external stability update 2011

External Stability : 

External Stability Australia’s position in August 2011 Are we stable?

The major impact on the Australian economy is ????: 

The major impact on the Australian economy is ???? Is the high A$ the cause of the current problems or the indicator of the cause?

Australia’s CAD record: 

Au stralia’s CAD average over the last 2 decades is on average 4.5%. (from 1% to 7.5% of GDP) The trade balance is occasionally in surplus however it depends on the business cycle. As shown by the times when the trade balance is positive this occurs during the slowdowns in the economy as imports and consumption is reduced. Meanwhile as Australia’s exports are demand inelastic they are still demanded. Australia’s CAD record

Analysis of Australia’s CAD: 

Analysis of Australia’s CAD Net Income Component Whilst the trade balance is cyclical the Net Primary Income is persistently at 3-4% of GDP This is the directly connected to the savings investment gap as when borrowings from overseas are needed then interest and dividends are needed to service the debt. The Net Primary Income records these debt servicing outflows

Comparisons of CAD (IMF 2008): 

Comparisons of CAD (IMF 2008) Green = Current Account surplus Brown= deficit. The darker the shade the higher the amount

Net Foreign Liabilities : 

The CAD and the amount of net foreign liabilities are directly connected As the savings/investment gap in Australian is predominantly debt. Debt requires interest payments and these then may require further borrowing.(Debt trap scenario) . Why has debt risen faster than equity? Globalisation has allowed the financial markets to rapidly expand whilst equity is connected to foreign investment. Lending is quicker and easier than the purchase of assets. Net Foreign Liabilities

Public Debt: 

Public Debt The Australian governments recent policy to lower the CAD has been to lower government spending. Between 1999 and 2007 the government saved more than it spent. (Budget surplus) This meant the government did not contribute to the CAD or foreign debt.

An increase in debt: 

An increase in debt Australian net public debt will reach a high of 7.2% of GDP In fact the public debt was all paid off in 2007 however the need to spend during the GFC has meant new debt in order to stimulate the Australian economy.

Comparisons to other nations: 

Comparisons to other nations The Australian government continues to paint the positive picture. Compare Australia’s debt to the rest of the world.

Savings and Investments: 

The gap between savings and investment is the amount of the CAD. This is because the savings deficit is made up from overseas investment and lending. In other words the gap in domestic savings is made up from overseas savings. So in order to invest our companies need overseas funds to make up the difference. Why? A rise in the value of exports caused by better prices for our exports in comparison to import prices (terms of trade) will only lead to a lower CAD if there is higher savings or lower investment. As the Australian economy has a large amount of investment opportunities (mostly commodities based) and a small population (thus low savings) there is a need for an overseas injection of funds. Savings and Investments

Savings Comparisons: 

These are similar economies with deregulated financial systems and economic structures. Australia has higher on avg gross savings levels than all of the others. Savings Comparisons

Translation to Investment: 

Compared to the same countries it can be shown that Australia has invested a significantly higher share of national output rather than having saved less. If Australia had invested the same as these other countries (with the same amount of savings) our CAD would have been a lot lower due. The important factor to look into- Is the investment productive or merely into non productive assets like private housing. Translation to Investment

Location of Investment: 

As you can see here public investment has fallen mainly partially due to privatisation. (since the 1980’s) The amount of business investment has been steadily rising. (trend 13% of GDP) The 1990’s recession saw business investment fall - it has risen since then. The amount of business investment is higher than housing investment. This is positive for the LT of the economy. Location of Investment

Business Investment: 

The Pitchford thesis is connected to the concept that Australian investment has been productive and leads to future growth and employment. The recent growth of business investment can demonstrate this idea when connected to Australia’s record of 20 years of successive economic growth. Business Investment

Future for Australia: 

Future for Australia Is our lack of savings leading to a major foreign debt trap? The alternate view- The reason why Australia has no public debt is that we have no public assets anymore- they have all been privatised. (This means the govt has no assets and lower income in the future) Many economists believe the ‘consenting adults’ theory which has become accepted is the pro-globalisation view and does not account for the fact that the market does not always make good decisions. Martin Fels argues againts the ‘consenting adults’ theory by stating that successful, increased private investment should lead to export surpluses. This does not consistently happen in Australia.

Structural Issues: 

In 2004 when the CAD was over 7% of GDP and earlier in 1986 when Keating made the infamous comment that Australia was in danger of becoming a ‘banana republic there has been concern about our net foreign debt and CAD. A banana republic is associated with a small economy reliant on agriculture. (normally corrupt Central American countries with dictators e.g El Salvador In reality the structure of the economy narrow export base I.e amount of commodities in comparison to others and lack of savings is the issue. Does Australia have a future in manufacturing??? Concerns regarding ‘Dutch disease’ are becoming real. The high $A continues to lower Aus international competitiveness. Structural Issues

Slide 17: 

Governement Policies to restabilise the Australian economy Resource rent tax- the original idea was that this tax would allow a reduction in the Company tax rate. It would slow down the commodity sector and make Australia’s resource sector more sustainable. Instead political issues blocked this reform. Investment in education and training along with technology. This would mean retraining of manufactures and specialise in areas where labour costs are less of a concern. Reduce public debt when appropriate. Pressure China to allow is currency to rise.