Question

Country facing a lost decade of growth, ANZ warns

By Shane Wright (Sydney Morning Herald, 21 January 2020)

Australia is facing a lost decade of economic growth, ANZ has warned, that will see living standards slip and wages grow modestly while putting pressure on the Morrison government's plan for a string of budget surpluses.

As separate research suggests consumers are eager to get back into the housing market, ANZ said the 2020s were likely to endure the slowest rate of growth since the 1980s, which was a decade that included a recession and the start of Australia's last economic contraction.

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ANZ head of Australian economics David Plank said growth through the current decade would average 2.6 per cent, with that tipped to fall to between 2 and 2.5 per cent across the 2020s.

He said that level of growth, lower than both estimated by the Reserve Bank and the federal Treasury, would be driven by tepid non-mining business investment, weak productivity and household consumption held back by high debt and modest wage increases.

Australian households, despite record levels of wealth due to high house prices, were carrying record levels of debt that would crimp their spending plans.

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In its December budget update, Treasury forecast economic growth to lift to 2.75 per cent through 2020-21 and then climb to 3 per cent for the next two years. That level of growth is expected to help drive down unemployment and push up wages.

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"Lower trend growth poses challenges for the fiscal outlook. Critically, however, the slowdown in trend doesn't have to be meekly accepted," he said. "To be specific, the policy focus should be on lifting investment."

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Question 1:

a) According to the macroeconomic indicators mentioned in the article above , what phase of the business cycle is the Australian economy most likely in during 2020? Represent your answer in a diagram.

b) What type of fiscal policy is undertaking in 2020 (at the article above)? How would this affect aggregate demand and the economy? Demonstrate your answer in a diagram.

Answer 1

a) According to the macroeconomic indicators mentioned in the article above, Australia will likely go through a slowed period of growth, or recession. Business environment is set to be timid, productivity weak, and household consumption held back due to high debt and modest wage increases. Here is what this change will look like -

The AD curve will shift leftward from AD1 to AD2. This would lead to a fall in real GDP from Y1 to Y2, and a decrease in price level from P1 to P2.

2. The fiscal response that the government is planning in 2020 is based on lifting investment. When government investment increases and it enables the private sector to increase investment, the aggregate consumption in the economy would go up. This is so because with increased investment, more income will be generated and people will have more disposable income in their hands. Here is what could happen -

If the recession level of demand is AD1, it will shift rightward to AD2. This would lead to an increase in real GDP from Y1 to Y2, and price level will go up from P1 to P2.