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Economics Assignment on Three Biggest Economic Challenges Faced by the Australian Economy
An economic problem or challenge occurs when a country fails to meet the needs or wants of its population with the scarce resources it has. It could be said that when an economy fails to meets its micro and macro-economic goals it creates an economic problem for them. Since 2007 the world has seen a setback economically and even the most stable countries have faced challenges in their economy. While developing countries are spending more on rectifying issues with poverty and inflation developed countries are now stressing more on climate sustainability. As stated before economics is divided into two fields; macro and micro, therefore the problems that lie are also different.
Microeconomics deals with how scarce resources should be used by the government and how the policies that the government makes focusing on those production actions. The problems are the questions of production which involve how much must be produced, how to produce and for whom to produce. The matters of competitive market and monopoly and also the government tax burdens that are levied on the companies. It focuses on how to maximize income while keeping individual productivity intact. Microeconomics focuses on the individual aspects or agents of the economy like households, labor, companies that conduct business, and inequality of wealth.
Macroeconomics, on the other hand, focuses on the bigger picture, focuses on the economy as a whole. The problems that are highlighted in macroeconomics are broader issues such as unemployment, inflation, debt, interest rates, and stagnant economic growth. It highlights the functions of a larger economic system.
While both macro and microeconomic problems are of importance but when talking about a countries healthy economic system the indicators are mostly driven from macro-economic factors. To assess whether a countries economic condition is stable or not it is important to note major economic goals such as standard of living, unemployment rate, and inflation rate.
When we talk about economic challenges that a country faces its most likely problem they are facing in accomplishing their macro-economic goals. Unemployment, income inequality, growing globalization, debt imbalance, lack of proper health and education, and climate changes are all considered as global economic challenges.
Australian economy specifically enjoyed success in the past decades with a considerably high gross domestic product, ranks favorably in wellbeing and has not seen a major recession in the past two decades. However recently the Australian economy is at risk of falling in a low growth trap, and many surveys have shown that there are many underlying economic problems in Australia. This essay will focus on the 3 biggest economic challenges present in Australia and what should be done to rectify them.
Australia’s economy is one of the most developed countries however recently the country has seemed to enter a phase of no growth. Wages are not increasing instead are stagnant, unemployment is increasing by the day, housing prices are falling it feels as if the economy is tanking and if not that it is moving towards it with its no-growth phase.
The three biggest economic problems that underlie in the Australian economy are unemployment, household debt, and slow economic growth.
During 2018 the government has been applauding itself for creating over 330.000 jobs, which is good news for most countries however it is not the case for Australia. The real picture is that where the jobs have increased the rate of unemployment has increased by a higher percentage. The numbers show that 330,000 jobs were added but what is not shown is that and addition of 350,000 workers were also added to the workforce. This scenario shows that although new jobs were added, the number of workers exceeded the number of jobs and hence worsening the situation of unemployment.
The current rate of unemployment is 5.6 percent, which has increased from a previous 5 percent in October 2018. The treasury and reserve bank of Australia both believe that the lowest it can go down to is 5.25 percent t without having inflation or wage breakout, which means that if unemployment is to be put reduced other problems, may occur. It is alarming to see that Australia being one of the most developed countries and standing among progressive countries like the USA, Japan, China, and Germany who have a matter of unemployment under control.
· The USA has an unemployment rate of 4.3%
· Japan has an unemployment rate of 2.8%
· The UK has an unemployment rate of 4.5%
· Germany has an unemployment rate of 3.9%
There are many factors why a country might be facing issues with increasing unemployment which include
· Frictional unemployment: this means that temporary unemployment has been created while people are switching jobs. So this is transitional unemployment.
· Structural unemployment: this is a type of long-term unemployment, it may occur due to a long-term reduction in the demand, globalization or competitive advantage.
· Cyclic unemployment: this is demand deficit unemployment; an economy does not have to go in recession to face such type of unemployment, it can occur on if the process of production is slowed down.
According to sources, it is an event that Australia is facing hiked numbers of unemployment due to lone run structural factors. Lack of trained and skilled labor has caused the number of unemployed workers to increase because the current force looking for jobs does not have the skill set required for the Australian economy.
Another reason for ever-increasing unemployment rates is the fact that people are preferring immigrants from different countries that have the requisite skillset and are arriving through the 457 visa programs over unemployed Australians.
Knowing the benefits that training and education can bring to Australia’s workforce the government has still imposed cuts on trade training, underfunding schools and increasing the university fees making it unaffordable for many students
The problem of unemployment can be rectified through either fiscal or monetary policy. In my opinion, fiscal policy would be the best possible solution since monetary policy looks a little risk because of the fluctuations in interest rates caused by household debt.
Fiscal policy can stimulate the economy and lower the rate of unemployment, by cutting back on taxes and increasing government spending. Increase in government spending will increase the aggregate demand of the economy, lower taxes would increase the disposable income and also increase the aggregate demand for goods. If the demand for goods increases, then the demand for workers will also increase which is why the unemployment rations will also decrease. This is called an expansionary fiscal policy.
Another way this fiscal policy can decrease the rate of unemployment is if the government spends on the right kind of training for unskilled workers and properly fund the schools that were previously underfunded.
After 28 years of expansion, stable growth rate, inflation, and increasing GDP the country is seeing a time where it might step into recession. The GDP this year has been $1.3 trillion the economy grew by 0.4% in the last three months which is double the amount that was in march but is still less than the estimated 0.5%.
The growth rate of 1.8% is far less than the 3.5% that is a long term average, the expansion rate has been this low since the great financial crisis. According to CommSec chief economist Craig James ‘The Aussie economy has lost momentum. And soft consumer spending is the main culprit,”
According to the forecast of IMF the economic growth, Australia will slow down by twice the speed as compared to other developed nations. The forecast also states that the highest GDP can go this year in 2019 is 2.1 which will be 0.7% less than in 2018.
The issue here is that although the economic growth is less than last year but is still a positive number, which may be a good situation for any other developing country, it is not the case with Australia. The issue with Australia is that the population is increasing too hence making the GDP per capita very low. According to the Australian Bureau of statistics, the GDP per capita has also fallen by 0.03%
Australia is going backward for the very first time, which has been happened in the past 2 decades. The main reason for slow growth can be that it heavily relied on natural resources as its main source of production, mining for coal and minerals was the main occupation of Australia and it earned most of its revenue from exporting it. Natural resources are finite and bound to replenish and that can become a problem for an economy who is heavily reliant on such sources.
Another common notion is that the more immigrants in a country the more its growth would be, the GDP growth of Australia was powered by immigrants and they also contributed to 50% of the population growth. The growth in population tends to depress the GDP per capita, so immigrants that was once the reason behind Australia’s economic growth is now threatening it.
To increase the economic growth of Australia it is feasible that expansionary monetary policy is stimulated so that aggregate demand increases which would lead a demand-led growth. Cutting on interest rates and increasing the amount of income available to people so that they spend and the GDP would increase.
The lower interest rate would also act as an agent in reducing exchange rates and hence making exports more competitive. Lowering interest rates would also mean that people face relaxation on payment of their debts and can now have more disposable income. This year recently the central bank of Australia has taken this first step by reducing the interest to a record low of 1.25%.
Another alarming situation for the Australian economy is the Household debt to income ratio is more than 200% and the ratio of the household debt to the local economy is 125%. Compare to other developed countries like Canada, Britain, and the USA who has a ratio lying between 80 to 100% is shockingly high. It is considered a big challenge to the Australian government because middle-class income earners owe most of the household debt. People like lawyers, doctors, accountants, and engineers owe these household debts and they are the backbone of the economy. If this income group faces any distress it would reflect on the economy and its growth. Are middle-income groups facing economic problems, they would cut back on their spending hence consumer spending would reduce. If debt increases the consumer spending decreases and so does economic health.
International Monetary Fund (IMF) is also highly concerned about the matter since Australian has been heavily relying upon household debt to drive the economy. Since the Federal Reserve is going to raise interest rates it is going to bring the Gross Domestic Product (GDP) down. The effects are starting to kick in since 2017 where a lot of loans that were viable once are not now and housing prices are going down. Australia ranks 4th highest household debt to income ratio in the world. If the household debt would be high the saving and consumer-spending ration would be low and therefore it would put pressure on the economy.
It is also important to realize that if the debt to income ratio is high this can at some point also lead to mortgage loan default. Because of this action, the banks undergo a severe financial loss and a contraction in lending occurs. Less lending will then lead to will in turn decrease business investment putting the Australian economy in reverse gear.
The sensible solution to this would be to stimulate an expansionary monetary policy where the interest rates are reduced so that the debt could be paid off easily without the burden and also the chances default reduce.
Australia has enjoyed a stable economy for nearly 28 years however the issue of unemployment has always been of concern to the economy. They were able to overshadow it by the immensely growing economy and equal distribution of wealth. However, Australia has now entered a phase of stagnant growth and the issue of unemployment and household debt has become unavoidable now more than ever. The rate of economic growth is a record low and slight fever of inflation can be seen. The government should apply the above-mentioned policies to make sure that these issues are corrected at the right time before the economy enters into a recession.
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