Australian Economy Over the Last Two Years - Essay Example

?Australian economy over the last two years Finance ‘runs’ the world in innumerable ways, both in the direct manner as well as in the indirect. From providing the needed personal comforts, to being the factor that decides the survival and the success of a country in the form of economy, finance impacts all aspects of lives. When one views at the annals of world history, it has been clearly validated that for a nation to elevate itself to the top echelons, it has to have an optimal, strong and ever growing economy. If a country’s economy faces obstacles, and goes into a recession due to various factors in its macro as well as micro environment, it will lead to a lot of problems for the country’s functioning, its business and it citizens. In the currently globalized world with maximum financial interconnectedness, problems in a particular country’s economy could arise mainly because of negative factors in the world economy. Thus, when the global recession started happening in United States in 2009-2009, it spread to various countries and its negative effects were felt all over the world including Australia. Although, Australia is geographically isolated, it is very much part of the world economy, and so economic recession in United States and Europe had ripple effects in Australia, necessitating the Australian government and the Australian Reserve Bank to initiate various measures. So, this paper will discuss how successful is the Australian Government and the Reserve Bank of Australia in running the Australian economy over the last two years in the immediate aftermath of the economic downturn, particularly focusing on the macro economic policies adopted by both the entities to avert the crisis and importantly to elevate the Australian economy. Australian economy is placed as a developed and modern market economy, with GDP running into more than one trillion dollars. It is also tagged as “one of the fastest growing advanced economies in the world” even in the times of recession and its aftermath. This can be viewed from the fact that “Australia is the 13th largest economy in the world according to nominal GDP (current prices) and the 17th largest according to GDP (PPP).” (economywatch.com 2010). The sector which dominates the Australian economy contributing maximum to its GDP is the services sector, around 68% of the GDP. It is followed by agricultural and mining sectors. Thus, it can be said that “Australia possesses a well-diversified economy boosted by the strength of its services and resources industries.” (economywatch.com 2010). Importantly, the economy grew optimally without slump from the last decade of the last century into the first decade of this 21st century. It grew in the positive figures in 2000’s until, break was placed in the form of global recession. “The Australian economy grew for 17 consecutive years before the global financial crisis.” (cia.gov 2011). So, in the aftermath of the financial recession, all the sectors had negative impacts, with these sectors particularly the mining sector losing sizable jobs. So, when the Australian economy witnessed a slump in the last two years as a result of global recession, after a continuous period of heightened growth, the government and the Reserve Bank of Australia swung into action, initiating key macro policies in the form of stimulus package and cutting of interest rates to historically low figures. “Rudd government introduced a fiscal stimulus package worth over US$50 billion to offset the effect of the slowing world economy, while the Reserve Bank of Australia cut interest rates to historic lows” (cia.gov 2011). When one focuses on the last two years of the Australian economy, it coincided with the rule of Kevin Rudd government, as the regime was in power from 2007-2010. In addition, both the government and the RBI functioned in a coordinative manner regarding all the major decisions impacting the Australian economy. So, the role of the Australian government and RBI cannot be maximally bifurcated and disassociated. The steps taken by both the entities were in association, although there were some disagreements. However, maximally, majority of the steps were adopted taking each other into confidence, thus each step initiated by a entity, can be grasped as the step by the other entity as well . When Kevin Rudd took place, the economy was functioning aptly, as the recession has not fully set in throughout the world, only showing ‘symptoms’ in United States. So, he sounded very optimistic that Australian economy will continue to grow in the same trajectory, and will be immune to the recession. “HAVING inherited a booming economy when he led Australia’s Labor Party to power in late 2007, Kevin Rudd predicted optimistically last October (2008) that his country would avoid a recession during the global downturn.” (economist.com 2009). However, when the global recession spread its wings, and Australia was no exception to it, the Rudd government started feeling the pinch and initiated the stimulus packages. The Australian government understood that recession is on and is negatively impacting and will impact the Australian economy, when the Treasury department of Australia in its report slashed the forecast revenue by over 100 billion Australian dollars. “The immediate trigger for the stimulus was a Treasury report that the global recession had slashed A$115 billion from forecast revenue up to 2012.” (economist.com 2009). Because of that threat, the Rudd government immediately announced an economic stimulus package amounting to A$10.4 billion. Although, many governments world over announced stimulus package, after observing the recession impacted economy for sizable time, the Australian government was very quick in its announcement of the stimulus package. Rudd (cited in Business Day 2008) pointed out this need for quick response by stating, “It's very important to act early and decisively...At a time when economies need stimulus support, don't leave it till too late.” In that package, around A$4 billion were allocated to the pensioners as part of pre-Christmas payments. As spending is a crucial component to jumpstart the economy, this Christmas payments were given to accomplish that role. Then, more than A$3 billion were given in support for families, and finally above A$1 billion were given to first-home buyers. Home buyers were focused because housing sector is a key sector for economic revival, and if there is optimum economic activity in that sector, it will reflect on other sectors as well. This was further emphasized by Rudd (cited in Business Day 2008), who stated that the allocation was “designed to support activity in the housing sector and the housing sector is critical to the economy overall”. In the same period, the RBI also focused on the key issue of Bank guarantees, pushing the government to initiate constructive steps. When the RBI initially advised the Australian government to cap the bank guarantee, it missed following. “The Government ignored the Reserve Bank of Australia's strongly voiced concerns about the impact of an unlimited guarantee scheme in its rush to announce a guarantee of all deposits in Australian deposit-taking institutions on October 12.” (Hewett 2008). However, when that decision led to problems in the entire financial system, the government fell back on line, and implemented RBI’s recommendation. When the government initially refused the advice, the RBI governor Glenn Stevens warned that “its blanket guarantee of deposits is creating serious dislocation in the entire financial system and must be changed.” (Hewett 2008). The government embarrassed by the further accentuation of the problem, and understanding how it negatively impacted the Australian economy, initiated steps to cap the guarantee. In that direction, the government by modifying the guarantee cap, stipulated premium payments amounting to over A$1 million. Thus, this corrective step by the Australian government due to the pushing by the Reserve Bank of Australia, worked in coordination with the simultaneously announced stimulus package. That stimulus package worked well, with the Christmas season aptly complimenting it. However, when the government sensed that if there are further more stimulus initiatives, it will surely help Australian economy positively, and so it came up with the next stimulus package in early 2009. That stimulus package was worth A$42 billion and was the biggest in Australian economic history. This package mainly focused on pepping up the infrastructure industry and so majority of the allocation, around A$26 billion, was allocated to that particular sector. Around A$2.5 billion were given to the small businesses in the form of tax breaks, and finally A$12.7 billion were given as cash bonuses to the citizens. The government was optimistic with this package, and exhibited its fullest commitment to make the Australian economy survive the recession, and help it keep on growing. After announcing the stimulus package worth A$42 billion ($27 billion), “the government, he declared, would “move heaven and earth” to keep the economy growing.” (economist.com 2009). Although, this package was supported by the state governments in Australia and also by many economists, the opposition leader Malcolm Turnbull and his coalition opposed it, by putting forward the point that further tax cuts in addition to the current tax cuts could only help the Australian economy to come out of the recession. The Rudd government for his part blamed the neoliberalistic policies followed all over the world, and particularly by his predecessor Turnbull for the economic recession. “Mr Rudd accused the Liberal Party, the main opposition party, which ruled for 11 years before the crisis, of being Australia’s neoliberals.”(economist.com 2009) At the same time in February 2009, to further complement the second stimulus package, the Reserve Bank of Australia announced cuts in its official interest rates, by cutting about 1 percent to reach 3.25 percent. “The central bank cut interest rates by a percentage point to a cash rate of 3.25% on the day Mr Rudd announced his stimulus”. (economist.com 2009). Glenn Stevens, the Reserve Bank of Australia governor, pointed out that that the resultant monetary and fiscal changes that may be initiated, will aid in “cushioning” the economy. Seeing the positive effect of that interest cut and to further elevate the Australian economy in the current better times, the Reserve Bank of Australia announced interest cuts close to 8 times. The latest announced interest cuts were in the first week of November, 2011. “The decision today to reduce the official cash rate from 4.75 per cent to 4.5 per cent is the first rate cut since April 2009, as the world tackled the global financial crisis.” (Murdoch 2011). The Reserve Bank of Australia governor Glenn Stevens is quite optimistic about this lowered interest rates, and is of the opinion that it would surely aid the Australian economy to maintain good growth rates, although other sections of the world economy is yet to recover fully. Glen Stevens stated that interest cuts were done because“…more neutral stance of monetary policy would now be consistent with achieving sustainable growth and 2–3 per cent inflation over time.” (Murdoch 2011). Although, this is the initiative of the Reserve Bank of Australia, it was fully supported by the Australian government. Julian Gillard, the earlier deputy Prime Minster took over from Kevin Rudd in June 2010, and as both belong to the same party, there will be continuation of the economic policies. In that direction, Julian Gillard stated that “rate cut was welcome news for families and encouraged banks to pass the cut on in full.” (Murdoch 2011). The earlier steps of stimulus package and interest cuts seems to have made a positive impact on the economy with the Australia’s Gross Domestic Product (GDP) growing by .5% last quarter of 2010. Although, it was not sizable margin, it proves that the initiatives launched by the government and Reserve Bank of Australia is working, and is tagged as the “something” factor, which provided the positive results. “That “something” appears to be a continuing robust economic stimulus program that focuses on investing in infrastructure.” (open.salon.com 2010). Also, with Christmas season right around the corner, there is expectation that these initiatives by the Australian government and the Reserve Bank of Australia would positively work out for the Australian economy. References Business Day 2008, Rudd unveils $10.4b stimulus plan, viewed on November 10, 2011 http://www.theage.com.au/business/rudd-unveils-104b-stimulus-plan-20081014-50a6.html?page=fullpage cia.gov 2011, Australia, viewed on November 10, 2011 https://www.cia.gov/library/publications/the-world-factbook/geos/as.html economist.com 2009, Australia's economic stimulus: Hey, big spender, viewed on November 10, 2011 http://www.economist.com/node/13062066 economywatch.com 2010, Australia Economy, viewed on November 10, 2011 http://www.economywatch.com/world_economy/australia/?page=full Hewett, J 2008, RBA warns on bank guarantee as Reserve and Treasury at loggerheads, viewed on November 10, 2011 http://www.theaustralian.com.au/business/breaking-news/rba-warns-on-bank- guarantee/story-e6frg90f-1111117807056 Murdoch, S 2011, Reserve Bank cuts rates, viewed on November 10, 2011 http://www.theaustralian.com.au/business/interest-rates/reserve-bank-cuts- rates/story-fn91wad8-1226182628415 open.salon.com 2010, The Australian economic stimulus package - It works, viewed on November 10, 2011 http://open.salon.com/blog/steven_rockford/2010/06/15/the_australian_economic_stimulus_package_-_it_works Read More