World Economies and How They Influence Australia

World Economies and How They Influence Australia

Maddy Taylor

Australia, as a relatively small country, is highly susceptible to the economic influences of other countries’ economies and significant events.  The major macroeconomic events that have affected Australia have to a large extent been flow-on effects from other countries rather than ‘home-grown’. In Australia, the two major economic events of the last century, the Depression of the 1930s and the inflation of the 1970s, were both part of worldwide developments. More recently, the international business cycle has been the main influence of Australia’s own business cycle; the three most recent Australian recessions of 1974, 1982 and 1990 were part of global recessions. Similarly, Australia’s own inflation experience reflected that of the OECD area, although it was later than most in reducing it after the initial surge in the 1970s.

Being trading partners with many large economies, such as China, Japan and the U.S, despite being ranked the 13th largest economy in the world according to Investopedia (in terms of GDP), economic events within other significant countries typically have direct effects on Australia’s domestic economy. These effects are reflected in the imports and exports to and from Australia, the state of the Australian dollar and government policy.

Australia exports to many countries, particularly China, the U.S and Japan. Japan was Australia's second-largest trading partner in 2015, the U.S fourth-largest while China dominated on imports and exports (Kimmorley, 2014). Trading between two countries can be affected by a variety of factors, which may reduce either country’s demand for imports or capacity to produce and export a certain commodity. If net exports are positive, then a nation’s GDP increases. Likewise, a trade deficit occurs when the value of a country’s imports is higher than that of their exports. In March 2011, Japan experienced a catastrophic earthquake and tsunami, referred to as the Great East Japan Earthquake. Despite initial concerns about the impact of the disasters on Australian exports, trade with Japan remained strong from late 2010, despite a slight dip in January 2011 as shown in Figure 1.

As a result of the Fukushima nuclear plant incident which was triggered by the Tōhoku earthquake, the Japanese government announced plans reduced its production and usage of nuclear power as an energy source, reflected in Figure 2 (ABC, 2011). The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES), upon this announcement, predicted that measures in Japan to reduce nuclear energy use would be likely to lead to higher utilisation of coal and gas-fired power stations (Department of Foreign Affairs and Trade, 2011). Australian fossil fuel exports to Japan increased in the following years, with Japan importing high quantities of coal and liquefied natural gas (LNG) from Australia. This statement is reflected by the data presented in Figure 2, which shows a sizeable spike in energy production from fossil fuels in Japan compared to the fall of nuclear power. [pic 1][pic 2]