Your HSC Eco 2017 Cheat Sheet

The Economic Climate

This document provides a brief outline of some contemporary issues within the Australian economy complete with statistics and graphs, targeted towards students about to sit the HSC Economics exam. In almost every essay at least one of these issues will arise, and including contemporary statistics and knowledge will help bolster your answers.

Slow Wage Growth

Evidence

  • 1.9% wage growth over the past year, according to the Wage Price Index — lowest rate since the commencement of the index in 1997
  • Average hourly earnings increased by 4% on average in the mid-1990s, down to less than half that level now.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.25.html

Reason for Trend

  • Casualisation of labour — since the 1960s, the share of part-time work has increased three-fold, and since 2013 growth in part-time employment has averaged 3% as opposed to growth in full-time employment averaging 1%. This reduces wage growth because part-time workers will earn a lower year-on-year wage and likely suffer from lower bargaining power meaning less ability to increase wages.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.17.html

Implications

  • Low wage growth means lower inflation, which has and may continue to put us below inflation target. This presents a constraint on monetary policy.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-5.1.html
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-5.2.html
  • Low wage growth will also result in declining consumption, as consumers will see slower growth of real incomes and thus declining purchasing power. This will act as a constraint on demand-driven economic growth.

The Environment

Evidence

  • Largest emitter of greenhouse gases per capita in the OECD, emitting 22.2 tonnes in 2015 (albeit down from 24.1 tonnes per capita in 2011).
  • Institutions such as the Grattan Institute have called for more policy action to achieve our 2030 target under the Paris Agreement of reducing emissions to 26–28% below 2005 levels.
  • Estimated that we will meet our 2020 target under the Kyoto Protocol of reducing emissions by 5% below 2000 levels.

Reason for Trend

  • Lack of concerted policy effort. Recently the Turnbull Government abolished the Clean Energy Target and scrapped subsidies to renewable energy.

Implications

  • Provides a constraint on long-run growth as resource depletion reduces aggregate supply, and higher emissions worsen quality of labour/standard of living.

Distribution of Income

Evidence

  • Gini coefficient was measured at 0.323 in 2015–16 — worse than OECD average, 0.318 in 2014. Improvement on the result in 2013–14 of 0.333, however.
  • Wealth distribution remains more unequal, with an associated coefficient of 0.573 in 2015–16, remaining steady at the same level as in 2013–14.
  • Households in the top quintile are worth $2.9million on average and hold 60% of wealth, whereas those in the lowest quintile have an average worth of $36,500, 1% of total wealth.

Reasons for Trend

  • One reason may be the housing bubble making it more difficult to acquire assets for lower-income earners, thus increasing income and wealth inequality.

Implications

  • See advantages/disadvantages of income and wealth inequality.

Transition to Services and the Exchange Rate

Evidence

https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.19.html
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.4.html
  • Upwards trend in share of service sector employment; up to almost 80% now from 50% in the 1950s.
  • Faltering business confidence within the mining sector.

Reason for Trend

  • Slowing demand from China in particular, due to its transition toward domestically-led growth.

Implications

  • Constraint upon MP, as RBA must keep the cash rate low in order to keep our exchange rate low and ensure export competitiveness.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-2.20.html
  • Could lead to falling growth as we undergo transition due to falling export demand in the mining sector which is not offset by increased service export demand.

Fiscal Consolidation

Evidence

  • Contractionary stance of 2017–18 budget; deficit of $29.4bn (-1.6% GDP) compared to $37.6bn (-2.1% GDP) in 2016–17. Surplus of $7.4bn (0.4% GDP) expected by 2020–21 (although this may be optimistic — see iBook).

Reason for Trend

  • Persistent deficits reduce confidence, which may reduce investment and consumption and constrain growth.
  • If deficits are financed by borrowing from the private sector, this can cause ‘crowding out’ - a situation whereby increased demand for savings places upward pressure on the interest rate. As the interest rate increases, prospective investors will tend to save rather than invest, and consumers and investors will be less able to borrow to finance consumption and investment respectively, reducing demand-driven growth in the economy.
  • Alternatively, if deficits are financed by overseas borrowing, a ‘twin-deficit’ scenario may arise - interest repayments made on overseas borrowing are recorded as debits on the Net Primary Income account, thereby increasing the Current Account Deficit. Thus, as the budget deficit increases, the CAD will also tend to increase - a scenario of ‘twin deficits’.

Implications

  • Lower short-run growth due to reduced stimulation of AD. However, whilst the stance is nominally contractionary, certain packages such as the infrastructure package may boost long-run growth. Growth is predicted to trend upwards (to 3% in 2018/19). Could possibly complicate transition and contribute to below-target inflation if growth estimates are not met.

Banking and Financial Regulation

Evidence

  • APRA strengthened capital requirements in July, requiring the big four and Macquarie Bank to hold reserves equal to 10.5% of their deposits, up 150 basis points from 9% prior.

Reason for Trend

  • High household debt levels have raised concerns about risk of default/potential of financial crisis.

Implications

  • Reduced investment — if banks were free to hold a smaller amount of reserves, they could invest more.
  • Improved financial stability.

Low Interest Rate Environment

Evidence

  • Cash rate at 1.5% since August 2016 (13 consecutive months).
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-4.1.html
  • Many economists don’t forecast a cash rate rise for at least 12 months.

Reason for Trend

  • Due to low wage growth, high household debt levels, wanting to retain a low exchange rate and the risk of a housing market crash.

Implications

  • Can act as a constraint upon the effectiveness of monetary policy — look into the concept of a ‘zero lower bound’ interest rate.

House Prices

Evidence

  • Sydney and Melbourne saw 16.7% and 15.1% growth respectively in house prices in 2016.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-3.8.html

Reason for Trend

  • Due partly to accommodative policies like negative gearing bolstering confidence in the property market as a fruitful source of investment.

Implications

  • Has caused extremely high household debt levels; currently at 190% of disposable income.
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-4.10.html
https://www.rba.gov.au/publications/smp/2017/aug/graphs/graph-4.12.html
  • Speculation of a housing market crash, which would prove devastating given the amount of leverage Australian households have undertaken — although this would likely require a shock of some sort.
  • Constrains monetary policy — can’t increase cash rate, as higher interest rates would increase repayments and increase likelihood of default.

Low Multi-Factor Productivity Growth

Evidence

  • Was stagnant at 0% on average over the periods 2003–04 to 2007–08 and 2007–08 to 2014–15.
  • Has recently picked up and is currently at 0.9% according to ABS estimates, above the 0.8% long-run average from 1973–74 to 2014–15.

Reason for Trend

  • Uncertain — the components of MFP are not fully understood.
  • Generally more of an issue in other advanced economies than in Australia.

Implications

  • Provides a constraint on long-run growth as lower productivity means lower AS in the long-run.
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