Group of Seven summit backs growth and plays down currency tension


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The G7 summit has seen the G7 countries pledge to bolster global growth and compromised over currency intervention policies. Given slow economic growth globally, the priority was to increase growth with increased focus on stimulatory fiscal policy and structural reform in relation to the industrial sector. The economies promised to avoid ‘competitive devaluation’ of their currencies but compromised on intervening in situations of severe market movements.

How does this relate to the HSC syllabus?

  • The G7 is an economic forum which meets annually to discuss global economic governance, international security and energy policy (HSC Topic 1 – The Global Economy). Given that the G7 contains the seven biggest and most influential powers in the global economy, its decisions and endeavours are highly influential to the growth and trajectory of other economies. There is criticism, however, that the G7 does not follow through on its resolutions.
  • The G7 is criticised as being biased against issues relating to developing countries, such as aid and developing economy debt, as a result of containing only developed economies (HSC Topic 1 – The Global Economy). As such, the G20 is starting to serve as the main economic forum.
  • Global economic growth was the greatest concern of the G7 throughout the summit. The prospects for the global economy remain weak. In particular, growth in the Japanese economy is a concern, with the Japanese Prime Minister stating that the economic conditions in Japan currently parallel with that of the GFC. To boost economic growth, the G7 economies have looked to use its policy mix more effectively (HSC Topic 4 – Economic Policies and Management). That is, the countries are realising the need to implement more effective fiscal policy to boost economic growth which is balanced by a need to maintain public debt at a sustainable level (HSC Topic 4 – Economic Policies and Management).
  • Reform in the industrial sector was stressed upon. The global economy is currently suffering from industrial overcapacity, especially in steel. This means that the global economy has more capacity to supply steel than there is demand for steel, creating a situation of excess supply (Preliminary Topic 3 – Markets). This has resulted in rapidly falling prices for steel which has hurt steel producers, especially in the G7 countries such as the US, Germany and France.

Vietnam investment breakthrough adds to reform momentum


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Vietnam’s largest listed company (Vietnam Dairy Product JSC) has eliminated its limits on foreign ownership, allowing for foreign direct investment. Analysts are saying that more firms need to follow suit to enable the country’s equities market to open up and allow for foreign investment into Vietnam. Accessibility to global funds enables will enable Vietnam to expand its financial market which is current a quarter of the size of the Philippines’. The Vietnamese government is seeking foreign investment to enable it to achieve its 6.7% growth target for the year. The IMF has stated that Vietnam risks being vulnerable to external shocks if economic reform in Vietnam to strengthen its banking system and restructure state businesses remains slow.

How does this relate to the HSC syllabus?

  • Foreign ownership restrictions limit the amount of foreign investment that is allowed into an economy (HSC Topic 1 – The Global Economy). This means that companies receive less funds from international sources to finance their investments to enable them to grow. Eliminating these restrictions, therefore enables Vietnam Dairy Product JSC to access more funds from overseas to invest in projects that will help it to generate revenue and grow. To fuel growth in Vietnam, however, more firms are required to relax their ownership restrictions so that foreign direct investment flows into Vietnam and supports business growth and therefore economic growth in Vietnam as a whole. The Vietnamese government plans to use foreign investment to help it achieve its 6.7% growth target this year.
  • Expanding ownership to foreign sources also enables Vietnam to grow its financial market and enable capital to flow in and out of the country (HSC Topic 1 – The Global Economy). The equities market in Vietnam is currently underdeveloped which means that firms do not have access to equity as a source of funding. Growth in the equities market will widen the pool of funds in which firms can borrow from (Preliminary Topic 5 – Financial Markets).
  • Relaxing ownership restrictions will increase the ease of financial flows to Vietnam, helping it to become more globalised (HSC Topic 1 – The Global Economy). This is significant given that the financial markets are generally the most interconnected market within the global economy.
  • The IMF has warned, however, that reform is required to strengthen the banking system to enable Vietnamese banks to withstand the risks in the global economy. Furthermore, there have been calls to restructure State businesses. This is due to the fact that opening up to globalisation would expose Vietnamese businesses to increased competition which can damage domestic businesses. Therefore, Vietnam needs to restructure its businesses to become more competitive as globalisation will expose firms to competition as well as make it more sensitive to the international business cycle (HSC Topic 1 – The Global Economy).

Industrial relations minister threatens to ban builder who give Construction, Forestry, Mining and Energy union big rises


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Michaelia Cash, the Employment Minister has vowed to ban builders from bidding up their wages if the deals struck by the construction union fail to meet guidelines promised be a re-elected Coalition Government. The Construction, Forestry, Mining and Energy union (CFMEU) has reached a deal in Victoria, securing 5% annual wage increases which will increase the costs faced by the industry by three times more than inflation despite the fact that the industry is making no productivity improvements. Already, the cost of construction in Australia is 40-200% more expensive in Australia than in other advanced economies which undermines the value of infrastructure investment.

How does this relate to the HSC syllabus?

  • The CFMEU is a union which is an institution which represents employees within the construction, forestry, mining and energy sectors. Whereas employees individually may not have much bargaining power with employers to raise their wages, unions can more easily negotiate wage increases through collective bargaining which essentially has more bargaining power than a single employee (Preliminary Topic 4 – Labour Markets; HSC Topic 4 – Economic Policies and Management). Given the strong bargaining power of the CFMEU, employees in the construction industry in Victoria will benefit from a 5% increase in their wages every year for three years.
  • The fact that wages are growing at 5% per year, which is significantly above that of inflation is a concern for the labour market. Given that wages are increasing above the rate of inflation, real wages in the construction sector are increasing despite minimal gains in productivity. Therefore, a situation of excess supply of labour arises (Preliminary Topic 4 – Labour Markets; HSC Topic 3 – Economic Issues). More people would want to work for the construction sector as a result of higher real wage, increasing the supply of labour in the market. In conjunction to this, employers are facing higher costs as a result of the requirement to pay higher wages. To reduce costs, employers would retrench some of its employees, therefore causing increased unemployment (HSC Topic 3 – Economic Issues).
  • Generous wage increases in the construction sector also affects economic growth. Although infrastructure costs are increasing by 30%, the returns to investment have been minimal. This means that the value of investment in construction work in Australia yields less return than in other countries and could mean ‘the difference between building five schools or three in some communities’. This issue is exacerbated by the fact that the labour force is making negligible productivity gains.

Target squares up to fashion giants


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Target has been underperforming as a result of increased competition from overseas retailers such as Uniqlo and H&M. Underperformance has resulted in 240 jobs cut from Target’s head office. Target is endeavouring to return to profit in 2017 through cutting product lines, reducing use of intermediaries and increasing direct sourcing and lowering prices. Branded stock has been eliminated except in toys where Target benefits from brand names such as Lego. It is questionable whether Target’s new strategy will be successful as Craig Woolford, head of research at Citi, says that the volume led strategy Target is undertaking can undermine its value proposition and history of being a quality retailer.

How does this relate to the HSC syllabus?

  • Target has been struggling to meet its goals as a business to increase market share (Preliminary Topic 2 – Consumers and Business). This has been due to the entry of Uniqlo and H&M into the market which have stolen market share. Uniqlo’s Australian sales have increased by 260% whilst H&M sales have almost tripled over the year.
  • To respond to the change in the market, Target is embarking on a ‘volume strategy’ which reduces the prices of the goods provided to increase the volume of the goods sold under the assumption that the demand for these goods are relatively elastic (Preliminary Topic 3 – Markets).
  • To enable the volume strategy to be sustainable, Target is limiting what it produces to unbranded stock to help it better compete with H&M and Uniqlo (Preliminary Topic 2 – Consumers and Business). The CEO has justified this move as the volume strategy is not conducive to ‘handpicking items for customers’. However, others have criticised the strategy given that Target’s value proposition is quality which is supported by having designer brands in the portfolio. Therefore, Target may need to undergo satisficing behaviour so that its future growth potential is not compromised (Preliminary Topic 2 – Consumers and Business).
  • The decision to cut out intermediaries will likely be beneficial to Target’s goal to maximise profit (Preliminary Topic 2 – Consumers and Business). Intermediaries usually add a margin to the prices that they supply goods to Target for to make a profit. By cutting out these intermediaries, Target eliminates the additional margin it pays for stock and therefore reduces its costs.

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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