Principles of Financial Markets
Introduction
Australia is an independent country with a very strong economy. The economy of the county is dependent on its exports which include a range of manufactured products, minerals, metals, coal and beef. Australia’s main imports consist of transportation and telecommunication equipment, machinery, computer and office machines. In order to assess the investment conditions in the Australian economy, the top down fundamental analysis approach will be used.
Overview of Australian economy
The Australian economy is among the most developed, modern market economies in the world. The country is endowed with natural resources and produces nearly all of its foodstuffs besides being a leading exporter of agricultural goods such as livestock, wool, wheat and minerals. The economy has received an extra boost from the significant expansion of the natural resources mining industry. Currently, the GDP of Australia is approximated to be US$1.6 trillion while the country’s total wealth is about 6.4 trillion dollars. As of 2011, it was ranked the 13th largest national economy in terms of nominal GDP. The economy is dominated by the service sector, which represents 68% of the GDP (International Monetary Fund, 2011, 23). The mining sector, on which the economic growth of the country is largely dependent, accounts for 19% of GDP.
Fundamental analysis
According to the Conference Board Global Economic Outlook 2012, the global growth rate is expected to be 3.5 percent in 2012, 3.6 per cent from 2013-16, and slow down to 2.7 per cent between 2017-2025 (International Monetary Fund, 2012, 3). The growth rate of advanced economies is projected to slow down from the 1.6 per cent in 2011 to a meager 1.3 per cent in 2012 (The Conference Board, 2012). The outlook further projects some recovery of a little more than 2 per cent in advanced economies from 2013-2016. The greatest challenge facing the global economy in the current slow growth environment is raising productivity without risking losing job opportunities for millions of people. The growth rate per capita income in the world is currently 2.5 but expected to fall below 2 per cent between 2017 and 2025 (The Conference Board, 2012, 1).
Australia’s economic fundamentals are currently strong, with solid economic growth, contained inflation, low unemployment, strong public finances along with a record pipeline of business investment. According to the International Monetary Fund through the World Economic Outlook of April 2012, Australia’s economy is the strongest in the developed world and it is expected to outperform all comers for at least the next couple of years. The country’s economy projected to grow more strongly that all other major advanced economies in the coming couple of years. The OECD predicts a growth rate of 3.1 percent in 2012 and 3.7 percent in 2013. Following the effects of the European sovereign debt crisis, growth across OECD economies is expected to remain constant at 1.6 percent in 2012 with the probability of picking up to a growth rate of 2.2 percent in 2013. However, emerging economies in this region are expected to experience continuous growth. Australia’s unemployment rate is expected to remain substantially lower than 7.9 percent for the entire OECD economy in 2013, and about half of the 11.1 percent projection for the entire euro area in the same year.
The country has adopted a well-placed 2012-2013 Budget to ensure that its economy continues to remain amongst the strongest economies in the developed world. This is meant to be achieved through delivery of four years of surpluses as a buffer in the uncertain global financial times and enable the Reserve Bank to reduce interest rates even further as need may be. In addition, the Budget would help diversify the benefits of the economic boom by delivering the much needed financial relief for non-mining businesses and millions of middle and low income households.
Figure 1: Australia and World GDP Percentage Growth
(ATC, 2012, 2)
According to the Heritage Foundation 2012 Index, Australia’s economy is the 3rd freest in the Asia-Pacific region with an impressive economic freedom score of 83.1. The country’s economy has higher scores in trade freedom, fiscal freedom, and government spending. The strong foundations of Australia’s economic freedom are supported by appropriate protection of property fights together with an independent judiciary that does not entertain corruption. Furthermore, Australia’s gross public debt is just 25 percent of its GDP, far much better than most large developed economies that are still experiencing growth in debt burdens as a result of years of government spending (Heritage Foundation, 2012, 2). Australia has undertaken strong control of its budget deficits through a prudent public finance management which recognizes limits on government. Generally, Australia’s modern and rather competitive economy is as a result of the government’s demonstrated commitment to open market policies which significantly influence global trade and investment. As such, efficient and transparent regulations are exercised evenly in all areas and serves to inspire dynamic entrepreneurial activity across the private sector.
Conclusion
In view of the strong fundamentals of Australia’s economy, the country is currently an attractive destination for stocks. The country’s stock market and currency has consistently posted incredibly strong returns and promises to give positive results going in the future (Roth, 2011, 65)
References:
Australian Trade Commission, 2012, Australia’s Economic Fundamentals Remain Strong, Retrieved from: www.austrade.gov.au/ArticleDocuments/3814/Data-Alert-120424-Australias-Economic-Fundamentals.pdf
International Monetary Fund, 2011, Regional Economic Outlook, April 2011: Asia and Pacific – Managing the Next Phase of Growth, Washington D.C: International Monetary Fund.
International Monetary Fund, 2012, World Economic Outlook Update: New Setbacks, Further Policy Action Needed, Retrieved from: http://www.imf.org/external/pubs/ft/weo/2012/update/02/pdf/0712.pdf
International Monetary Fund, 2012, World Economic Outlook, April 2012: Growth Resuming, Dangers Remain, Washington D.C: International Monetary Fund.
Roth, M, 2011, Top Stocks 2012: A Sharebuyer’s Guide to Leading Australian Companies, New York: John Wiley & Sons.
The Conference Board, 2012, Global Economic Outlook 2012, Retrieved from: http://www.conference-board.org/data/globaloutlook.cfm
The Heritage Foundation, 2012, Australia, Retrieved from: http://www.heritage.org/index/country/australia
