Eco
Volume 27 • Number 2 • May 2013
Contents
Recent Influences On Australia’s External Stability......................................2-4
What Have Been The Recent Influences On Australia’s External Stability?........ 2
Sovereign Debt Issues.................................................................................2-3
The Fiscal Cliff And Sequester In The USA.................................................. 3
Growth In The Asian Economies.....................................................................4
Conclusion.....................................................................................................4
References. ...................................................................................................4
Australia In The Asian Century And Its Trade Implications
From Economic Transformation Of China And India....................................5-6
Introduction...................................................................................................5
Australia-China Trade................................................................................5-6
Australia-India Trade. ...................................................................................6
Conclusion.....................................................................................................6
Sources........................................................................................................6
Media Watch........................................................................................................7
Forecast Confidence Intervals......................................................................7
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Recent Influences On
Australia’s External Stability
By Dr. Anthony Stokes
Senior Lecturer in Economics
Australian Catholic University
seems promising the advanced (industrialised) economies grew
by only 1.3 per cent in 2012, with modest growth of 1.4 per cent
expected in 2013. Economic growth in the USA increased to 2.3
per cent in 2012 but is expected to slow to two per cent in 2013
(Figure 1). The Euro area, on the other hand, has largely been
in recession. Economic growth in the Euro area fell 0.4 per cent
in 2012 and is expected to fall by a further 0.2 per cent in 2013.
The compensating force for Australia has been the growth in the
emerging markets and developing economies, notably in China.
China is now Australia’s main export market, purchasing 25 per
cent of Australia’s exports. Its growth was estimated at 7.8 per
cent in 2012, with IMF projections of 8.2 per cent in 2013.
Before examining the most recent influences on Australia’s
external trade and financial situations, it is important to consider
what is actually meant by the term external stability. In fact,
it cannot be measured by a single indicator of economic
achievement but rather it encompasses a variety of economic
indicators and issues. External stability or external balance is
the achievement of a sustainable ‘net flow of resources between
countries’ (RBA 2006). This is indicated roughly by a sustainable
ratio of the current account balance to GDP.
The question then becomes what is a suitable current account to
GDP ratio? In 1986, Paul Keating considered that six per cent was
a ‘banana republic’ crisis level. In 2005, seven per cent was not
considered to be a crisis for the Treasurer, Peter Costello, but a
level of six per cent in the USA put downward pressure on their
dollar. So as you can see there is no ‘magic number’. No doubt if
Australia’s Current Account Deficit (CAD) to GDP ratio rose to
over 10 per cent it would probably trigger a crisis.
In recent years the Australian Government’s main economic focus
in terms of external stability has been on reducing the size of the
CAD and the Foreign Debt, and as a result attempting to stabilise
the value of the Australian dollar. Each of these three factors plays
an important part in contributing to external stability.
It is important to remember that any analysis of the CAD situation
should recognise that there is nothing inherently wrong with
borrowing from overseas: the issue is whether the borrowings
are put to productive use and whether governments can readily
adapt policies to handle major changes in economic conditions.
If investors lose confidence in an economy’s capacity to sustain
existing trends, they become reluctant to hold that nation’s
currency. This is something that has become very apparent in a
number of European countries such as Greece, Portugal, Ireland,
Spain and Italy, and to a lesser extent in the USA.
This economic uncertainty flows onto other nations in a globalised
world. Some of these factors work to improve the value of
Australia’s CAD, foreign debt and dollar but others work in the
opposite direction. The Australian dollar has risen in recent years
as a result of the Australian economy becoming a better place for
investment and fiscally more stable, along with growing demand
for resources from China. While this has been a positive factor in
slowing the growth of the foreign debt and reducing and inflation,
it has caused serious problems for some of our export industries
resulting from a loss of international competitiveness.
Figure 1: Growth in USA, the Euro Area and Japan
The following sections will examine the underlying factors that
have impacted on Australia’s external stability in recent times.
STUDENT ACTIVITIES
1. Examine the concept of external stability.
2. Discuss the usefulness of three main indicators of external stability.
3. Why might there be ‘nothing inherently wrong with borrowing from overseas’?
4. Outline several recent influences on Australia’s external stability.
In your answer refer to the data in Figure 1.
Sovereign Debt Issues
In 2008 most of the world was impacted by the Global Financial
Crisis (GFC). Economic growth, world trade levels and foreign
investment all declined. The value of the Australian dollar fell
from 96 cents US in June 2008 to 64 cents US in January 2009
(Figure 2). By the start of 2010 it appeared that the worst was over
and the world was on the way to recovery. This proved not to be
the case as concerns about sovereign debt issues grew. In many
advanced economies, the public sector had high funding needs
because of persistent budget deficits and the increased reliance on
short-term debt financing in the early stages of the financial crisis.
What Have Been The Recent
Influences On Australia’s External
Stability?
Growth in the Australian economy is very much linked to global
growth. The International Monetary Fund (IMF) (2013) has
reported that World GDP grew by approximately 3.2 per cent in
2012 and it is expected to rise to 3.5 per cent in 2013. While this
~2~
Sovereign Debt Issues
The Fiscal Cliff And Sequester
In The USA
(cont’d)
In 2011, the IMF reported that Japan and the United States faced
the largest public debt rollovers of any advanced economy at 56
per cent and 29 per cent of GDP, respectively. The severity of the
debt issues were greatest, however, in the Euro area with a number
of governments facing the highest market pressures to cope with
annual costs to fund the debt above 15 per cent of GDP (Figure 3).
This led to growing fears that certain countries had debt problems
that may lead to them defaulting on their loans. There is an
estimated $3.9 trillion worth of debt owed by Portugal, Ireland,
Italy, Greece and Spain to other European nations.
In 2012 another concern arose in the USA in regards to their
fiscal policies and plans to reduce the budget deficit. This
became known as the ‘Fiscal Cliff’. The ‘Fiscal Cliff’ was the
sharp decline in the budget deficit which could have occurred
due to the increased taxes and reduced spending required by
previously enacted laws in the USA. The US Government
had agreed to temporary tax cuts and increases in spending to
stimulate the economy during the GFC. Among the changes
that were set to take place at midnight on December 31, 2012
were the end of temporary payroll tax cuts (resulting in a two
per cent tax increase for workers), the end of certain tax breaks
for businesses, shifts in the alternative minimum tax that
would increase taxes, a rollback of the ‘Bush tax cuts’ from
2001-2003, and the beginning of taxes related to President
Obama’s health care law. At the same time, the spending cuts
agreed upon as part of the debt ceiling deal of 2011 – a total
of $1.2 trillion over ten years – were scheduled to take effect
(Kenny 2013).
The impact of abiding by the previous decisions made during
the GFC would have been higher unemployment and a likely
recession. While the combination of higher taxes and spending
cuts would reduce the deficit by an estimated $560 billion,
the Congressional Budget Office also estimated that the
policy would have reduced Gross Domestic Product (GDP)
by four percentage points in 2013, sending the economy into
a recession. At the same time it predicted that unemployment
would rise by almost a full percentage point with a loss of about
two million jobs.
The USA has a sovereign debt of $16.4 trillion. Both the large
debt and the possibility of the ‘Fiscal Cliff’ pushing the USA
and the global economy back into recession created low
confidence and economic uncertainty. While the decision to not
go ahead with many of the tax increases and cuts to spending
temporarily averted the ‘Fiscal Cliff’ at the beginning of 2013
the underlying problem remains.
The new term that will consider the level of spending cuts that
will take place in the USA is known as the ‘Sequester’. The
‘Sequester’ is the $1.2 trillion in spending cuts that Congress
agreed to in the Budget Control Act of August 2011 in order
to limit excessive spending by the Obama government. The
Republicans required the scheduled cuts in exchange for raising
the debt ceiling. These cuts involve $600 billion each in both
defence and discretionary spending, and are scheduled to last
from this year through 2021. This year, the impact would be
about $1.2 billion if the entire sequestration kicks in. Now,
Congress can let the ‘Sequester’ go into effect as scheduled
or come up with a new budget deal to address the deficit via
more targeted spending cuts (Kenny 2013). Either way, this
again creates economic uncertainty in both the US and global
economies. The impact of this ongoing uncertainty has been
a decline in the value of the US dollar in comparison to many
nations, including Australia.
Figure 2: The Value of the Australian Dollar Compared to the US Dollar, the Euro and the Yen
Figure 3: The Higher Costs of Funding the Government Debts (in per cent)
Source: IMF, Global Financial Stability Report, 2011.
The issue facing these European nations is that the growth in debt,
and the level of funds required to finance the debt, is much larger
as a percentage of GDP than in the USA or Japan (Figure 3). The
impact of the economic uncertainty in the Euro area has led to a
decline in the value of the Euro relative to other countries. Since
December 2008, the Australian dollar rose from 0.48 Euro to 0.86
Euro in July 2012, an increase of almost 80 per cent (Figure 2).
This has led to a loss of competiveness for many Australian export
industries in European and other markets.
STUDENT ACTIVITIES
5. Distinguish between sovereign debt and external debt and explain how
sovereign debt can affect external stability. In your answer distinguish between finance for the public sector and the private sector.
6. Describe the current sovereign debt problems of the USA, Japan and the Euro area. In your answer refer to Figure 3.
STUDENT ACTIVITIES
8. Explain the development of the Fiscal Cliff in the USA. How could it represent a threat to the stability of the world economy and the Australian economy?
9. What is the Sequester and why was it proposed?
7. How have the recent sovereign debt problems affected Australia’s external stability?
10. Discuss the contribution of the Sequester to the level of uncertainty in the global economy and the value of the Australian dollar.
~3~
Growth In The Asian Economies
has led to increased investment in the mining industry. More
than 40 per cent of Australia’s business investment is now in
the mining industry. This has also led to employment growth
in that industry. The subsequent rise in the Australian dollar,
however, has led to a loss of international competiveness in
other industries with downturns especially in the manufacturing
and service industries. If growth in China slows, or demand in
the USA and the Euro area improves then the Australian dollar
may decline and demand for Australia’s exports may become
more diversified.
Despite the problems facing many of the large advanced economies,
Australia’s economic growth and trade performance has been
strong as a result of relatively strong growth in a number of Asian
economies. The RBA (2013) reports that, in particular, GDP growth
in China over the next two years is expected to be a little stronger
than in 2012, underpinned by growth in domestic demand. The
overall effect of the industrial growth in Asia has been a rise in
commodity prices (Figure 4), especially for resources, since 2003
leading to a higher value for the Australian dollar. It should be
noted however, that the decline in commodity prices in 2012 also
had the effect of lowering the value of the Australian dollar.
STUDENT ACTIVITIES
11. Why has Australia’s external position remained strong despite the problems in many of the large advanced economies? In your answer refer to Figure 4.
Figure 4: RBA Index of Commodity Prices
(2008/09 average =100)
12. Explain the likely effects on Australia’s external stability if the value of the Australian dollar declines relative to the US dollar, the Euro and the Yen.
13. Essay: Assess the effects on Australia’s external stability of the
current growth rates in the Asian economies and the economic uncertainty arising from the debt crises in the USA, Japan and the Euro area.
References
International Monetary Fund (2011), Global Financial Stability Report, available at
http://www.imf.org/.
International Monetary Fund (2013), World Economic Outlook Update, available at
http://www.imf.org/.
Kenny, T. (2013), About.com, available at
http://bonds.about.com/b/2013/01/29/the-sequester-explained.htm and http://bonds.about.
com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm.
Reserve Bank of Australia (Various years), Reserve Bank of Australia Bulletin, Sydney, RBA.
Stokes, A. (2010), The Current Trends and Challenges Facing the Global Economy, available at
http://homepages.ihug.com.au/~gep/The%20global%20economy(2010).pdf.
Conclusion
Stokes, A. (2011), Is the Global Economy on the Road to Recovery? available at
http://homepages.ihug.com.au/~gep/The%20global%20economy(2011).docx.
Stokes, A. (2012), Where is the Global Economy Heading? available at
http://homepages.ihug.com.au/~gep/The%20global%20economy(2012).pdf.
There are signs that the global economy is starting to pick up but
the improvement is still very tentative especially in parts of the
Euro area. The growth in Asian demand for Australia’s resources
Stokes, A. (2012), ‘Fluctuations in the Value of the Australian Dollar and Structural Change in the Australian Economy’, Ecodate, Vol. 26, No 1, March.
~4~
Australia in the Asian Century
And Its Trade Implications
From Economic Transformation
Of China And India
By Dilip Dutta
Associate Professor of Economics
University of Sydney
Introduction
gas, and water), construction and services over the past decade or so.
Another achievement that China has made is very high reduction
in poverty. According to World Bank estimates, Chinese people
below the poverty line (i.e., living on less than US$1.25 a day)
accounted for 12.6 per cent of the total population in 2008. China
is expected to replace the United States as the world’s largest
economy in terms of purchasing power parity (PPP) in a decade or so.
The Australian Government recently commissioned a White
Paper on Australia in the Asian Century. Its aim was to consider
the current and likely future course of economic, political and
strategic change in Asia, encompassing China, India, the key
ASEAN countries as well as Japan and South Korea. The White
Paper published in October 2012 sets out a strategic framework to
guide Australia’s navigation of the Asian Century. It also plans
for a series of actions that will be taken over the next five years,
and further policy initiatives to be developed over the next 10 to
15 years, by focusing specifically on the following:
• the domestic economic and social opportunities and challenges of the Asian Century for Australia;
• opportunities for a significant deepening of Australia’s engagement with Asia across the board, including in the economy, science and technology collaboration, clean
energy, education, business-to-business and people-to-
people links and culture;
• the political and strategic implications of the Asian Century for Australia; and
• the role of effective economic and political regionally and globally cooperation.
The scale and pace of Asia’s recent unprecedented economic
transformation, particularly of China and India, has profound
implications for Australia.
Table 1: China’s Growth in GDP at Factor Cost in 1996
prices (per cent)
20042005
20052006
20062007
20072008
20082009
20092010
GDP (value added)
11.3
12.7
14.2
9.6
9.2
10.4
Agriculture,
Forestry, Animal
Husbandry
& Fishery
0.8
3.3
10.6
9.2
5.2
7.9
Mining
30.2
12.8
3.5
35.3
14.3
17.4
Manufacturing
11.8
14.1
14.1
8.8
8.0
11.0
Production and
Supply of
Electricity,
Gas & Water
12.1
13.6
11.4
-21.9
4.4
5.7
Construction
14.7
15.3
14.5
13.7
20.2
11.6
Services*
11.7
13.9
16.8
9.5
13.4
10.0
Sources: Various issues of Statistical Yearbook of China over the period of 2005-2012.
The author is thankful to Dr. Yibai Yang for computing data used in Table-1.
Notes: *Services include Transport, Storage and Post, Information Transmission,
Computer Services and Software,Wholesale and Retail Trades, Hotels and
Catering Services, Financial Intermediation, Real Estate, Leasing and Business
Services, Scientific Research and Technical Services, Management of
Environment and Public Facilities, Services to Households and Other Services,
Education, Health, Social Security and Social Welfare, Culture, Sports and
Entertainment, and Public Management and Social Organizations.
STUDENT ACTIVITIES
1. Explain why the Australian Government commissioned a paper
on the implications of the Asian century, the 21st century, for
Australia.
2. Identify the main areas in which Australia should act in order to benefit from the further economic transformation of the economies of Asia.
Australia has largely benefited from China’s rapid industrialisation
and urbanisation and, therefore, its high demand for Australia’s
natural resources. Consequently, the Australia-China trade
relationship has grown very quickly in recent years. Australia
in turn is now buying from China all kinds of household goods,
electronic products including computers, and heavy machineries.
China being the largest export market and the largest import
sources for Australia in recent years has become Australia’s
largest trading partner with total trade flows in excess of $121
billion in 2011. China’s investment in Australia has also been
steadily increasing and its total stock was $19 billion at the end
of 2011, while the stock of Australian companies’ investment in
China was $17 billion at the same time. Apart from the resources
sector, the other sectors that also greatly benefit are education and
tourism.
Australia-China Trade
After China’s historic ‘open door’ policy adopted in December
1978, and then its accession to the World Trade Organisation
(WTO) in 2001, it has been experiencing a rapid economic
growth accompanied by a fundamental transformation of its
economic structure. China has transformed from a low productive
agriculture-based economy to one dominated by its industrial and
service sectors. As Table-1 shows, China’s high growth rates of
gross domestic product (GDP) growth have been the result of
high growth rates in mining, manufacturing, utilities (electricity,
~5~
Australia-China Trade
Opportunities exist for Australia to supply resources, as well as
financial, construction and logistics services. Australian
agribusiness companies may also open up as Indian’s
consumption patterns change with growing wealth. Recent
data show that India has been Australia’s eighth-largest trading
partner, with two-way trade valued at $18.3 billion in 2011-12.
In 2012, Australia was India’s largest supplier of coal and wool,
the second-largest supplier of copper ores and the fourth-largest
supplier of gold. India is now the fourth-largest destination
for Australian exports of goods and services. There has been a
continual increase in the number and value of proposed Indian
investments in Australia. Australia’s Foreign Investment Review
Board approved 319 Indian investment proposals, worth over $11
billion in 2010-11. Almost $9 billion of this was in the resources
sector. A number of Indian conglomerates are developing mining
assets and infrastructure in Australia. All of the major firms in
India’s world-leading software and information technology (IT)
industry are represented in Australia with a small but growing
market presence. There are about 150 Australian companies with
a corporate presence in India, similar to the total number of Indian
companies in Australia.
(cont’d)
One of the most visible features of our people-to-people links has been
the increasing flow of Chinese students and tourists to Australia. In fact,
more people now travel to Australia from China than at any other time
in our history. In 2011, 542,000 Chinese people visited Australia, making
it our third largest source of visitors. China is also a major destination
for Australian travellers, who made over 369,000 trips to China in
2011. China is the largest international education market for Australia,
with more than 120,000 Chinese students studying in Australia. China is
also a major source of migrants. In 2011-12, 25,509 Chinese migrants
arrived in Australia, making it the second largest source of permanent
migrants after India (China Profile, Australia in the Asian Century).
STUDENT ACTIVITIES
3. Describe China’s economic transformation. In your answer refer to Table 1.
4. Explain how Australia has benefited from China’s recent economic growth.
5. Outline Australia’s current people-to-people links with China.
Tourist flows in each direction are growing. India is now the tenth
most popular destination for Australian travellers, with 186,000
Australians departing for India in 2011-12. Around 152,000
Indians visited Australia in 2011-12, including holiday makers,
business visitors and Indians visiting their families. India was the
11th largest source of arrivals in Australia in 2011. Education
is a pillar of the relationship. India is the second-largest source
of international students in Australia. There were 29,500 Indian
student visa holders in Australia as at 31 December 2012 and
26,933 Indian students enrolled across all education sectors as at
February 2013 (India Profile, Australia in the Asian Century).
Australia-India Trade
After the adoption of a comprehensive economic liberalisation policy
in July 1991, the Indian economy underwent a substantial change [see
Dutta (2011) for details]. As can be evident from Table 2 below, India
has become one of the world’s best performers, with average annual
GDP growth of more than 8 per cent during the period of 2005-2011,
except for 2008-09 due to the Global Financial Crisis (GFC). However,
it has experienced slower growth in 2012 and 2013. In 2011, India
became the third-largest economy in the world (in PPP terms).
Although poverty has declined in India on an average by 1.5
percentage points per year between 2004-05 and 2009-10, still 29.8
per cent of people are below the poverty line. There are, however,
two trends in India which are noteworthy:
• India’s rapidly growing middle class which is expected to number more than 250 million people by 2015; and
• Half of India’s population being under 25.
India is projected to add 12-15 million workers (equivalent to
Australia’s population) to its labour force every year over coming
decades. The Indian Government has set a target of providing skills
training to 500 million workers across 30 sectors by 2022 and
Australian education providers are seeking to get involved in India.
STUDENT ACTIVITIES
6. Describe the main features of India’s recent economic
transformation. In your answer refer to Table 2.
7. Explain how Australia has benefited from India’s recent growth.
8. Examine the importance of further links with India in terms of
tourism and education.
Conclusion
Australia is very optimistic that its close relationship with
countries across Asia, including China and India, will continue
unabated as economic, political and cultural links gradually
deepen. The White Paper is right to argue that this optimism
also depends on the need for Australia to maintain a fair and
prosperous society based upon an open and resilient economy.
Table 2: India’s Growth in GDP at Factor Cost in 2004-05 prices (per cent)
200506
200607
200708
200809
2009103R
2010112R
GDP
9.5
9.6
9.3
6.7
8.6
9.3
Agriculture, Forestry
& Fishing
5.1
4.2
5.8
0.1
0.8
7.9
STUDENT ACTIVITIES
Mining & Quarrying
1.3
7.5
3.7
2.1
5.9
4.9
Manufacturing
10.1
14.3
10.3
4.3
11.3
9.7
Electricity, Gas, & Water
Supply
7.1
9.3
8.3
4.6
6.2
5.2
Construction
12.8
10.3
10.8
5.3
6.7
10.2
Trade, Hotels & Restaurants,
Transport & Communication
12.0
11.6
10.9
7.5
10.4
12.3
Sources
Financing, Insurance, Real
Estate & Business Services
12.6
14.0
12.0
12.0
9.7
10.1
Australia in the Asian Century, White Paper, Commonwealth of Australia, October 2012.
China Statistical Yearbook, Beijing: China Statistics Press (various issues).
Community, Social &
Personal Services
7.1
2.8
6.9
12.5
11.7
4.3
9. Essay: Critically assess Australia’s current and likely future
responses to the economic, social and political transformation of Asia in the 21st century.
Dutta, D. 2011, ‘Recent Economic Development in the Indian Economy,’ Ecodate, 25 (3), July.
Economic Survey 2012-13, Delhi: Ministry of Finance, Government
Source: Economic Survey 2012-13, Government of India, Table-1.1, p. 3.
Notes: 2R = Second Revised Estimate, 3R = Third Revised Estimate.
~6~
Media Watch
By Ted Kramer
Forecast Confidence
Intervals
Excerpt from Reserve Bank of Australia, Statement of Monetary Policy,
Feb 2013, page 68. http://www.rba.gov.au/publications/smp/2013/feb/pdf/0213.pdf.
T
able 6.1 presents the Bank’s expectation of the central or
most likely path for key macroeconomic variables. However,
many other outcomes are also possible. Some of the factors
that could result in alternative outcomes are more obvious –
see the discussion under the heading ‘Risks’ – but others are
less tangible.
The range of likely outcomes can be estimated by examining
past forecast errors. In a recent Research Discussion Paper,
Tulip and Wallace (2012) calculate the Bank’s forecast errors
between 1993 and 2011.1
The distribution of these errors can be added to the forecasts
to construct confidence intervals. Graph E1 shows 70 per cent
and 90 per cent confidence intervals around the forecasts for
underlying inflation and GDP growth on a year-ended basis.
The top panel shows that a 70 per cent confidence interval
for the forecast of underlying inflation over the year to the
December quarter 2014 extends from 1.6 per cent to 3.2 per
cent. That is, if the Bank makes similar-sized forecast errors
to those made in the past, then there is a 70 per cent
probability that underlying inflation will fall between 1.6 per
cent and 3.2 per cent. Similarly, the 70 per cent confidence
interval for GDP growth over the year to the December
quarter 2014 extends from 1.5 per cent to 4.4 per cent.
These estimates make several assumptions. They assume that
the accuracy of the current forecasts will be similar to that of
the past. They assume that the confidence intervals are metric
and centred on the forecasts.
1 See Tullip and S Wallace (2012). Estimates of Uncertainty around the RBA’s
Forecasts. RBA Research Discussion paper No 2012-07.
Permissions granted by Reserve Bank of Australia.
STUDENT ACTIVITIES
1. Why is it difficult to prepare economic forecasts?
2. Why does the Reserve Bank state that other outcomes are possible to its published forecasts of macroeconomic variables?
3. How does the Reserve Bank estimate the range of likely outcomes for an economic variable?
4. Explain the meaning of ‘a 70 per cent confidence interval’. In your answer refer to Graph E1.
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Student Activities Writer: Ted Kramer
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~ 7 ~ Denise Michie