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Economic Context of Management

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MGSM845 : ECONOMIC CONTEXT OF MANAGEMENT Essay Term 2, 2013

‘Sustaining Australia’s rate of economic growth above 3.25%, once the mining sector’s level of investment spending reduces during the next couple of years, is going to be a major challenge which will require a focus by the public and private sectors on productivity’. Discuss this statement, including an analysis of Australia’s GDP growth rate since 2000 and the drivers of GDP growth in Australia. What are the implications of your outlook on monetary policy settings?

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MGSM845:ECONOMIC CONTEXT OF MANAGEMENT Term 2, 2013

The Australian resources sector plays a vital role in the Australian economy. The resources sector is the largest contributor to merchandise exports, a major contributor to GDP, a major employer, a major contributor to government revenue and investment. Other benefits such as its contribution to rural and regional development and technological development and environmental research are also significant. Australia has experienced significant GDP growth since the early 2000’s, it has effectively been a two speed economy where the strong mining sector growth has been offset by the reduction in the manufacturing sector. Following the global financial crisis in the late 2000’s, the Australian government fiscal policy placed significant pressure on the foreign exchange rate which lead to slowing of industries and sectors sensitive to such movements including tourism, local manufacturing, education and agriculture.

Australian Gross Value Added (GVA) 2000‐2012
1600000 1400000 1200000 1000000 800000 600000 400000 200000 0

Agriculture, forestry and fishing

Mining

Manufacturing

Construction

Services

Source: ABS 5204.0 Australian System of National Accounts

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MGSM845:ECONOMIC CONTEXT OF MANAGEMENT Term 2, 2013

The sustainable growth of Australia’s GDP after the mining sectors level of investment reduces will potentially rely on the services sector supporting the mining sector. The recent investment within mining and mining related activities has produced a strong platform for the mining sector to be able to increase its capability for mining and its increased capacity for output (productivity). The alleviation of infrastructure bottlenecks restraining increased output and ever increasing overseas demand for mineral commodities will further sustain Australia’s GDP growth. In addition, Australia’s services sector provides products and services for other major sectors within the economy. The growth of the services sector has been a direct result of growth in other sectors rather than an internal growth of the services sector itself. Australia’s services sector is a large contributor to GDP. The services sector is also less vulnerable and susceptible to economic conditions then the mining sector. While the mining
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sector is concentrated in that a relative small number of human resources can produce relatively large financial gains. Exceptional large profits can be experienced when demand is high and consequently high prices prevail. It should be noted that a high level of capital infrastructure and equipment is required at the outset. Notwithstanding this, an adverse effect towards economic growth can easily occur from the mining sector if either:    Demand reduces A reduction in commodity prices Reduction in Australian dollar value

The result of such events can significantly affect the sustainability of GDP growth. This has been recently experienced by the labour government. The government forecasted revenues from the mining sector via the carbon and minerals resource rent tax. The forecasted revenues were not achieved due to reduced production volumes in the mining sector. This is among the contributing factors to the recently announced $18Bn budget deficit.

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Australia’s GDP Growth Rate Since 2000 Since early 2000 we have seen the economy of most countries shaken up by various events all over the world including catastrophic weather events, terrorism, foreign policy and financial challenges such as the Asian Crisis, US Banking and Financial Crisis, the recent US debt crisis and the current European Crisis. In Australia we have been somewhat shielded from the full impact of such events through the use of the floating dollar. Australian sectors are still exposed by the economic activities and responses of other nations to these events.  Australian GDP experienced growth from the 2000’s due to the high demand in minerals and energy from emerging economies in China, Japan and India. This drove an increase in commodity prices and an appreciation of the exchange rate.     A steady decline in the manufacturing sector continued due to the lack of government incentive and high labour costs with an increasing exchange rate The appreciating exchange rate also affected the tourism sector during this period. The events of September 11 and the increasing oil prices placed strain of flying costs. Construction sector was strong and growing, due to the 50% discount of Capital Gains Tax and low interest rates. Services sector also experienced strong growth with demand to support other sectors. Economic growth continued until the “Global Financial Crisis” hit during 2008, which produced a sharp increase in household savings. The decline in the Australian dollar during the same period provided a stimulus to the economy with a rise in Tourism, Exports and Tertiary Education. The positive effect of household savings and money flowing into Australia from the various sectors due to the low exchange rate would have seen the need to borrow less from overseas but this was eliminated by the then Labour Government’s fiscal stimulus packages.

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The Australian dollar appreciated past parity with the US dollar due to increase in imports to support the stimulus packages but also due to the government spending on the stimulus packages and lack of long term economic benefit for Australia from these packages. This meant that the government had to continue to borrow from overseas to fund the Australian economy well after these stimulus packages had been implemented. Whilst growth in GDP over this period occurred, by the end of the 2000’s we found Australia with the previous Liberal Government’s Surplus consumed and with a high exchange rate. At this time the RBA was applying a soft monetary policy by keeping the cash rate low in order to stimulate the economy.

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MGSM845:ECONOMIC CONTEXT OF MANAGEMENT Term 2, 2013

Sustaining Australia’s GDP Growth Rate in 2013 and beyond Some of the major world economies are facing significant challenges, namely the US and European Union. Australia has been working with local emerging and since matured markets such as China, India, Japan, Indonesia and Vietnam for sustained growth.

However within Australia, the key drivers that will impact the sustained economic growth rate above 3.25% are as follows:  The decline into manufacturing and comparatively short term pain within tourism due to the unnatural appreciation of the Australian dollar due to the fiscal stimulus packages by the federal government.  The recent large capital investment to develop the mining sector will have a positive long‐term effect in growing sectors supporting the mining sector, specifically the services sector.       The increase in mineral demands and our ability to support demand due to the mining investment. A predicted increase not only in mining products but also mining expertise to other sectors and regions. Growth in the development of technology and medical research Adjustments within the economy based on demographics with Australia experiencing an ageing population Fiscal measures to support Australia’s growing services sector Quality investment into primary and tertiary education
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The current investment into the mining sector will increase Australia’s Mining capability allowing for greater volumes to be exported, this will setup Australia for a long term sustained export of mining products especially to emerging markets within our region. Longer term, there is the possibility that with the growth of emerging markets, the middle class within these economies to possibly double or even triple over the next 10 years. This increase of the middle class will in‐turn demand greater quality of life which potentially translates into greater demand within Australia’s tourism, entertainment and agriculture sectors (Parkinson 2012). Combining this with the advancements in technology, the services sector will continue to grow in servicing these other sectors as they grow over time with the continued growth in population over time. The services sector will shift away from models such as fly in fly out but rather setup communities around mining locations and possibly push Australia to a Dutch Economy focused around not only the mining sector but the services sector supporting mining communities (Garton 2008).

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MGSM845:ECONOMIC CONTEXT OF MANAGEMENT Term 2, 2013

Outlook on Monetary Policy Settings In order to assist the sustainability of Australia’s economic growth the RBA should employ a relaxed monetary policy to help stimulate the economy and build consumer confidence and generally improve sentiment. The economy will strengthen due to several drivers of which could include but not limited to:    increase demand in mineral resources increase in commodity prices depreciation of the dollar

Continual monitoring of the economy is obviously required as once the economy improves this could see the rapid increase in inflation and for this reason monetary policy settings should be tightened again. The serving government should also work to align its agenda with the RBA so that both the government’s fiscal and RBA’s monetary policy setting to do contradict one another. This will achieve a greater effectiveness in managing Australia economy.

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Conclusion The decline in mining investment over the next couple of years will be offset by increased growth in the services sector, especially services related around mining activities. The growth of the services sector is based on the growth of other sectors and is not necessarily based on a self‐sufficient services sector. Due to the current economic condition of Australia with a significant budget deficit, high exchange rate and low cash rate, Australia’s reliance for economic growth will be based on the continued demand and output of the mining sector on the back of recent investment to increase Australia’s mining capabilities providing sustained growth for the Australian economy. However should there be a reduction in the Australian exchange rate over time, which seems to have started, this will help stimulate other sectors and general investment into Australia.

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References
Reserve Bank of Australia (RBA) Website http://www.rba.gov.au/ Australian Bureau of Statistics (ABS) http://www.abs.gov.au/ The Resources Boom and the Australian Economy: A Sectoral Analysis http://www.rba.gov.au/publications/bulletin/2013/mar/5.html Parkinson, Dr Martin, 2012, “CHALLENGES AND OPPORTUNITIES FOR THE AUSTRALIAN ECONOMY”, The Australian Government, The Treasury http://www.treasury.gov.au/PublicationsAndMedia/Speeches/2012/Challenges‐and‐opportunities‐for‐the‐ Aust‐economy Garton, Phil, 2008, “The resources boom and the two‐speed economy”, The Australian Government, The Treasury http://archive.treasury.gov.au/documents/1421/HTML/docshell.asp?URL=02%20The%20resources%20boom% 20and%20the%20two%20speed%20economy.htm M Roarty, 2010, “The Australian Resources Sector its contribution to the nation, and a brief review of issues and impacts” http://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BN/101 1/AustResources#_ftn7 T McCrann, The Australian, December 2012 “Budget deficits are in Labor's fiscal DNA” http://www.theaustralian.com.au/business/opinion/budget‐deficits‐are‐in‐labors‐fiscal‐dna/story‐e6frg9k6‐ 1226542090974 David Crowe, The Australian, February 2013 “Super‐profit tax would 'have been worse'” http://www.theaustralian.com.au/national‐affairs/super‐profit‐tax‐would‐have‐been‐worse/story‐fn59niix‐ 1226579205867 P Cleary, ‘Sea hunt for another oil boom’, Weekend Australian, 3 April 2010, Inquirer, p 1, viewed 3 June 2010,

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Appendix

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