Australian GDP preview: Current account narrows to smallest deficit since 1980

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Australia has hit its smallest current account deficit (CAD) in 37 years. It was driven by LNG production, which added more to real GDP than iron ore and coal combined.

How does this relate to the HSC syllabus?

  • The Australian balance of payments is a record of all financial transactions between Australians and the rest of the world. Transactions are recorded into one of three accounts as debits (outflows) and credits (inflows). (HSC Topic 2)
    • The current account records trade and income transactions. The current account can be broken down:
  • Balance of goods and services (BOGS) - exports and imports
  • Net primary income (NPY) - main sources of income such as dividends and interest
  • Net secondary income (NSY) - other sources of income such as government transfers (unconditional aid), personal transfers, workers' remittances of wages. These are usually non-market transfers (money is transferred for nothing in return)
  • Australia’s current account is usually in deficit. The size of the deficit is usually measured as a percentage of GDP as this allows more effective comparison between countries and across time. Australia’s persistent CAD can be attributed to three factors. (HSC Topic 2)
    • Large savings and investment gap – a low household savings ratio means that there are low national savings, which means any investment needs to be funded from overseas sources, which means more dividends and interest payments need to be made, hence worsening the net primary income account.
    • Australia's narrow export base – because Australia focuses on primary sector goods in its export base and production, it relies on overseas countries for certain goods, meaning there are more imports purchased from overseas. This makes the balance of goods and services more negative, which contributes to the persistently negative CAD.
    • Capacity constraints such as poor transport infrastructure, thus causing a lower level of production and exports.
  • The result means that it is more likely that Australia will avoid a technical recession.
    • A recession is defined as two consecutive quarters of negative economic growth.
    • Australia experienced a contraction of 0.5 per cent in the September quarter. When this article was published, many economists held the view that Australia’s December quarter would be more positive. Indeed, the economic growth rate for the December quarter was 1.1 per cent.
    • Another factor that ensured a positive economic growth is the relatively weak Australian dollar, which made Australian exports, such as education, tourism and business services, more internationally competitive.

Australia poised to seize world economic record

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Australia is set to be the economy with the longest economic expansion on record, entering our 104th quarter of growth without recession. Notably, we have been able to survive the ‘end of the end of the mining boom’.

How does this relate to the HSC syllabus?

  • Economic growth can be defined as a change in a country’s productive capacity, measured by changed in its real gross domestic product over time. (HSC Topic 3)
    • Australia stands to beat the Netherlands to be the economy with the longest period of time without a recession, which is defined as two quarters of negative economic growth.
    • Australia has been experiencing strong economic growth due to the mining boom, but this has recently subsided. Typically, we would expect Australia to decline heavily in growth as the mining boom ends, but we have been relatively unscathed. Many feared that the end of the most recent mining boom would lead to negative economic growth, and this was demonstrated in the September quarter GDP numbers, where the economy shrunk 0.5 per cent.
    • The Dutch disease refers to a situation where large resources booms lead to declines in other sectors, such as manufacturing. One possible explanation is that the resources boom leads to an appreciation of the currency, which then decreases international competitiveness in other industries. Most of Australia’s past mining booms have ended in heavy inflation.
    • Ric Battelino, former Reserve Bank deputy governor, believed that the most recent mining boom would be different due to the floating exchange rate, a more flexible labour market and stronger frameworks for monetary and fiscal policy.

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 six scholarships. He has experience at a top tier investment bank.

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