Principals of International Economics

Introduction

This report assesses the current performance of the Australian economy, and makes predictions for the coming year, 2008. Our analysis focuses on the domestic economy, on the one hand, and international factors that affect the Australian economy. The report is divided into two broad sections, reflective of this dual focus.  

We begin our analysis by looking at the current national accounts and balance of payments. Snapshots of two domestic sectors - housing and the government sector - are provided, as a point of focus for the domestic economy. We assess specific indicators from both of these sectors, in addition to other indicators to assist in forecasting likely economic performance in 2008. For the housing market, the indicators used were residential building approvals and housing starts. Consumer sentiment was used to guide analysis of inflation and interest rates.

Turning to the broader international economic outlook, in the international trade section the economic performance of Australia's main trading partners and the foreign exchange rate were analysed. The Westpac Leading Index also referred to in our forecasting.

The result of our analysis is the prediction that economic growth will be maintained but at a more moderate rate than the last few years. Domestic FactorsGDP - National Accounts

Over the past few years, GDP has been steadily rising in Australia, reflecting a strong, growing economy. The National Accounts for the financial year June 2006 to June 2007 reported a 4.3% increase in GDP, as composed of the following elemental increases.

The increase in final consumption expenditure was primarily due to increases in domestic demand and consumer expenditure. The increase in the terms of trade suggests that prices of exports rose faster than the prices of imports, which reflects the appreciating Australian Dollar. The growth in imports was driven by increasing domestic demand with consumers being attracted by cheaper import alternatives to locally produced goods. Housing marketCurrent situation

During the first half of 2007, an increase in housing prices was recorded in urban centres across the country. According to the ABS's House Price Index, established house prices rose on average by 3.2% in the June quarter, compared with a 1.4% rise in prices recorded in the March quarter.

The cost of purchasing a home has been greater in certain capital cities than in others. House prices rose substantially in Brisbane (6.5%), Adelaide (5.7%) and Melbourne (5.0%), but only moderately in Canberra (2.9%), Hobart (2.3%) and Sydney (2.3%) and even fell in both Darwin (-1.4%) and Perth (- 0.9%). The recent experiences of two cities at either end of the market, Brisbane and Perth, demonstrate how changeable the housing market can be.  

The strong overall growth in prices throughout the country is consistent with longterm trends, observable in the graph below showing Housing Price Indices from 1970 to 2003.

As housing prices have risen disproportionately to income, home ownership has become a more remote prospect for an ever-larger number of households. An alternate measure to the ABS's House Price Index is the Housing Affordability Index, compiled by ...