Academic journal article The Economic and Labour Relations Review : ELRR

The Economy in the Nineties: Through the Slump to Prosperity?

Academic journal article The Economic and Labour Relations Review : ELRR

The Economy in the Nineties: Through the Slump to Prosperity?

Article excerpt

1. Introduction

This article examines the prospects for the Australian economy in both the short run (the 12 to 18 months to the end of 1991) and the long run (the subsequent five years or so). There is no doubt that at the moment the economy is in a slump, and will remain in the slump for the next three to six months. At the time of writing (April 1990), the latest national income statistics show virtually no change in constant price GDP in the December quarter 1989. A fall for three successive quarters in constant price private business investment in equipment, and for two quarters in constant price private investment on dwellings, indicate that this is much more than a temporary pause in growth. Other indicators, even lagging ones like unemployment which has been rising since December, also point to the fact that the economy is in a slump. The Westpac leading indicator of economic activity has now had a downward trend for 12 months.

The fact that the economy is now in a slump is completely uncontroversial and needs no further documentation. Equally uncontroversial is the fact that this slump was induced by macroeconomic policy. In 1988-89 Australia had a fiscal policy stance that was probably tighter than in any other OECD country (Nevile, 1989). Given the usual lags one would expect that to show up in a downturn in economic activity by the second half of 1989. Monetary policy has been even more severe. Short term interest rates (the ones most directly determined by government policy) rose to 17 per cent in February 1989, traded upwards until October and were still above 17 per cent in February 1990.

This contractive monetary and fiscal policy was the inevitable government response to the surge in imports and the deteriorating current account policy. Similarly, unless the recent tentative improvement in the current account continues the government will reverse the current mild relaxation of both monetary and fiscal policy, damping down any rise in economic activity. The need to contain the growth in imports sets a limit on the economic growth that Australia can afford, and that the government will allow, over the next 18 months.

The next section sets out in detail the factors determining how much growth the Australian economy can afford in the short run, and argues that if this growth is achieved the economy will have a soft landing in which unemployment rises by no more than one percentage point. It also argues that this is the best possible outcome, which is unlikely to be achieved, and that unemployment is more likely to be near eight per cent by December 1991.

The third section looks at the long term prospects, and asks whether, after the economy emerges from the slump the rest of the nineties will be a decade of prosperity. It argues that such an outcome is feasible, but will not be achieved easily. A policy framework, which will increase the likelihood of prosperity is set out.

Finally, the threads are drawn together in a brief conclusion.

2. The Short Term Outlook

This section addresses three questions concerning the 12 to 18 months to the end of 1991:

1. What rate of economic growth can the Australian economy afford, given the external constraints of the balance of payments position?

2 What are the consequences of this rate of growth?

3. What is the likelihood of Australia achieving this rate of growth?

With regard to the first question, "affordable" economic growth is defined as a rate of growth in aggregate production which is consistent with the aim of stabilisation of the level of foreign debt.

Current account deficits (a result of a series of trade deficits over the eighties, recently aggravated by dramatic increases in debt servicing deficits), and the consequent levels of foreign borrowing necessary for their financing, have become the overriding economic policy concern in Australia. …

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