Australia: ECONOMY

ECONOMY

Overview: Australia’s market economy charted a fourteenth consecutive year of positive growth in 2004, and growth in early 2005, although somewhat cooler, remained robust. Recent growth has been buoyed by rising demand for commodities that Australia has in abundance and that China requires for its surging economy. China and Australia, natural economic partners (China needs raw materials, and Australia needs manufactured goods), are pursuing a free-trade agreement. In January 2005, a free-trade agreement between Australia and the United States went into force. The services sector accounts for 68.4 percent of the gross domestic product (GDP); mining and agricultural services (only 7 percent of GDP combined) account for 57 percent of Australia’s goods and services exports. Manufacturing, in decline for decades, accounts for just 11 percent of GDP. Since the 1980s, Australia has replaced its import substitution economy with an export-oriented one, in the process instituting key reforms such as reducing high tariffs, floating the Australian dollar, and improving the integration of state economies into a federal system. These reforms, along with consistent positive economic indicators (including high and rising per capita income, rising productivity, low unemployment, low inflation, and consistent GDP growth), are the foundation of Australia’s economic prosperity.

Gross Domestic Product (GDP): Australia’s GDP grew by 3.5 percent in 2004 to reach US$607.6 billion, with services accounting for 68.4 percent of GDP, industry 28.2 percent, and agriculture just 3.4 percent. GDP per capita was approximately US$30,000. GDP is expected to increase by 3.2 percent in 2005.

Government Budget: In 2004 Australia’s general government budget was US$221.7 billion. Revenues slightly exceeded expenditures. The budget surplus was expected to decline somewhat in 2005–6. Australia has a remarkable record of fiscal discipline, as demonstrated by the statistic that government debt corresponds to only 2.9 percent of gross domestic product (GDP), compared with an average of about 45 percent of GDP in Organisation for Economic Cooperation and Development (OECD) nations.

Inflation: Inflation fell to 2.3 percent in 2004, down from a four-year high of 4.5 percent in 2000.

Agriculture, Forestry, and Fishing: In 2004 agriculture accounted for 3.4 percent of gross domestic product (GDP) and employed about 4 percent of the labor force. Continued dry conditions in 2004–5 are expected to reduce output in the agricultural sector. Production of wheat, one of Australia’s major agricultural products, is expected to decline by 19 percent from the record 24.9 million ton harvest in 2003–4. Besides wheat, other significant agricultural products include barley, sugarcane, fruit, cattle, sheep, and poultry.

In 2002 (the most recent year for which figures are available), Australia’s sawnwood production totaled 4.1 million cubic meters, and roundwood removals totaled 31.4 million cubic meters (excluding bark). In 2001–2 (the most recent year for which figures are available), Australia’s total catch was 233,000 tons of fish, up from 229,800 in 2000–2001.

Mining and Minerals: In 2002 the major products of Australia’s mining sector included magnesite (449,000 tons), hard coal (348.9 million tons), gold (278 tons), iron ore (198 million tons gross weight), talc (166 million tons), lignite (73 million tons), and bauxite (54 million tons), as well as 240 million barrels of crude petroleum and 33 million cubic meters of natural gas. In that same year, Australian mines produced 32 million carats of gem and industrial diamonds. The majority of Australia’s mineral production is exported, with the exception of crude oil, which is refined and used domestically.

Industry and Manufacturing: The industrial sector’s share of Australia’s gross domestic product (GDP) has declined steadily since the 1970s. In 2004 the industrial sector accounted for 28.2 percent of GDP and employed about 26 percent of the labor force. In 2002 (the most recent year for which complete figures are available), major products included concrete (19.4 million cubic meters), tobacco (18.4 million tons), automotive gasoline (18 million liters), automotive diesel fuel (13 million liters), raw steel (8.3 million tons), cement (7.2 million tons), pig iron (6 million tons), and beer (1.7 million liters).

Energy: Australia has significant reserves of coal, natural gas, and petroleum and is one of the few Organisation for Economic Cooperation and Development (OECD) countries that is a net exporter of energy. As of January 2002, Australia had the capacity to generate 45.3 million kilowatts of electricity. In that same year, Australia generated 210.3 billion kilowatt-hours while consuming 195.6 billion kilowatt-hours.

Coal fuels most domestic power consumption, and Australia is the world’s largest exporter of coal, with 28 percent of global coal exports. Australia’s coal reserves are estimated at 90.5 billion short tons, and approximately 60 percent of annual production is exported, with 60 percent of coal exports destined for Japan. In the decade leading up to 2002, coal production grew by 4 percent annually, reaching 378 million short tons that year. Proposed tariffs on coal imports into Japan as well as competition from China’s coal sector could weaken the industry in the future.

Oil reserves are estimated at 3.5 billion barrels, an increase of 20 percent over 2001 levels. Oil production peaked in 2000 at 805,000 barrels per day but has fallen since then and is expected to level out at 560,000 barrels per day in 2006. Australia has eight refineries with a total crude oil distillation capacity of 754,975 barrels per day, but the refinery sector has suffered from declining gross margins. ExxonMobil closed its Adelaide refinery in 2003, and further closures are expected.

Natural gas reserves are estimated at 90 trillion cubic feet, making Australia the largest reserve in the Asia-Pacific region. Disputes over rights to large reserves in the Timor Sea between Australia and East Timor continue despite the signing of the Timor Gap agreement in March 2003. Australia began exporting liquefied natural gas (LNG) in 1989 and by 2002 was the sixth largest global exporter of LNG. Japan is the primary market for Australian LNG, although China, South Korea, and Spain also purchase smaller shipments. A proposed sale of 12.5 percent of the Gorgon field’s proven reserves (estimated at 12.9 trillion cubic feet) to China’s CNOOC would generate US$21 billion in sales over a 25-year period, making it the largest export commitment in Australia’s history.

Services: In 2004 services constituted an estimated 68.4 percent of Australia’s gross domestic product (GDP) and employed about 70 percent of the labor force. Services include banking and finance, education, entertainment, information technology, legal services, and tourism. In 2002 Australia exported US$24.0 billion worth of services, including US$8.1 billion worth of tourism. The services sector benefits from a multilingual workforce.

Banking and Finance: As of the end of 2003, Australia’s financial services industry accounted for 8 percent of gross domestic product (GDP) and employed 345,000 people. At the same time, banks and other financial institutions had assets of about US$1.8 trillion, more than 70 percent higher than five years earlier. Banks accounted for half of these assets; other financial institutions included registered financial corporations and managed funds. With almost 54 percent of adult Australians owning shares, Australia’s equity markets have grown even more dramatically. From the end of 1993 to the end of 2003, the market capitalization of the Australian Stock Exchange (ASX) increased from US$132 billion to US$580 billion. The ASX now ranks as the second largest stock exchange in the Asia-Pacific region and the eighth largest in the world.

Tourism: In 2002 Australia’s international tourism receipts reached US$8.1 billion, up from US$7.6 billion in 2001. Tourism directly employs 500,000 workers in Australia and is one of the country’s fastest growing industries. In 2004 nearly 250,000 tourists from China visited Australia, a one-year increase of nearly 50 percent, suggesting that growth in the tourism sector is likely to continue as new sources of visitors emerge.

Labor: In June 2005, Australia’s unemployment rate was 5.1 percent, close to a 30-year low. Employment exceeded 10 million. The labor participation rate was 64.7 percent. About 70 percent of the labor force is employed in the services sector, 26 percent in industry, and 4 percent in agriculture.

Foreign Economic Relations: Australia is balancing traditionally strong economic ties to the United States with a budding economic partnership with China, but the European Union is Australia’s largest overall trading partner. The United States is the single largest investor in the Australian economy, and Australia buys more products from the United States than from any other nation. However, U.S. farm subsidies and trade barriers have been the source of friction. On January 1, 2005, Australia and the United States enacted a free-trade agreement, and now Australia is pursuing similar agreements with China, Malaysia, and the United Arab Emirates. China and Australia are natural economic partners because China needs Australia’s raw materials, such as coal, iron ore, gas, and oil, for its manufacturing sector. Japan—the top single importer of Australian products—purchased twice as much from Australia as China did in 2004.

Although Australia generally prefers bilateral trade agreements, it sometimes is willing to advance its economic goals in a multilateral context, such as via the Association of Southeast Asian Nations (ASEAN) Free Trade Area (AFTA) Closer Economic Partnership and the Asia-Pacific Economic Cooperation (APEC) forum. The Australian government believes that more trade liberalization can be achieved through bilateral arrangements than under the auspices of the World Trade Organization (WTO), of which Australia is a founding member (since January 1, 1995).

Imports: In 2004 Australia imported US$110.0 billion of merchandise. The largest imports were passenger motor vehicles (7.9 percent), crude petroleum (5.9 percent), computers (3.9 percent), medicine (3.8 percent), and telecommunications equipment (3.5 percent). The principal import partners were the United States (14.5 percent), China (12.7 percent), Japan (11.8 percent), Germany (5.8 percent), and Singapore (4.4 percent).

Exports: In 2004 Australia exported US$91.7 billion of merchandise. The largest exports were coal (11.4 percent), iron ore (5.2 percent), non-monetary gold (4.8 percent), crude petroleum (4.2 percent), and bovine meat (3.9 percent). The principal export partners were Japan (18.9 percent), China (9.3 percent), the United States (8.1 percent), South Korea (7.8 percent), and New Zealand (7.4 percent).

Trade Balance: In 2004 Australia posted a merchandise trade deficit of US$18.3 billion.

Balance of Payments: In 2004 Australia’s current account balance was negative US$39.6 billion, representing 6.4 percent of gross domestic product. The current account deficit was offset by a similar surplus in the capital and financial account. In particular, the inflow of portfolio investment was unusually high. In general, inbound direct and portfolio investments are needed to finance Australia’s chronic current account deficit.

External Debt: In 2003 Australia’s external debt was US$237.9 billion, representing 30 percent of gross domestic product.

Foreign Investment: In 2004 foreign direct investment totaled US$57 billion, only slightly less than China’s US$60 billion. This unusual achievement was attributable in part to investor interest in Australia’s mineral resources. However, Australia also attracted foreign investment because of the country’s transparent and law-abiding government institutions and strong services sector. As of year-end 2004, cumulative foreign investment in Australia totaled US$888.6 billion versus Australian investment abroad of US$460.8 billion.

Foreign Aid: In the 12 months ending in mid-2005, Australia contributed US$1.6 billion of official development assistance (ODA), representing about 0.25 percent of gross domestic product (GDP), slightly higher than the donor average. Typically, the largest recipient of ODA is Papua New Guinea, a severely underdeveloped country that receives one-fifth of the total amount. However, in January 2005 Australia announced a US$770 million tsunami aid package—divided equally into grants and loans—for Indonesia. The twin goals of the ODA program are poverty reduction and regional stability, which the government holds to be closely related. The primary aid categories are governance (20 percent), education (16 percent), health (13 percent), infrastructure (13 percent), and other (24 percent).

Currency and Exchange Rate: Australia’s currency is the Australian dollar (AUD). The exchange rate as of September 1, 2005, was US$1=AUD1.33. The Australian dollar, which has floated since 1983, is the world’s seventh most traded currency.

Fiscal Year: Australia’s fiscal year runs from July 1 to June 30.

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