The Australian economy, also known as “miracle economy”, was successful in avoiding recession during the 2007-2008 financial crisis, and the worst of the 1997 Asian financial crisis. But, the year 2020 started as a nightmare for the economy and it could no longer do any miracle.
The Australian Bushfire catastrophe started in the year 2019 and entered the new year with a lot of destruction and devastation in the form of damage to homes and businesses, job and wage losses, farm and crop losses, infrastructure damage, auxiliary business losses, school closures and the costs of power outages to businesses. The economy estimates losses as much as A$50 million each day. The country was covered with a toxic haze from smoke billowing in from the fires. Sectors from agriculture to property to tourism were adversely affected due to this bushfire.
Along with this, the whole world is facing another dilemma of China-borne virus, COVID-19. The widespread started from the months of March and still exists in most of the countries. Australian economy witnessed the same and has faced many negative economical impacts. The entire economy was in a lockdown situation and the fact that in a week about one million Australians became unemployed shows the seriousness of the outbreak of virus in Australia.
The figures from the Bureau of Statistics show that the Australia’s economy shrank around 0.3% of its GDP in the last quarter, amid bushfire and early stages of the coronavirus pandemic. The economy could not show any magic as it used to and got trapped by the two hindrances and suffered its first recession in 29 years.
THE PILLARS OF ECONOMY THAT DEFINES THE STORY ARE: government, households and net exports.
Drop in the consumption level of household:
Households constitutes 56% of the entire economy, so if households stop spending, the economy is in big trouble. Due to the strict lockdown situation, households spending reduced and in turn impacted the economy and its GDP. Household consumption dropped 1.1% (the biggest one-quarter fall since 1986). The unemployment rate had risen to 6.2% till May and the rate is constantly increasing. People have lost income and there are little chances of increment in the wages for the entire year. Falling house prices are another threat to the financial outlook for many households when added to the loss of incomes. Hence, rising unemployment, loss of income and falling house prices will lead to a greater drop in the household behaviour.
Reduction in Imports contributing to GDP
It is rightly calculated that net exports adds to the national income. Due to the pandemic situation, household spending, firms manufacturing units and everything has come to standstill. This has led to a fall in export and imports of goods and services: with imports falling much more. Reduction in import adds to the growth because import reduces national income. Though GDP increases, but it is not a good sign for an economy because fall in imports also shows households and businesses are less inclined to spend money. Moreover, some of Australia’s major exports include iron ore, metallurgical and thermal coal, and liquefied natural gas and energy products, and China is one of the biggest consumers of those products. The virus made other countries rely less on China and this has also led to some negative trading relations with other countries. So, due to this export quantity might decrease as well.
Government spending to the economy
The Government’s economic response to the coronavirus pandemic has been sweeping, including payments for job seekers and “job keepers”, as well as wage subsidies and support for businesses. The government has spent a lot in order to recover the economy but in order to have long term benefits, it is necessary that the Government ramps up the investment quickly. It announced the stimulus package of worth to be estimated as 3.3 percent of Australia’s gross domestic product this budget year — and 6.1 percent next year. The Central Bank has already cut the cash reserve ratio by 1% which needs to be increased. So far, direct aid to the business has been of around A$200bn, which has never happened before. The UK, the US are bigger, wealthier countries and are spending more to prop up their economies, but Australia’s Covid-19 rescue packages are its greatest ever financial gamble since it has never announced such a high amount of package before.
These were the pillars of national income of the Australian Economy. It has been hit by recession with numerous steps taken by the Government to solve the situation. Both the demand and supply side have been shrunk making all the sectors face a disequilibrium condition. But the economy has to prove how MIRACULOUS it has been and accept the current hindrances in a positive way and again revive back to normalcy. Some of the steps which the Government and the Reserve Bank can take are:
- To combine long-term structural policy measures with short-term demand management. The point of having a floating exchange rate and an inflation-targeting central bank is that fiscal policy does not have to worry about short-term demand management.
- Unemployment itself is a major issue. It needs to be tackled on a priority basis. The government must focus on job creation, especially for older and uneducated workers.
- Reforms need to be made in the legal compliances requirements so that it is easier for the employers.
- The government needs to change Australian tax rates, so that more business can come up, FDIs can be attracted and more money in the form of tax can be given to the Government. Tax reform including a GST increase and higher land tax will be needed to avoid the debt burden of the $214bn Covid-19 economic response falling on young people.
- As mentioned earlier, the Reserve Bank of Australia (RBA) reduced its cash rate to an all-time low of 0.25%. It might need to make some other monetary reforms if it does not help them to revive.
These are some of the reforms which can be made in a nutshell. This may actually help the Australian Government revive their economy and contribute more to their allies in helping them in reviving.