News Summary: Australian Economy Hit by Slowing Growth

Australian Economy Hit by Slowing Growth

1.) Recently released data is showing a slower growth over the year to March than economists expected. Economists had predicted a GDP growth of 0.8% for the March quarter and a 'year-on-year' growth of 2.7%. However, the Australian Bureau of Statistics reported that for the first quarter of 2013 the GDP grew 0.6% and the growth for the year was 2.5%. UBS chief economist Scott Haslem said, "The overall tone of the release is pretty soft. We saw some improvement in consumer consumption and trend improvement in housing, but at this stage it's not sufficient to offset the pull-back we've seen in capital expenditure in this quarter. When we take away the net export contribution of about 1% in the quarter, the domestic economy was clearly negative." Haslem noted that the latest figures, released by the Australian Bureau of Statistics, showed an increase in consumption due to lower interest rates, but also that business investment and activity was not improving. The March quarter growth was largely due to the finance, mining, transport, and retail industries. However, this growth was counteracted by a 0.9% fall in public investment and a 0.4% drop in inventory changes. Following this release of data, the Australian dollar fell to 96.11 U.S. cents. This causes investors to believe that the data could prompt further rate cuts. Due to slow retail sales, falling job ads, and weakness in the manufacturing sector, some economists have also altered their GDP forecasts to be lower than before. The Reserve Bank held the cash rate a 2.75%, but also said it retained the "scope for further easing, should that be required".

 
2.) This issue directly relates to the calculation for GDP that we have discussed multiple times throughout the quarter. We established in class that GDP = Consumption + Investment + Government + Net Exports (Exports - Imports). The Australian Bureau of Statistics reported a small growth in consumption, but there was also a decrease in business investment and activity, which would cause the GDP to either decrease or more generally just slow in growth. The release of this data also affected the inflation of the Australian dollar as it fell from 96.35 to 96.11 U.S. cents.

3.) This situation could have been caused by the inflation of the Australian dollar and the increasingly high cost of living, which could have caused businesses to be less interested in investing in Australia and the fall in public investment. The slowing growth of the Australian economy might also be due to slowing investment in machinery and equipment. The only resolution I could propose to solve this issue would be to somehow encourage more public and foreign investment in the Australian economy, however I realize that the solution to this problem is much more complicated than briefly described in this article.