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US and Australia Economic Growth Comparison

Both the US and Australia have been adversely affected by the recent economic crisis, which started in the year 2007. The larger part of 2008 recorded a decline in economic activities in most major economies worldwide. The US and Australia reacted to the onset of the economic recession in fairly similar ways. They both employed ambitious expansionary fiscal policies popularly known as the stimulus packages.

The intention was to minimize the impact of the recessionary forces on the economy while at the same time shortening the span of the recession. The US employed over 700 billion dollars, while Australia employed about 50 billion dollars. Notably, the economic recession first started in the US and was triggered by the housing markets before spreading to other countries. This means that the US-led in reacting to the recession. The implication is that the economy is also likely to be a leader in pulling out of the recession.

The year 2008 was the epitome of the recession. In the US, the full effect of the credit crunch was becoming a reality, and the government still comprehended the enormity of the problem. The fourth quarter saw the economy shrink by about 6.2%, the worst performance for several decades. The credit crunch had already moved into the real economy, and the country was experiencing a weak balance of payments. In addition, the economy was experiencing competing objectives, which made policy formulation a real challenge. As a result, real GDP actually declined. 1

In the economic year 2009, there was an overall economic decline of about 2.4%. However, the last quarter of the year recorded a growth of 5.9% surprising most analysts. The country was already recovering from the recession after the start of the implementation of the economic stimulus package. Business investment was already strengthening and inventories contribution to the GDP growing steadily.

The economic crisis reached Australia much later and had much less effect than in the US. In the last quarter of the year 2008, the economy grew at a much slower rate of about 2%, unlike the previous quarters, where the growth rate was consistently above 4% per quarter. This was mainly due to the fact that the internal systems, including the financial systems in Australia, were much stronger compared to the US and that the effect actually came as an external problem due to a fall in demand for Australian goods abroad as well as lesser inflows of capital. In the last quarter of 2009, the growth rate was much slower at just over 0.6%. The reduction is attributed to the fact that the recession took much longer to hit the economy. However, this was the worst performance in the entire recession period2.

Due to the shaken macroeconomic stability, the private sector’s role in ensuring the US recovered from the recession could not be relied upon. Therefore, government expenditure was significantly boosted. In Australia, the government also had to engage a stimulus package to boost expenditure, but the private sector played a much bigger role in the recovery as compared to the US.

The Australian economy can be predicted using a variety of indicators. The most commonly applied economic indicators are the leading index, retail turnover, dwelling units approved, and the consumer sentiment index. The leading index is perhaps the most direct indicator of economic performance. It projects how rapid economic activities are expected to be within the next nine months. The Consumer Sentiment index, on the other hand, incorporates the expectations of the consumers about interest rates. The number of dwelling units registered is important for the growth in demand and hence the production levels, which are likely to boost the level of real output in the economy.

The overall economic outlook in Australia is highly positive, considering the indices explained above. In January 2010, the consumer sentiment index declined by about 2.6% in the month of February. This saw a decline from 120.1 to 117. The decline means that the consumers expected interest rates to decline in the near future. It is known from economic theory that expectations are an important part of interest rate determination. This means that borrowing is expected to go up, boosting the investment activities, which on the other hand, increase the production capacity of the economy.

The leading index was 6.2% in December 20093. This was above the long-term index, which averages 2.7%. This implies that economic activity in the first nine months of 2010 will be above the long-term average, thus enhancing the optimistic view of the economic performance in the year. In addition, the recorded number of dwelling units approved has been rising throughout 2008. January 2010 was no different as the numbers rose by 1.9% this is an indication that the year 2010 will see improved economic activities; hence the economy will most certainly experience significant growth4.

The US also has several lead economic indicators. The economic outlook index, however, is the most trusted index. It predicts future growth in economic activities that determine levels of real GDP. The index is composed of several other indicators such as the number of building permits issued, values of export orders as well as information from the yield curve. The indices indicate that the year 2010 will record impressive growth in real GDP in the US.

The number of building permits issued is consistently on the rise with indications that it could grow by around 3% for all the months in the year 2010. Export orders, on the other hand, are also on a rapid rise, and the yield curve portrays improvement in efficiency for the economy. This being the case, it is clear that the year 2010 will experience higher growth than 2009, meaning that the country is well recovering from the recession5.

The above analysis shows that both the US and Australia are expected to record impressive growth in real GDP for the year 2010. The US is pulling out of negative growth while Australia is enhancing its growth rate for the year. The accuracy of the economic indicators has been proven over time, and more importantly, there have been great improvements in the indices, making them more relevant and accurate based on the actual performance of the respective economies.

Footnotes

  1. Rates. 2010. Web.
  2. Tracking the pulse of the economy. US Today. 2010. Web.
  3. Building Approvals. Australian Bureau of statistics. 2010. Web.
  4. Leading Index. Westpac Banking Corporation. 2010. Web.
  5. of New Residential Construction. Census. 2010. Web.