As lockdowns happen again in NSW and Victoria, consumption continues to be limited by consumers’ lack of confidence in the economy. Furthermore, we get another look at COVID’s significant past, present and future impact on aggregate demand.
Then, as the federal Government continues to wrangle with issues related to the Defence industry, we are offered a close look at examples of the Structural Change and Infant Industry theories playing out in real life.
1. Further wave of lockdowns to cost the Australian Economy
As we learnt clearly during the first lockdown, the public health issues related to COVID-19 and associated lockdowns force an incredible reduction in aggregate demand and dramatically slow the economy.
Let’s look into the details of this economic slowdown: due to Covid-19, the government often has to order citizens to stay at home in order to control the spread of the virus.
This directly reduces consumption by preventing consumers from spending money at physical shops, restaurants, tourist spots and other businesses. In turn, businesses receive much less income, are forced to pay lower wages and greatly reduce investment in new projects, further reducing business-to-business consumption and investment. Quite quickly, aggregate demand and economic activity will fall off a cliff.
As the economy grinds to a standstill, individuals and businesses that possess surplus funds [money that they can invest], will be even less willing to invest, fearing a low or negative profit return if they did invest. This again reduces investment and sources of fixed capital.
If investment is significantly reduced in the long term, future growth in aggregate supply and future economic growth will begin to be seriously affected.
Economic growth is mainly supported by growth in aggregate demand and aggregate supply.
Aggregate supply is the sum of the value of all the goods and services that an economy is able to produce in a period of time. By gradually shifting the aggregate supply curve outwards, growth in aggregate supply is one of the main pillars supporting sustainable, long-term economic growth. It is driven by individual and commercial investment into expanding production capacity, which achieves greater output for lower input cost over time.
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Without aggregate supply growth, there would be no meaningful long term expansion of the size or production capacity of an economy, bringing real long term growth to stagnate.
This is because that economy would only be capable of producing the same [or even less] amount of goods and services year after year and economic growth would be short term and purely dependent on aggregate demand, which is cyclical and temporary rather than linear and sustained over the long term.
Thus hypothetically, if aggregate supply does not grow, or even declines, then the economy may see a general negative trend in real economic growth, i.e. shrink over the long term as our investment-starved economy is increasingly unable to produce goods and services efficiently.
For context, during the most recent lockdown, NSW was Australia’s most economically important state, representing 31% of total GDP, the vast majority of that in Sydney. So if individuals and businesses are scared to invest in expanding business production capacity, Australia will see its future economic growth negatively affected.
Going back to aggregate demand, the head of Australian economics at the Commonwealth Bank of Australia, Gareth Aird noted that this new wave of lockdowns might “see the national economy contract over the September quarter, by around 0.7%”.
2. Defence Industry
While infrequently mentioned, Australia’s highly skilled workforce and relationship with the USA and France has given our economy another opportunity to become a major exporter of weapons and military material, particularly benefitting firms based in South Australia.
Having signed a contract to manufacture submarines in South Australia, the Liberal government has indicated its desire to support the expansion and development of the Australian defence industry through a $270bn spending scheme. If implemented effectively, Australian defence firms may become very successful exporters and sustain the growth of the Australian economy.
The government estimates that this new support and investment will benefit the growth of over 3000 businesses and create/sustain even more jobs.
Overall, the creation of export firms that are efficient enough to be profitable while competing against foreign firms is a bonus to our whole economy in increasing income injections to our Current Account as well as supporting aggregate demand in our economy.
This series of weekly articles aims to compile the important economic news of the week into bite-sized summaries with HSC-specific takeaways.
You can expect a new article every Monday!