Australia Macroeconomic and International Trade Analysis

Introduction

The global economy has experienced a significant period of growth and development. However, this economic development is experienced differently from one region to another, as not all countries manifest the same degree of economic progress. Some countries, like the United States, have reported growth at a slower pace. China's economic development stimulated certain sectors of Australia's economy as well, given the intense commercial relationship between these two countries. Global economic expansion also influenced Australia's growth, a fact evidenced by the strengthening of the Australian dollar.

Macroeconomic Outlook on Australia

Australia's economy follows the Western capitalist model. The most important factors positively influencing the Australian economy include strong business and consumer confidence and relatively high export prices for raw materials and agricultural products. In addition, the economy benefits from a series of structural reforms, a low inflation environment, and deepening trade relationships with China. This combination of factors has made Australia's economy stronger and more resilient.

Another macroeconomic trend has been a trade deficit that widened in recent years due to drought and strong import demand. However, the trade balance improved in 2006, reflecting a recovery in exports. In 2005, Australia reached a peak in housing prices, which led authorities to refrain from raising interest rates, thereby preventing excessive speculation in the property market. Since 2002, the country's budget has recorded a surplus, driven by conservative fiscal policies (CIA, 2007).

The following key indicators summarize Australia's macroeconomic position: GDP (purchasing power parity) — $674.6 billion; GDP (official exchange rate) — $644.7 billion; GDP real growth rate — 2.7%; GDP per capita — $33,300; GDP composition by sector — agriculture: 3.7%, industry: 26.2%, services: 70.1%; labor force — 10.74 million; labor force by occupation — agriculture: 3.6%, industry: 21.2%, services: 75.1%; unemployment rate — 4.9%; household income share — lowest 10%: 2.0%, highest 10%: 25.4%; inflation rate — 26.7% of GDP; budget revenues — $268.2 billion; budget expenditures — $257.3 billion; public debt — 16.1% of GDP (CIA, 2007).

Australia's agricultural sector produces wheat, barley, sugarcane, fruits, cattle, sheep, and poultry. The industrial sector is anchored in mining, industrial and transportation equipment, food processing, chemicals, and steel. The industrial production growth rate stood at -3.5%.

Regarding electricity, production reached 236.7 billion kWh while consumption was 219.8 billion kWh. Australia recorded no electricity exports or imports. Oil production stood at 530,000 barrels per day, with consumption at 877,300 barrels per day; oil exports totaled 333,200 barrels per day and imports 611,400 barrels per day, with proved reserves of 1.491 billion barrels. Natural gas production reached 38.62 billion cubic meters against consumption of 25.72 billion cubic meters; exports totaled 12.9 billion cubic meters, with no imports recorded and proved reserves of 750.6 billion cubic meters.

Australia's principal export partners were Japan (19.6%), China (12.3%), South Korea (7.5%), the United States (6.2%), India (5.5%), New Zealand (5.5%), and the United Kingdom (5.0%). The leading export commodities included coal, gold, meat, wool, alumina, iron ore, wheat, and machinery and transport equipment. Total exports reached $124.8 billion in 2006. Key import partners were China (14.4%), the United States (14.1%), Japan (9.6%), Singapore (6.0%), and Germany (5.1%). The principal imported commodities were machinery and transport equipment, computers and office machines, telecommunications equipment and parts, and crude oil and petroleum products. Total imports reached $134.5 billion in 2006.

Currency Outlook on Australia

Additional financial data for Australia include: current account balance — -$41.14 billion; reserves of foreign exchange and gold — $55.08 billion; external debt — $628.1 billion; stock of direct foreign investment at home — $246.2 billion; stock of foreign direct investment abroad — $226.8 billion; market value of publicly traded shares — $804.1 billion. Exchange rates (Australian dollars per U.S. dollar) were 1.3285 in 2006, 1.3095 in 2005, 1.3598 in 2004, 1.5419 in 2003, and 1.8406 in 2002.

The Australian dollar has experienced considerable volatility. In July and August 2007, it recorded significant declines. Shortly thereafter, however, the Australian dollar staged a successful recovery despite continuing weakness in the U.S. dollar. This resilience reflected the fact that the impact of global financial turmoil on Australia and New Zealand was far more limited than many analysts had anticipated (Calleya, 2007).

Several factors explain why the effects of global financial turbulence were less severe than expected in Australia. First, the country carries a large current account deficit backed by substantial external liabilities, a configuration that encouraged investors to borrow at lower interest rates and deploy funds in the domestic market. This dynamic helped stabilize market conditions and supported the Australian dollar's outperformance relative to other currencies.

A second factor was the relatively small share of subprime loans in the economy. The Reserve Bank of Australia reported that such loans accounted for approximately 1% of the total mortgage stock, limiting contagion risk and supporting expectations that interest rates would remain stable.

However, certain vulnerabilities remain. Australia has experienced dislocation in its money markets, and a continuation of this dislocation could expose the Australian dollar to periods of weakness. A further risk involves any retrenchment in international capital flows that reduces the overseas funding on which the Australian dollar depends. Analysts expected this risk to be partially offset by Australia's continuously expanding equity market.

Conclusion

Monthly Economic and Social Indicators (2007). Parliament of Australia, Parliamentary Library. Retrieved December 7, 2007, from

OECD Economic Outlook No. 82 — Australia (2007). Organisation for Economic Co-operation and Development. Retrieved December 7, 2007, from http://www.oecd.org/country/0,3377,en_33873108_33873229_1_1_1_1_1,00.html.

Trade Topics — A Quarterly Review of Australia's International Trade (2007). Australian Government, Department of Foreign Affairs and Trade. Retrieved December 7, 2007, from