17.4 The impact of global events on the Australian economy

Economic events

The development of a globalised economy, improved communication and technology, and the expansion of multinational corporations have all supported the development of a global economy. As such, all countries, including Australia, are interconnected. What happens in one country can influence other countries. The GFC is believed to have begun in July 2007. There was a loss of consumer confidence in the USA and the housing market collapsed. This led to a liquidity crisis and the US Federal Bank had to put a lot of money into financial markets.

By September 2008 the crisis had worsened as stock markets around the world crashed, and share prices decreased and became very unstable. Consumer confidence also decreased as people were concerned that things would get worse. The poor economic performance moved through most of the world, affecting a number of economies, employment levels and economic growth.

In Australia, government policy and increased spending to stimulate the economy meant that Australia was not affected as severely as other countries and economic growth continued. The Australian economy recorded better growth outcomes than most other developed economies, many of which have experienced severe recessions and rises in unemployment. The Australian financial system is also stronger. Australian banks were profitable, effective and did not require any support from the Australian government. The Australian dollar also depreciated rapidly and sizeably as the crisis intensified, declining by over 30% from its July 2008 peak. The Reserve Bank intervened in the market and the dollar has stabilised and remained relatively high until the end of 2013.

While Australia was relatively free from the serious effects of the crisis, some of Australia’s trading partners were affected. In China, for example, there was a sharp drop in economic activity measured by GDP in the first part of 2009. At the same time there was a large decrease in exports; many export-focused industries in the south of China were hit and some companies closed down. There was also increased unemployment in China’s economy.

This had an impact on the Australian economy. During this period Australia’s merchandise trade decreased substantially, but trade between Australia and China increased. At the same time China was also Australia’s largest export market and accounted for 21.6% of total exports. The growth in urban areas and cities in China and the accompanying infrastructure development also benefited Australia as 80% of Australian exports in 2009 were energy resources and minerals.

Therefore, while many countries and economies suffered badly during the GFC, Australia was relatively unscathed due to government policies and increased trade with some of our main trading partners.

Source 17.23a The Global Financial Crisis (03:38)

DEVELOPING YOUR UNDERSTANDING 17.8

Read the extract and answer the questions below.

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China’s economy grew at its slowest pace in 18 months in the first quarter of this year, according to the latest official data.

China’s annual economic growth slowed between January and March to 7.4%, from 7.7% in the previous three months.

Authorities have ruled out major stimulus to fight short-term dips in growth, and some analysts think the economy will continue to lose momentum (motion) into the middle of the year.

‘Policymakers seem pretty comfortable with the current pace of growth,’ said Julian Evans-Pritchard, an economist at Capital Economics in Singapore.

‘I don’t think they’re going to announce any further significant measures to support growth.’

Beijing has announced some modest measures, such as tax cuts for small firms and speeding up some investment in rail projects, to try to steady growth around its target of 7.5% without disrupting plans to restructure the economy.

Figures for March already released have done little to ease concerns that the economy is losing more momentum.

Official and private surveys also show the manufacturing sector continuing to struggle.

Source 17.24 Extract based on the article ‘China economic growth slows to 18-month low in first quarter’

  1. Identify two pieces of data or information that tell you something about the economic performance of China.
  2. Explain why it is important for Australia to understand and react to changes in other country’s economic conditions.
  3. There is a saying (with many variations in the country mentioned), ‘When China sneezes, Australia catches a cold’. Describe what you think this statement means.