COMPAK | ECONOMICS UNITS 3 AND 4

ECONOMICS UNITS 3 AND 4

Economics Exam Preparation:

A summary of Australia’s economy
for 2023-2024
TIMMEE GRINHAM | FINTONA GIRLS’ SCHOOL AND ECONOMICS EDUCATION CONSULTANT

Numerous key knowledge and key skill criteria of Units 3 and 4 require students to be
familiar with recent economic performance and recent policy settings. And so, heading
into the Unit 3 and 4 Economics end-of-year examination (which takes place at the end
of October this year), students should be familiar with how the Australian economy has
performed over the last two years. This student resource is a summary of Australia’s
recent economic performance and policy settings.

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INTRODUCTION

Throughout 2023 and 2024, Australia’s economic performance has remained mixed. The economy
has continued to emerge from the impacts of the COVID-19 pandemic and government and public
health responses to the crisis. As students will recall, the COVID-19 pandemic triggered government
responses to combat the spread of the disease, including lockdowns, forced closures, travel bans and
social distancing. The result was a severe contraction in economic activity, in Australia and globally,
with rapidly rising unemployment I and deflation (falling average prices, shown by negative growth in
the CPI.)

Following the end of the pandemic, there were ongoing supply-side disruptions that impacted the
global economy. In addition, there has been continued geo-political instability, including the ongoing
war following Russia’s invasion of Ukraine in 2022, and the escalating conflict in the middle east since
late 2023.

THE GOALS OVER 2023 AND 2024

What appeared to be the beginning of a recovery during 2022 soon transformed into a more mixed
picture. What follows is a summary of Australia’s performance in terms of the three key domestic
macroeconomic goals.

The ‘price stability’ goal

High inflation remains a challenge for Australia (and globally). As noted by the Reserve Bank of
Australia in its latest Statement on Monetary Policy (SOMP), which was published in August this year,
‘Inflation is proving persistent and the quarterly inflation rate has fallen very little over the past year.’

Students are reminded that the goal of price stability / low and stable inflation is to contain the increase
in consumer price inflation (as measured by the CPI) to 2 to 3% on average over time.

The latest quarterly CPI data available is for the June 2024 quarter. It indicates the following:

 The CPI rose by 1% over the June 2024 quarter

 Over the year to the end of the June 2024 quarter, the CPI rose 3.8%

The annual CPI figure for the June quarter remains well above the top of the target band for the
low and stable inflation target.

It is worth noting that a 1% quarterly inflation figure translates to a 4% annualised inflation figure
(calculated by multiplying the quarterly figure by four), indicating that there is still quite a bit of
inflationary pressure in the economy. The annualised figure is useful, as it can provide an indication of
the direction in which the economy is moving, since it shows what an annual figure would be if the last
twelve months had performed in the same way as in the last three months. If the annualised figure is
higher than the annual figure, this indicates that inflation is rising in the most recent period, compared
to the full preceding year.

In recent years, the Australian Bureau of Statistics (ABS) has launched a ‘monthly CPI Indicator’
which provides a timelier indicator of inflation, by providing inflation data for a smaller number of prices
than the full CPI quarterly data. The most recent release for this indicator was for the 12 months to
August this year. During that 12-month period, the CPI indicator rose 2.7%.

The chart below shows the CPI quarterly and annual data for the last ten years. As is clear, inflation
has trended down over the last two years, but remains high. It is worth noting the recent ‘uptick’ in the
annual inflation result. After a period of disinflation (where prices continued to rise, but at a slowing
rate), it has again started to pick up pace.

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Chart 1: CPI Australia Quarterly and Annual Movements

Source: Australian Bureau of Statistics, Consumer Price Index Australia, June 2024,
https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia/latest-
release

Some of the factors contributing to ongoing high inflation include:

 The impact of global instability on supply chains and availability of key energy and food
resources, such as oil, gas and certain crops.
 The continued interruptions to global supply chains as the global economy continues to
emerge from the COVID-19 period.
 The increasing impact of climate change in terms of the damage from extreme weather
events. (At the time of writing, the enormous and ferocious Hurricane Milton is bearing down
on the Caribbean and the south-east coast of the United States, and is expected to inflict
major damage.)
 Excessive demand relative to supply. As noted by the RBA in its August SOMP, ‘inflation is
still too high because demand is still too strong. … There is still more demand for goods and
services than the economy can sustainably supply.’
 The labour market in Australia remains ‘tight’, which means that unemployment remains low
enough to be contributing to wage growth and rising prices. In addition, skills shortages
persist, which also contributes to wages growth and inflation.

As shown in the chart below, taken from the August SOMP, the RBA is predicting that inflation will only
be reliably within the target band (2-3% CPI inflation) at some stage in 2026.

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Chart 2: Inflation forecast, Australia

Source: Reserve Bank of Australia, Statement on Monetary Policy August 2024,

https://www.rba.gov.au/publications/smp/2024/aug/

The strong and sustainable economic growth goal

Australia’s economic growth has been anaemic at best over the last year.

The latest data, released for the June 2024 quarter, showed the size of the economy (as measured by
GDP – the value of all Australian output) had grown by 1% over the year to the end of June this year.
The economy grew by 0.2% over the quarter to the end of June. As is clear from the table below,
similar quarterly figures have been recorded for each quarter since September 2023.

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Table 1: Chain Volume GDP (% change), seasonally adjusted, Australia

June September December March June
2023 2023 2023 2024 2024
quarter quarter quarter quarter quarter
Chain volume 0.5 0.3 0.2 0.2 0.2
GDP (%
change)

As is clear from the chart below, extracted from the ABS release for the June 2024 GDP figures, the
value of Australia’s output (GDP in dollar terms, as shown by the line, measured against the right-hand
side axis) continues to grow, but at an ever-slowing rate. The blue bars indicate the quarterly GDP
growth in percentage terms, and the size of these has trended downwards since late 2021.

It is worth noting that the annualised GDP figure paints a particularly grim picture for economic
growth. A quarterly GDP growth of 0.2% in June 2024 translates to an annualised GDP figure of 0.8%
- even lower than the 1% annual figure recorded for the year from June 2023 to June 2024.

Chart 3: Gross Domestic Product, Australia, seasonally adjusted

Source: Australian Bureau of Statistics, Australian National Accounts, June 2024,

https://www.abs.gov.au/statistics/economy/national-accounts/australian-national-accounts-national-income-
expenditure-and-product/latest-release

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The goal of strong and sustainable economic growth is to achieve the highest growth rate possible,
consistent with strong employment growth, but without running into unacceptable inflationary, external
or environmental pressures. It is suggested that is likely to be a rate of economic growth (measured by
growth in real GDP) within the range of 3-3.5% per annum.

Consequently, recent real GDP data for Australia indicates it is clearly below the suggested target.
Furthermore, the rate of growth continues to decline, and has occurred alongside persistently high
inflation.

Factors contributing to weak economic growth in recent years include:

 Weaker growth in our trading partners. As noted by the RBA, the Chinese economy has
‘softened’, and this has also been reflected in weaker commodity prices.
 Weak consumer confidence domestically and weak consumption (C) growth has reduced
Aggregate Demand (AD).
 A contractionary monetary policy stance, with the target cash rate at 4.35% since November
2023, which has reduced demand across the economy, including via a reduction in household
discretionary income.
 An appreciating Australian dollar since early 2024, which has dampened export demand and
encouraged more imports, reducing (AD).
 Geopolitical instability has also contributed to reduced external demand and worsening global
conditions.
 High and persistent inflation has made household cautious, and reduced household spending.

Full employment goal

In previous budget documents, the goal of full employment was suggested to be the maximum
sustainable rate of reduction in unemployment by lifting the pace at which economic growth can be
maintained without running into inflationary and external pressures. This indicates that it is important
that the economy operates in a way that allows for strong economic growth and low unemployment
without pushing up inflationary pressures.

In the February 2024 Statement on Monetary Policy, the RBA stated that it attempts to achieve full
employment as the ‘maximum level of employment consistent with low and stable inflation’.

Students will have learned about the ‘NAIRU’- the non-accelerating inflation rate of unemployment.
This is suggested to be the lowest rate of unemployment possible without causing inflation to
accelerate, and therefore is sometimes interpreted as ‘full employment’. Some suggest this is the
‘natural’ unemployment rate, since some unemployment is inevitable and necessary for a functioning
economy, and any attempt to push unemployment below this level will inevitably result in excessive
inflation. The RBA consistently notes, however, that no particular ‘level’ of unemployment /
employment or single statistic can be determined to be the full employment ‘goal’. As a result, what is
assumed to be the NAIRU has changed over time, but in more recent years it was suggested that an
unemployment rate somewhere around 4.25% may be the lowest rate possible without accelerating
inflation.

Given there is no agreed level of unemployment that is considered the NAIRU or full employment goal,
the important point is that, when the labour market is ‘tight’ this will contribute inflationary pressure,
and an unemployment rate below this level may not be compatible with achieving the low inflation
goal.

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The Reserve Bank of Australia has consistently observed in the last two years that Australia’s
labour market remains ‘tight’. This means that, despite high inflation and weak economic growth,
Australia’s unemployment rate remains relatively low. In fact, many observers have made much of the
fact that, despite deteriorating business conditions, the labour market has yet to weaken.

The high rates of unemployment that occurred briefly at the height of the COVID-19 pandemic
lockdown (7.4% seasonally adjusted in mid-2020) did not persist for long, and the unemployment rate
fell rapidly. It reached 3.5% in January 2023 and has slowly but gradually trended up since then. It
remained at 4.2% in August this year, with no increase from July. The underemployment rate
(another indicator of spare capacity in the labour market) has fluctuated between 6.4% and 6.7% over
the last twelve months, with no obvious upward trend.

In addition to the unemployment and underemployment rates, it is worth noting some other indicators
of labour market tightness that the RBA considers when judging the achievement of full employment.
The participation rate (the proportion of the working age population that is in the labour market) is still
at a record high, reaching 67.1% in July this year. In addition, job vacancies have remained higher
than usual – with some employers continuing to find it hard to fill vacancies. Average hours worked
have also stabilised.

All of these indicators point towards a labour market that has limited spare capacity, and these tight
labour market conditions have been identified as contributing to inflationary pressure across the
Australian economy, as well as operating as a constraint on output. Consequently, the RBA has aimed
to dampen economic activity, to try and bring about a better match between the level of demand in the
economy and the capacity of the economy (including the labour market) to meet this demand.

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EXTERNAL SECTOR PERFORMANCE

While Australia’s economic performance in terms of its current account balance and net foreign debt
are not formally macroeconomic goals in the VCE Economics syllabus, it is worth being aware of key
factors relating to our economy’s performance on these measures in the last two years.

As noted previously, the value of Australia’s dollar exchange rate (AUD) has continued to trend
upwards this year, both in terms of the AUD/USD exchange rate and the Trade Weighted Index. This
can be seen in the chart below, taken from the RBA website. Students should be aware that an
appreciating AUD has numerous implications for the economy, most notably by reducing Australia’s
international competitiveness, because it raises the relative price of our exports, and reduces the
relative price of imports, contributing to a reduction in the Net Exports (X-M) component of Aggregate
Demand.

Chart 4: Australian dollar exchange rate: AUD/USD and TWI

Source: Reserve Bank of Australia, Exchange Rates, https://www.rba.gov.au/exchange-rates-overview.html

As the two charts below show, both Australia’s terms of trade and commodity prices more broadly
have trended downwards over the last two years, negatively impacting the value of net exports.

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Chart 5: Terms of Trade, Australia Chart 6: RBA Index of Commodity prices

Source: RBA Chart Pack, Commodity Prices, September 2024, https://www.rba.gov.au/chart-pack/commodity-

prices.html

After a period of about five years where Australia recorded mostly successive Current Account
surpluses (with only two deficits), following many decades of persistent CA deficits, the Current
Account Balance recorded successive deficits in March and June 2024. While Australia continued to
record a trade surplus (with the value of exports exceeding the value of imports), the current account
deficit reflects the rising level of debits for income payments to overseas relative to credits received for
income payments received from overseas (a rising net primary income deficit). The declining size of
the trade surplus (as a result of rising import spending and declining commodity prices) has meant the
increasing net primary income deficit has once again tipped the Current Account balance back into
deficit.

Chart 7: Australia’s Current Account Balance, percentage of GDP

Source: RBA Chart Pack, Balance of payments

and external position, September 2024,
https://www.rba.gov.au/chart-pack/balance-
payments.html

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So where is Australia in the business cycle?

Given the complexity of the data relating to Australia’s economic performance over the last two years,
this question is challenging to answer. As noted, Australia still faces high and persistent inflation,
unemployment is rising but very slowly and the labour market remains tight, and at the same time,
economic growth has been anaemic.

Given the poor economic growth performance, Australia is likely to be in a downturn (the
contractionary phase of the business cycle). The rate of growth in real GDP has continued to fall, with
the economy growing - but increasingly slowly. As already noted above, the latest data for the June
quarter of 2024 was only 0.2% growth in real GDP (a very low annualised rate of 0.8%). The figure
also compares unfavourably with the December 2023 quarter figure of 0.3% growth, and the preceding
quarter growth of 0.5% in the September 2023 quarter.

It is also common for a period of very low growth to follow recovery (which Australia experienced
following the COVID-19 recession). According to the Reserve Bank of Australia, the future trajectory of
Australia’s economy is quite uncertain.

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AGGREGATE DEMAND MANAGEMENT POLICY

Monetary Policy
The RBA noted in its latest (August 2024) Statement on Monetary Policy that:

Inflation is still too high and is coming down slower than we expected. There is a risk that inflation
stays above the target range for too long. Bringing inflation down in a reasonable timeframe is the
Board’s highest priority.

In line with this priority of bringing down inflation, the RBA has maintained a contractionary monetary
policy stance through 2024. It has had to balance the risk of pushing unemployment up significantly
against the risk of tipping the economy into a downturn when attempting to combat inflation through
raising the cash rate.

Table 2 below summarises recent changes to the cash rate as part of Monetary Policy
settings.

Table 2: Target Cash Rate

Source: Reserve Bank of Australia, Cash rate target, https://www.rba.gov.au/cash-rate-target-overview.html

As is clear from the table, since May 2022, the RBA has raised the cash rate 13 times, and it is now at
4.35%. This is well above what is considered a neutral monetary policy cash rate of approximately
3.5%. The ‘neutral’ monetary policy rate is the target cash rate that would be expected if the
economy’s growth rate was running at a strong but sustainable rate (around 3.25%) with inflation
within the target band. At well above the neutral rate, the current stance of monetary policy is
contractionary (also known as restrictive.)

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The RBA Board decisions to increase the cash rate have had a flow on effect to the structure of
interest rates across the economy, as retail banks have passed on most or all of the increases. As a
result, monetary policy is now considered to be exerting a ‘contractionary’ effect on economic activity.

As of the time of publication (mid-October 2024) the RBA Board has left the cash rate target
unchanged since November 2023, despite numerous public calls for a reduction in interest rates.

The Board has restated that ‘sustainably returning inflation to target within a reasonable timeframe
remains the Board’s highest priority.’ And that ‘this is consistent with the RBA’s mandate for price
stability and full employment.’

The Board’s most recent decisions focused on the fact that inflation remains stubbornly high, even
though it has fallen substantially since 2022, as higher interest rates work to reduce Aggregate
Demand and inflationary pressure. As noted earlier in this article, the RBA does not see inflation
returning ‘sustainably’ to target until sometime in 2026. They stated that the Bank sees underlying
inflation as more indicative of inflation momentum, and the consistently high underlying inflation, and
the fact it has fallen very little over the past year, justifies the continued contractionary stance of
monetary policy.

Budgetary Policy
The government intends to spend more than it will receive in revenue over the 2024-25 financial
year. This means that the budget outcome (the relationship between the money collected by the
government in ‘receipts’ and the money to be spent by the government in ‘payments’ over the year(s)
under consideration) will be a deficit.

The estimated (underlying) outcome of the 2024-25 Budget is an underlying cash deficit of $28.3B,
or -1.0% of GDP. This figure means that government payments are expected to exceed government
receipts by $28.3 billion over the 2024-25 year. The figures for the current budget, along with recent
and future budgets, are in Table 3 below, which has been reproduced from Budget Paper 1 from the
2024-25 Budget. The current budget’s figures are in the blue-shaded column.

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Table 3: Australian Government budget aggregates

Source: Budget 2024-25, Budget Paper 1, www.budget.gov.au

If you look closely at Table 3 above, you will see that the actual (final) budget outcome for 2022-23
was a surplus of $22.1 billion – which was the first budget surplus in fifteen years. This was followed
by an estimated surplus of $9.3 billion for the 2023-24 financial year.

Since the release of the 2024-25 Budget in May this year, the government has released the final
(actual) 2023-24 Budget figures. The budget outcome for 2023-24 was in fact an even larger
than predicted surplus – of $15.8 billion (0.6% of GDP) as compared to the $9.3 billion surplus
predicted in May this year. (It is important that students don’t confuse the current budget outcome –
a predicted deficit of $28.3 billion for the 2024-25 Budget – with last year’s final budget outcome – an
actual surplus of $15.8 billion for the 2023-24 Budget.)

The underlying cash balance is the most commonly reported figure when stating the budget
outcome. It is the figure most often used by the media and discussed by economists when referring to
‘the budget outcome’, and the figure most likely to indicate the economic impact of the budget
over time.

As noted above, for the current budget (2024-25), the budget outcome is estimated to be a deficit of
$28.3 billion. This is a much smaller deficit compared to the 2020-21 deficit of $132.4 billion (and even
slightly smaller than the 2021-22 deficit of $32 billion). But, as noted, it will be a deficit outcome,
following the first two budget surplus outcomes in fifteen years, delivered in 2022-23 and 2023-24.

The figure of a $28.3 billion deficit is based on assumptions about the economic conditions expected
to prevail throughout the coming financial year, along with deliberate policy changes the government
announces it will make over the period. In brief – there are both ‘structural’ (discretionary)
influences on the budget outcome (including actions like changes to tax rates and deliberate changes
to payment rates for welfare or funding of certain programs) and ‘cyclical’ (automatic) influences on
the budget outcome (that are a result of economic conditions prevailing in the economy over the
period and are not a consequence of anything deliberate done by the government.)

Both the structural and cyclical components of the budget will contribute to the budget outcome. The
split between these two impacts on the budget outcome are shown clearly in Chart 8 below, which has
been taken from the 2024-25 Budget papers. It highlights the contribution of the structural and cyclical
factors (along with temporary budgetary measures – at their most significant at the height of the
pandemic) to the underlying cash balance (i.e. the Budget outcome) over recent years. It is clear that
in 2024-25, by far the largest contribution to the budget deficit is structural measures (the red bar). In

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simple terms, the major contributor to the budget deficit in the most recent budget (2024-25) was
deliberate government decisions, rather than unfavourable economic conditions.

Chart 8: Structural versus Cyclical components of the budget outcome

Source: 2024-25 Budget, Budget Paper No.1, Statement 3, p. 119

The end of year examination sometimes asks students to consider the different impacts on the budget
outcome, so it is important to be aware of some key structural components of the 2024-25 Budget,
along with the major cyclical factors impacting the budget outcome in recent years.

For example, the Stage 3 tax cuts, that came into force from 1st July this year, were a deliberate,
structural component of the budget that resulted in reduced tax collections, and therefore contributed
to a budget deficit outcome. On the other hand, rising unemployment rates (albeit a slow rise), have
meant that more people have become eligible to receive JobSeeker payments due to lack of
employment. This has meant the government has had to pay out larger amounts of welfare payments
(without making any deliberate policy changes). This is an example of a cyclical influence on the
budget outcome, which would have increased government payments and contributed to a deficit, or a
larger deficit, budget outcome.

When the Treasurer delivered the 2024-25 Budget in May this year, he framed it as ‘striking a balance’
between providing relief to those struggling with the cost of living and not overstimulating the
economy, but rather investing in a ‘Future made in Australia,’ to build a strong and more resilient
economy.

Given the 2024-25 Budget is estimated to deliver a deficit of $28.3 billion, after an expected surplus of
$9.3 billion in 2023-24 (which, as already noted, has since been announced to be an actual surplus of
$15.8 billion), the deficit implies a more expansionary budgetary policy stance by itself, as the
government contribution to AD (the ‘net fiscal stimulus’) increases. It will have a mildly expansionary
impact on the economy.

Students are encouraged to access articles about the Budget published earlier this year (including in
Compak) that provide more detail about key elements of the budget along with important initiatives.

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PREPARING FOR THE EXAMINATION

As students prepare for the final examination at the end of this month, they can use the information in this
article to enhance their responses to practice examination questions. They can also use it to consider the
kinds of questions that could be asked about the economy, the goals, and policy setting over the last two
years.

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Subject editor: Timmee Grinham

Chief editor: Geoff Peel
Page layout: Vivian Le’Toille
Text design: Studio 673
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