Treasurer Scott Morrison opens door to ASX competitor, offshore buyers

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The government is effectively ending the ASX’s monopoly by allowing competition to enter into the market to clear share trades in mid-2017. Clearing takes place between a trade and settlement as a risk management function. One year ago, the ASX requested for an addition five years to invest in a new clearing and settlement system in return for cutting fees. The ASX has 18 months to adjust to this change. However, the opening of the ASX up to competition may be irrelevant if it adopts blockchain technology which can clear trades virtually instantly.

How does this relate to the HSC syllabus?

  • The ASX is the largest and most dominant clearing house for the share market in Australia and can be essentially considered a monopoly. While the ASX faces some competition from 4.5 year old trading exchange Chi-X Australia, Chi-X was not given the same regulatory and competitive treatment as the ASX (Preliminary Topic 3 – Markets).
  • Given that the ASX was a monopoly, it is a price maker which means that it can charge consumers whatever price it sets (Preliminary Topic 3 – Markets). Introduction of competition from overseas exchanges is expected to reduce the exchange’s pricing power as it faces pricing pressures from competitors.
  • In the face of increasing competition, the ASX may adopt new blockchain technology to remain competitive (Preliminary Topic 2 – Consumers and Business). It currently takes a maximum of 2 days to clear a transaction. With blockchain, the ASX can clear transactions almost instantaneously. However, it takes time to adopt such innovative technology, justifying the ASX’s request one year ago to maintain its monopoly for another 5 years.
  • Adoption of blockchain will benefit consumers as transactions will be cleared more quickly and at a lower cost. Increasing competition will most likely lead to the ASX to become more efficient in adopting such technology, demonstrating the reduction of market inefficiencies when a monopoly is faced with competition (Preliminary Topic 3 – Markets).
  • Increased competition, however, requires additional regulatory measures from ASIC to monitor and supervise trades. This is expected to increase regulatory costs of up to $18 million a year (Preliminary Topic 5 – Financial Markets).

The fast lane is accelerating in our two-speed economy

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Back during the mining boom, there was talk of a ‘two speed’ economy, that is, rapid growth in the mining sector and stagnant growth in other sectors including manufacturing and retail. While growth in the mining sector has receded, there seems to be an emergence of a new ‘two speed’ economy characterised by high economic growth in New South Wales and Victoria and slower growth in all other states. Infrastructure investment and retail spending is greater in NSW and VIC which is creating more growth and employment in these states while job vacancies in other states are decreasing.

How does this relate to the HSC syllabus?

  • Australia is transitioning the composition of its exports to services exports including tourism and education. Since the majority of the services industry is situated in NSW and VIC, these two states have enjoyed increased economic growth as exports are increasing, leading to increased aggregate demand (AD = C + I + G + X – M) (HSC Topic 3 – Economic Issues).
  • Growth in NSW and VIC have also been supported by increased investment in infrastructure from the booming housing market. Since investment is also a factor of aggregate demand, an increase investment leads to an increase in aggregate demand, therefore increasing economic growth) (HSC Topic 3 – Economic Issues).
  • Other states, such as WA and QLD, however, have suffered from slow growth, significantly lagging behind NSW and VIC which has led to the development of the ‘two speed’ economy. Given that WA is predominantly a mining state and that the mining boom is receding, growth in exports has been low (HSC Topic 3 – Economic Issues). As such, WA has experienced less growth than NSW and VIC. Similarly, QLD is predominantly an agricultural and mining state. Given both sectors have not been performing as well as services and housing, QLD’s growth is also lagging behind.
  • Since labour is a derived demand, growth in NSW and VIC has caused a surge in job vacancies. As businesses receive more demand for their goods and services, they produce more, requiring more inputs including labour (Preliminary Topic 4 – Labour Markets). Therefore, the increasing growth in NSW and VIC has resulted in an increase in job vacancies of 9.3% and 17.4% respectively. Conversely, slowing growth in other states has resulted in a decrease in vacancies.

PMI: Manufacturing surges to 12-year high

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Given that the Australian dollar has fallen 30% lower against the US dollar since 2013, manufacturing growth in Australia has hit its highest levels in 12 years. The manufacturing purchasing managers index rose to 50.2 in March compared to an estimate of 49.4. A depreciated currency is helping exports and import-competing producers as Australian goods become more internationally competitive. However, the 10% appreciation of the Australia dollar over the past month poses continuing risk to the manufacturing sector going forward.

How does this relate to the HSC syllabus?

  • Since 2011, Australia’s manufacturing sector has suffered from low growth due to the high Australian dollar that was trading above parity. This is because the higher Australian dollar made it more expensive for other countries to buy Australian produced goods as more foreign currency was required to buy the Australian dollar (HSC Topic 2 – Australia in the Global Economy). Given that other economies such as China could produce manufactured goods for lower prices, Australia’s manufactured goods were less internationally competitive, leading to a decline in the manufacturing sector (HSC Topic 2 – Australia in the Global Economy).
  • Given that the Australian dollar has depreciated by 30% and the terms of trade has decreased since 2013, Australia’s exports have become more internationally competitive (HSC Topic 2 – Australia in the Global Economy). As such, the Australian Industry Group’s performance of manufacturing index has increased by 4.6% in March as demand increases for Australia’s more competitive manufactured goods.
  • Growth in demand for Australia’s manufactured goods has led to an expansion in the manufacturing industry for the first time in more than four years (Preliminary Topic 3 – Markets). There has been observed growth in production, sales and new orders in March. Since exports are a factor of aggregate demand, this increase in manufacturing exports increases aggregate demand and therefore economic growth (HSC Topic 3 – Economic Issues). The growth in Australia’s manufacturing industry has been mirrored by the Chinese purchasing managers index which grew above estimates.
  • Although growth was strong in March, the manufacturing sector continues to face risk of competitiveness as the Australian dollar has been observed to appreciate over the past few weeks (HSC Topic 2 – Australia in the Global Economy).

Theresa Dang THERESA DANG

Theresa Dang is an economics mentor at Keystone Education. She attended Sydney Girls High and achieved an ATAR of 99.70 in 2012. She is now studying Commerce and Law at the University of Sydney. She has experience in a global technology firm and a mutual fund.

Gary Liang GARY LIANG

Gary Liang is the founder and director of Keystone Education. He attended Sydney Boys High and achieved an ATAR of 99.95 in 2012. He achieved 5 state ranks in Mathematics, Mathematics Ext 1, Mathematics Ext 2, Chemistry and Economics. He is now studying Economics and Science (Advanced Mathematics) at the UNSW Australia, where he is the recipient of four scholarships.

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