommunication sector’s equipment and services took a hit, the Communication group fell by 3.3%.
The Education group saw a minor rise of 1%, which can be credited to secondary education. Additionally, after the ceasing of free childcare, primary education saw increases.
The Insurance and financial services group increased by over 1.5% annually as insurance was given increased importance.
The Furnishings, Household Equipment and services group fell by 0.1%. The main reason for this was dissolving an education and relief package, which made child care free for a week in July. Barring this event’s effects, this group would have risen by 1.3% considering a strong surge in demand for household appliances and home office furniture.
The Alcohol and Tobacco group rose by 8.1%, led by an increase in tobacco consumption.
As for the Housing group, the increase in new residential acquisitions by 0.5% was induced by rises in base prices and declines in promotions and offers. The increase was partly compensated by government grants, which reduced new dwelling purchases from pocket expenses. Rebates, fall in rents, discounts were provided in view of the pandemic, a historic first considering Australia’s sky-high rents arising from a housing crisis.
The group fell by 0.2%, and yet Housing remains the largest group as it constitutes over 1/4th of what an average Australian household spends on.
As the number of citizens entitled to a pharmaceutical subsidy scheme increased, it was accompanied by increased activity in medical services, making the Health group rise by 1%.
As a response to spending significantly more time indoors, there was a surge in technology equipment ranging from home theatres to gaming systems. Despite this, the Recreation and Culture group fell by 0.7% due to a drop in vacations, international travel, and hospitality.
Since the CPI basket is “fixed”, it does not account for evolving changing behaviours, leading to substitution bias and making it difficult to accurately ascertain inflationary pressures.
CPI tracks the manner in which prices of items in the basket change over time but does not indicate the level of those prices. Moreover, CPI calculation is restricted to Australia’s 8 capital cities, with relatively more metropolitan households, and excludes rural areas.
To yield accurate price measures, the frequency of price collection by item differs as appropriate. Some items’ prices are unpredictable (their prices which differ several times every quarter) and periodic market assessments are required for these items in order to obtain a reliable estimate of the average price for the quarter. Changes in indexes from one time period to another can be interpreted as changes in index points or as changes in percentages.
Inflation
Inflation refers to an increase in the prices of goods and services in the economy, measured as the percentage change in the prices paid for these goods and services at two different points in time.
Cost of living inflation is the change in spending by households necessary to maintain their standard of living. Hence, it is dependent on the decision of maintaining that specific standard of living and not on the spending pattern of that average household.
A measure known as CPI excluding volatile items is the average inflation rate of all items in the CPI basket except for groceries and fuel, as they are subject to unpredictability. Considering a 2020 example, changes to the price of child care after the free childcare policy would not be excluded from this measure either. The ABS collects over 100,000 prices each quarter from various sources ranging from retailers to website owners.
The Reserve Bank of Australia’s target is to maintain the yearly CPI inflation rate between 2–3% on average over time, which is used as a benchmark to ensure relative price stability. CPI Inflation is also known as Headline Inflation, and it includes all prices in the CPI basket. They can be impacted by significant price changes and external factors, which makes them volatile in nature.
Other measures, such as underlying inflation, exclude any large or one-off price changes. In situations where movements in the price for individual items are considerably large, they can affect headline inflation. However, since these changes are temporary or one-off, they might not demonstrate how the prices of most other goods and services are changing in the economy, causing underlying inflationary pressures. For instance, even as childcare was free temporarily during June 2020, groceries were not.
Exports
As of December 2020, Exports increased by 16% ($4,900 million), approximately totalling to $34,900 million — a significant rise from November 2020 with a $30,000 million estimate. The 22% increase in Metalliferous ores exports was led by iron ores, corroborated by the prices and abundance in quantity for iron ore.
Record-high exports of cereals were seen in December 2020. Increased cultivation led to wheat and barley rising by over $600 million and $180 million as exports. Moreover, favourable cultivation environments were created for this advancement. Despite the fact that Russia leads the global wheat production, its unfavourable cultivation conditions made Australia witness a surge in cereal demand.
Coal exports rose by $760 million in December 2020, as coal exporting regions such as South Korea, Japan and India met their coal export requirements. Thermal coal and hard coking coal drove the coal exports demand.
December 2020 exports are 3% greater than 2019 December, driven by export increases in metalliferous ores, cereals and non-monetary gold. However, these increases were balanced out by the -35% fall in gas exports and -23% in coal exports throughout the year.
Overall, annually 2020 saw a fall in exports by 7% when compared to 2019.
Countries such as the US, India, Japan, China, and South Korea are the main export destinations of Australia. India and the USA imported coal and non-monetary gold from Australia the most and replaced Singapore and the UK as one of the top export destinations. China is Australia’s biggest trading destination. 80% of iron ore exports in December 2020 were by China. Over 1/3rd of Australia’s wheat exports in December were to China, making it the record highest wheat export to a country in a single month.
Considering the recent conflicts between Australia and China, it is uncertain if China will hold the same position in Australian exports in the coming year, which might negatively impact the export figures.
Imports
As of December 2020, Imports decreased by 9% ($2,500 million), approximately totalling to $26,000 million. A $1 billion decrease in the imports of transport equipment was since aircrafts were imported from the US in November 2020.
Similarly, sound and telecommunications equipment saw a fall of over $200 million as newer models of mobiles and other technology launched within the country, diminishing the need for imports in this category. Other miscellaneous goods meant for manufacturing such as machinery generating power which is influenced by seasonal factors saw a decline the latest month.
Considering that it is currently Summer in Australia, goods such as solar equipment saw a fall in imports. However, road vehicles reached a high record value of over $3,000 million, a consistent rise since the lockdown peak.
The most noteworthy changes from 2019 in imports, which made it 5% lesser overall include a fall in transport equipment, accompanied by a fall in petroleum, and an increase in road vehicles and manufacturing goods which are miscellaneous.
The maximum imports were road vehicles from the countries Thailand and Japan, which was realised to be of better value than importing road vehicles from Germany, causing a 15% decrease for the latter this year.
China and the US saw a significant drop as import destinations as well, due to the decrease in technology equipment and transport equipment respectively.
Unemployment Rate
The unemployment rate was 5.2%, in March 2020, the period which was the onset of the pandemic and spreading of the bushfires. Shutting down non-essential services and small businesses apart from other additional shutdowns impacting jobs throughout the country significantly impacted the unemployment rate as it rose throughout the year. December 2020’s unemployment rate was 6.6% and is 1.5 points higher than December 2019. This was a departure from 2018 when unemployment levels had reached an all-time low in five years. The number of unemployed people was almost 222,000, while the youth unemployment rate rose by 2.3 points.
Despite initiatives such as JobKeeper wage subsidies in receipt of JobSeeker payments and the subsequent gradual easing of restrictions, the unemployment rate did not slow down as the extreme consequences of people losing jobs overpowered the efficiency of these initiatives.
The current slack in the labour market can be perceived as cyclical unemployment. Additionally, due to the mass loss of jobs, people transitioned between jobs. Nevertheless, it cannot be perceived as frictional unemployment as it is not just short-term and has impacted wages and inflation significantly.
Living Standards
Selected Living Cost Indexes
Living Cost Indexes ascertain the effect of fluctuating prices and their impact on the target households’ out-of-pocket expenditure.
A living cost index represents variations in the purchasing power of households’ after-tax incomes over periods of time. To obtain access to a fixed basket of consumer products and services, it calculates the effect of price increases on the out-of-pocket expenditures incurred by households. In contrast, the Consumer Price Index is intended to calculate price inflation for the entire household sector, and it is not viable for determining shifts in the buying power of disposable household incomes.
Household Income and Wealth
Income forms an indispensable part of Australians’ lives, especially considering the high cost of living there. In times of decreased income or considerable unforeseen expenditures, wealth reserves or savings could be withdrawn to sustain living standards. After considering factors such as the age and the number of people in a single household, combinedly assessing income and wealth forms a better grasp of the economic stability in households.
Between the years 1997–98 and 2017–18, the mean incomes of low-income, middle-income, and high-income households increased by $140, $310, and $870 respectively. This progression demonstrates that all household groups have experienced a real rise in their incomes since the late 1990s.
As for the changes in wealth, high-wealth and middle-wealth households have seen a notable rise in their average net worth over the years — increasing by $1.3 million and $150,000 respectively between 2003–04 and 2017–18. The incline in well-off households’ net wealth is due to property acquisition, which significantly led to a spike in their wealth. Low-wealth households have seen a stagnant value in their wealth is worth $35,000 over the years.
The distribution of wealth is comparatively more unequal than the distribution of income in Australia. Over 60% of the total household wealth was retained by the top 20% of the wealthiest households while the bottom 20% of households barely had 1% of the overall household wealth, which demonstrates the rampant wealth inequality even in a country as developed as Australia.
In comparison, the income pattern has retained more stability in 20 years as the top-income households got 40% of the total income while the households in the bottom of the scale received around 8% of total income. A recovery in average income was seen after the 2008 financial crisis.
Low-income households are dependent on schemes and pensions to form a majority part of their income, in contrast to better-off household groups where employee income forms most household income. Overall, such households are less likely to diminish savings to fuel their consumption.
Conclusion
A typical pattern in the industries most affected by COVID-19 is that they witnessed more significant rebounds in economic activity in the September quarter, after record-low activity in the June quarter.
Prior to the downturn in global supply chains, sufficient exports gave rise to trade surpluses, benefiting the country later during disruptive circumstances. The negative growth rate is not exclusive to 2020 and was seen in two years: 1983 and 1991 out of the past six decades. With the growth rate averaging at 3.2% since the recession in 1991, it continues to maintain an impressive spot compared to several other nations.
Australia’s GDP has grown by 190% in the past 30 years, with the GDP per person amounting to $54,000, better than Germany, UK, France. Considerable changes in consumption expenditure due to travel restrictions and social distancing measures led to household spending diverting to home entertainment, improvement appliances, and groceries instead.
After analysing Australia’s economic indicators throughout the years, it can be concluded that economic growth will continue to rise once the pandemic’s negative after-effects such as worldwide growth and capacity constraints are stabilised. Building a resilient, and more efficient job market and revenue-generating economy for Australia to recover from the pandemic is imperative, considering the current state of unemployment.
By implementing a more concrete course of action to counter tax evasion and reducing the burden of personal taxation, handling the widening socio-economic gap, and bettering policy executions for the target beneficiaries, the Australian federal government can expect to see higher steadiness in the Australian economy.
