[HSC] Economist 1 - 14th August

1. IMF World Economic Outlook Update:

The IMF is forecasting global economic growth of 3.0% in 2026, before recovering to 3.4% in 2027. This is a decrease from 3.5% in 2024 and 2025 and while this is not recessionary, growth remains relatively subdued and uneven across economies.

A major reason is the continued geopolitical conflict in the Middle East. Disrupted global oil supply has pushed energy prices higher, increasing the cost of production and transportation, and therefore leading to cost-push inflation.

Conflict can also weaken business and consumer confidence. If firms become less certain about future economic conditions, they may postpone investment, reducing aggregate demand and slowing economic growth.

Despite this, the 3.4% projected growth is by no means small. The global economy is buoyed by rapid investment in AI and technology infrastructure. The four largest global technology businesses alone, Amazon, Google, Microsoft, and Meta, are set to spend around $725B on AI infrastructure. As a reflection of this, the IMF identifies AI-driven demand as helping economies integrated into global technology supply chains.

Australia is also experiencing a significant expansion in AI infrastructure investment. Westpac estimates Australia’s data-centre investment pipeline at more than $155 billion. This is alongside a jump in private investments by 6.5%, compared to just 1% predicted by economists.

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This is a great contemporary example for:

Economic growth → Aggregate demand → Investment

Higher investment increases AD through the investment component (I):

AD = C + I + G + (X − M)

In the short run, this can increase economic growth and employment. In the longer run, investment in productive infrastructure and technology may also increase aggregate supply and productive capacity.

2. Terms of trade falls:

Australia’s Terms of Trade (ToT) has fallen from 117 to 111.9 between the March and June quarters of 2026. This means the prices Australia receives for its exports are declining relative to the prices it pays for imports.

One important pressure is the outlook for Australia’s commodity exports, particularly iron ore. Increasing global supply places downward pressure on commodity prices, while weaker demand for steel and construction materials from China can also reduce demand for Australian iron ore.

In particular, Guinea recently ramped up their ‘Simandou Project’, which is set to become the world’s largest iron ore deposit. Similarly, iron ore shipments have soared in Brazil by 14% this quarter. Iron ore is one of Australia’s major exports, and a decrease in its price has greatly affected our ToT.

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A sustained fall in the ToT can contribute to:

Lower export prices → lower export income → weaker net exports → lower aggregate demand → slower economic growth

It can also reduce company profits, mining investment and government taxation revenue.

Exam trap

Terms of Trade measures prices, not volumes. Saying that Australia’s ToT fell simply because the quantity of exports fell is incorrect. You need to explain what happened to export prices relative to import prices.

Terms of Trade = Export Price Index ÷ Import Price Index × 100

3. Trump fresh tariffs make waves

On the 24th of July 2026, US president Donald Trump implemented new tariffs targeting approximately 60 trade partners, with rates ranging from 10.0% to 12.5%, arguing that these economies had insufficient restrictions on goods produced using forced labour.

The policy provides another strong example of increasing global protectionism.

A tariff increases the price of imported goods in the US. This can make foreign producers less competitive relative to American firms and reduce the volume of international trade.

For Australia, there are both direct and indirect effects.

The direct impact is Australian exports to the US become more expensive in the US market, reducing Australian export competitiveness.

However, the potentially greater impact comes indirectly from weakened demand from China, which constitutes ~32% of Australian exports, whereas the US only constitutes 5%.

Australia is significantly more exposed to the Chinese market. If greater American trade barriers weaken Chinese production, investment, and economic growth, China’s demand for Australian exports may also weaken. In fact, it is estimated that Chinese growth will decrease to 4.4% by 2027 (compared to long term averages of 8 - 10%)

The transmission mechanism could therefore be:

US tariffs → weaker Chinese exports/investment → slower Chinese growth → lower demand for Australian commodities → lower Australian export revenue

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This is an excellent example for essays on:

Protectionism
Globalisation
Trade liberalisation
Australia’s external stability
Economic growth
Australia’s economic relationship with China

It also demonstrates how Australia can be affected by trade disputes even when Australia is not the main target of the policy.

4. Minimum wage rise:

From 1 July 2026, Australia’s National Minimum Wage increased to $26.44 per hour, or $1,004.90 per week for a 38 hour week. Minimum award wages also increased by 4.75%.

The increase is designed to improve incomes for lower paid workers, protect their purchasing power, and ease cost of living pressures.

Because minimum wage earners are concentrated toward the lower end of the income distribution, increasing their wages may also contribute to a more equitable distribution of income.

There may also be an effect on consumption. Lower income households generally have a relatively high marginal propensity to consume, meaning that additional income is more likely to be spent. Higher wages can therefore increase consumption and aggregate demand.

However, there are potential inflationary effects.

Businesses facing higher labour costs may attempt to pass some of those costs onto consumers through higher prices, contributing to cost-push inflation.

Higher household income may also increase consumption, potentially creating demand-pull inflation if aggregate demand grows faster than the economy’s productive capacity.

What about unemployment?

A higher minimum wage does not automatically cause unemployment.

In the classical labour-market model, unemployment may increase if the minimum wage is set above the equilibrium wage.

At the higher wage:

more people are willing to supply labour
firms may demand fewer workers because labour is more expensive
labour supply can exceed labour demand.

This is known as real-wage or classical unemployment.

The actual effect depends on factors including productivity, labour demand, firms’ profit margins and how far the minimum wage is above the market-clearing wage.

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This one policy can be used across multiple syllabus areas:

Minimum wage ↑ → income distribution becomes more equal

but potentially:

Wage costs ↑ → production costs ↑ → SRAS ↓ → cost-push inflation

and, under certain conditions:

Real wages above equilibrium → labour demand ↓ → classical unemployment ↑

The monetary-policy connection is also useful. The RBA has already increased the cash rate several times in 2026 and left it at 4.35% in August, demonstrating its continuing concern about inflation.

5. HECS/HELP debt is indexed:

The 2026 HELP indexation rate is 2.8%, one of the lowest rates of recent years.

HELP debts are indexed so that their real value is maintained over time rather than being eroded by inflation.

Under the revised system, indexation is calculated using the lower CPI inflation or the Wage Price Index (WPI). This helps prevent student debts from rising substantially faster than borrowers’ wages.

Lower indexation means outstanding HELP balances grow more slowly.

This can particularly benefit younger Australians with large outstanding debts. HELP balances can affect borrowing capacity when lenders assess applications for mortgages and other loans, meaning slower debt growth may improve households’ financial position over time.

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This is useful for essays involving: