The global Covid-19 pandemic has also left its mark on Australia’s economy. It posted its first contraction in 2020 – which is considered unprecedented as Australia’s economy was able to withstand the 2007-2008 global financial crisis.
Australia Economy Overview
Australia’s economy has been growing steadily in the last 26 years. However, the 13th largest economy in the world in terms of nominal GDP posted its first contraction in 2020 due to the impact of the global Covid-19 pandemic. Australia’s GDP growth has fallen to -4.2% in 2020, from 2.2% in 2019.
Nevertheless, the IMF forecasts GDP growths of 3.5% in 2021 and 2.9% in 2022 for Australia in its January 2021 update of the World Economic Outlook. Meanwhile, GDP per capita is expected to increase from $52,000 in 2020 to $62,000 in 2021 and $65,000 in 2022.
The country ranks as the 25th largest exporter and 20th largest importer of goods worldwide. Australia’s economy is driven by business and government expenditures and its strong financial sector and large-scale agricultural product exports.
Australia’s population is around 25.7 million, and 89% of its people can be found in many urban areas. Over 7.5 million migrants are living in the country, and more than a third of its annual population growth is due to net overseas migration.
Prior to the pandemic, the unemployment rate was 5.2%, but it went up to 6.9% in 2020. The IMF projects Australia’s unemployment rate will rise to 7.7% in 2021 before falling to 6.7% in 2022. An aging population and climate change impacts are some of the other challenges to the Australian economy.
Currency and Central Bank
The Australian dollar or AUD is the official currency of Australia and its external territories, namely Christmas Island, Cocos (Keeling) Islands, and Norfolk Island. People use the dollar sign ($) within the country but add an A or AU before distinguishing it from other dollar-denominated currencies.
The AUD is the fifth most traded currency globally, behind the US dollar, euro, Japanese yen, and UK pound sterling.
The Reserve Bank of Australia (RBA) has been the country’s central bank since 1960. Prior to the Reserve Bank Act 1959, the Commonwealth Bank of Australia had central banking functions.
The central bank has decided to maintain the base interest rate at the all-time low of 0.10%. The lender left the target for three-year government bond yields at about the same rate. The inflation rate stood at 0.9% in 2020. The IMF expects it to rise to 1.7% in 2021 and 1.6% in 2022.
Industry and Trade
Australia’s economy is dominated by its service sector, which contributed 66.1% to the GDP and employed 77.7% workforce. Business and financial services from Australia exhibited the most significant growth in the industry. This makes Australia the sixth largest pool of managed fund assets globally.
Healthcare, social assistance, and travel services count among other growth leaders sectors of Australia’s economy.
Australia is traditionally an importer of finished goods. Despite being relatively smaller in size, its industrial sector has been characterized by high productivity levels. Around 75% of the industries found in the country have above global average productivity ratings.
The sector comprises 25.2% of the GDP and employs 19.8% of the labor force as of 2020. Food, machinery and equipment, metal processing and metal goods, chemical and petrochemical, and building materials production are among the top industries in Australia.
Australia’s agriculture sector only contributes to 2.1% of the GDP and provides jobs to 2.5% of the workforce.
However, Australia’s agricultural and mining sectors are the most critical for exports. Iron exports, comprising 24% of the country’s total annual exports. In addition to this, Australia is also one of the leading exporters of wool, meat, wheat and cotton in the world.
China, Japan, South Korea, UK, and the US are the main trading partners of Australia, while its main suppliers are China, US, Japan, Thailand, and Germany. Meanwhile, China is Australia’s largest trading partner in terms of exports and imports.
Survey and Rankings
Australia went up by one spot in the Heritage Foundation’s Index of Economic Freedom from the 4th freest in 2020 to 3rd in 2021, but its overall score declined by 0.2 points from 82.6 to 82.4. The country has been in the “Free” category for the past 15 years.
In the World Bank’s 2020 Ease of Doing Business 2020, the country rose by four places from 18th to 14th. Australia has increased its overall score from 80.7 to 81.2, ranking 9th among countries in the OECD high-income region.
Stock Exchanges and Capital Markets
Australia’s primary securities exchange is the Australian Securities Exchange or ASX, which is considered among the top 10 listed exchange groups in the world in terms of market capitalisation. The ASX was formed following the merger of the Australian Stock Exchange and the Sydney Futures Exchange in July 2006.
It offers diverse asset classes and services, including equities, debt securities, derivatives, and commodities.
Maintained by Standard & Poor’s, the market-capitalization weighted and float-adjusted S&P/ASX 200 index is considered the benchmark of the ASX. The largest companies that make up the index include the healthcare firm CSL Ltd., Commonwealth Bank of Australia, and BHP Group Ltd, a leading global resources company.
The Reserve Bank of Australia (RBA) extended its 0.10% overnight cash rate target to the three-year Australian Government Bond yield. This was aimed at lowering the funding costs across Australia’s economy. This was previously set at 0.25% back in March 2020.
Moreover, Australia’s central bank has announced a bond purchase program to buy an additional $100 billion worth of bonds issued by the Australian government, states, and territories. It will focus mainly on 5-year and 10-year bonds. The previous $100 billion purchase program will end this April.
Real Estate Market
A key issue in the Australian real property market is affordability. House prices, which were four times the average household income in 1990, jumped to six times by 2011. This was due to high levels of immigration and the tendency of new immigrants to stay in capital cities.
Moreover, the government’s decision to loosen rules for foreign investment in real property in 2008 contributed to the affordability problem. In Australia, foreigners are allowed to buy residential properties, subject to the approval of the Foreign Investment Review Board (FIRB).