[HSC] Economist: 27 August — 2 September

The week in review.

Jono Vandenberg
Sep 2, 2018 · 6 min read

The Productivity Commission released a report into inequality in Australia this week. In comparison to the OECD average, Australia performs slightly worse when it comes to income, but slightly better on the wealth scale. Additionally, Australia’s newly-minted Prime Minister Scott Morrison announced that a free trade agreement with Indonesia will be signed before the end of the year. Finally, Westpac decided to increase their home loan interest rates, which will place further strain on household finances.


1. Inequality

Photo by Josh Withers on Unsplash

The Productivity Commission’s report: Rising inequality? A stocktake of the evidence sets out the latest trends in income and wealth inequality in Australia. The key findings are summarised below:

  • There has been a gradual increase in income inequality — as measured by the Gini coefficient — since the 1980s.
  • Australia’s level of income inequality is slightly above the OECD average.
  • There was a notable increase in income inequality during the mining boom as a consequence of the high rates of return on capital during that era.
  • Young people have seen their incomes grow more slowly than the national average in recent years.
  • Australia’s progressive income tax and welfare payments system help to reduce income inequality by approximately one-third.
  • Final consumption inequality — perhaps a more important indicator — is significantly lower than income inequality, with a Gini coefficient of around 0.2.
  • From 2003/04 to 2015/16 wealth inequality in Australia increased by 7%, with most of this increase occurring during the mining boom.
  • Australia’s distribution of wealth is more equal than the OECD average.

2. Indonesia FTA

The Unshackled

Prime Minister Scott Morrison has announced that a free trade agreement with Indonesia will be signed before the end of the year. Indonesia is Australia’s 13th-largest trade partner, with two-way trade worth $16.5 billion annually. The agreement — which is expected to come into force in 2020 — will see an increase in the number of Indonesians granted working visas in Australia, whilst 99% of tariffs that Australian exporters face would be either reduced or eliminated. This is expected to increase export volumes in a number of key industries, such as steel, grain, frozen meat and live cattle. It is also hoped that the agreement will deliver increased financial flows and tourism between the two nations.

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  • Australia is expected to sign a Comprehensive Economic Partnership with Indonesia before the end of the year.
  • The expected reduction in tariffs will increase the market share of Australian exporters, leading to enhanced export volumes and an improvement in the Balance on Goods and Services (BOGS).

3. Interest Rates

Westpac decided to raise their variable mortgage rate by 14 basis points on Wednesday, marking the first time one of the big four banks has raised their interest rates this year. The move comes as a result of rising funding costs, which are placing pressure on profit margins. The increased cost of funding is in part due to the US Federal Reserve deciding to raise their federal funds rate to 2.0%, above Australia’s 1.50% cash rate. This has resulted in a number of foreign-owned financial institutions borrowing in Australia rather than overseas. In turn, this has caused crowding out within the domestic financial market, making it more expensive for Westpac to source financing. It is not yet clear whether this move will be mirrored by the other big banks, but smaller firms Suncorp Bank and Adelaide Bank have already raised their rates in response.

These developments are particularly concerning given the current state of the housing market, with prices and clearance rates falling significantly. It is very unlikely that Australia will enter a recession, but a significant rise in interest rates, or a more rapid fall in house prices, would be problematic given the substantial level of household debt within the economy.

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  • Westpac has raised their interest rates without a concurrent increase in the cash rate and the other big banks could follow suit.
  • Rising interest rates increase the cost of repayments, reducing the cash flow of borrowers, whilst simultaneously increasing it for savers.
  • A ‘credit crunch’, a substantial rise in interest rates and falling house prices all occurred in the United States in the lead up to the Global Financial Crisis. If they were to occur in Australia, a similar economic downturn may follow.

4. Elsewhere around the Globe

  • Severe uncertainty in Argentina has caused the Argentinian Peso to fall to an all time low of 34.2 pesos per $US. In response, President Mauricio Macri has requested financial support from the IMF.
  • The second estimate of US second quarter economic growth returned a 4.2% annualised figure, slightly above forecasts of a 4.0% expansion.
  • Japan’s unemployment rate increased from 2.4% in June to 2.5% in July. Meanwhile, unemployment in the Euro Area remained at 8.2% in July, which is the equal-lowest rate since November 2008.
  • Brazil’s rate of economic growth slipped to 1.0% in the second quarter of 2018. Conversely, India’s annual economic growth rate increased to 8.2%.

Further Reading


This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Sunday at 6pm!

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Jono Vandenberg

Written by

Economics Student at the University of Sydney

Project Academy | HSC Tutoring

Comprehensive and personalised tutoring year 10–12 students. A dedicated and passionate team of 99.95 ATAR graduates, state-rankers and subject experts supporting students with ❤.

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